Moving to prevent numerous Internet-related businesses from leaving the city, the Los Angeles City Council on Friday voted unanimously to create a new, lower business tax category specifically for Internet companies.
The 13-0 vote came after months of controversy over the city’s efforts to reclassify several Internet-related businesses into higher business tax categories.
The new Internet business tax category, which will take effect for the current tax year that began on Jan. 1, would put an estimated 1,400 Internet-related businesses in the city’s lowest business tax bracket.
Many Internet-related businesses had long been filing in the multi-media tax category, which has the lowest business tax rate of $1.01 per $1,000 of gross receipts. That tax was designed to attract multi-media entertainment companies to Hollywood.
However, the city has recently been placing moving Internet businesses into the professional services category, which is $5.91 per $1,000 of gross receipts, in cases where the businesses do not produce entertainment. That reclassification represented a nearly six-fold increase in the tax rate. As a result, LegalZoom.com, Shopzilla.com and other Los Angeles-based Internet companies fighting reclassification threatened to leave the city.
Council President Eric Garcetti, who authored the motion the council approved on Friday, cited a Rand Corp. study that showed that more than 1,000 jobs had already left the city because of the reclassification of Internet businesses.
Friday’s unanimous council vote moves these businesses back to the $1.01 per $1,000 tax rate.
The vote came despite concerns that creation of the Internet tax rate could result in the loss of up to $3.4 million a year in business tax revenue.
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