By DANIEL TAUB
Responding to complaints that the process is unfair, Los Angeles City Councilwoman Laura Chick moved last week to scrap plans to collect back taxes from home-based businesses.
Long illegal in the city, home-based businesses were granted legitimacy five months ago by the City Council. But now that the businesses are legal, city officials want to collect back taxes from the past three years.
That’s going a step too far, says Chick, who believes that businesses shouldn’t be forced to pay taxes for a time when they weren’t legally allowed to operate.
“It was never our intent to penalize home-based businesses,” said Ken Bernstein, Chick’s planning deputy. “The whole point was to legalize them, as (has been done) in every other major city.”
Under the city’s amnesty program, which kicked off last month, home-based business owners who filed with the city by June 5 would be liable for a $25 registration fee plus up to three years of back taxes.
They would not be liable for any penalties, which can be as high as 40 percent of the amount owed for overdue taxes.
A motion Chick planned to introduce late last week would eliminate the requirement to pay back taxes and give business owners until Sept. 5 to file with the city.
The City Clerk’s Office estimates that $2.5 million in taxes is owed by the city’s approximately 20,000 home-based businesses.
As of April 9, about 670 home-based businesses had registered with the city to operate legally and pay their taxes. They have paid about $74,500 in current and back taxes, and an additional $16,750 in registration fees.
The city, meanwhile, is spending close to $265,000 in promoting the amnesty program through radio and newspapers ads, along with residential Department of Water and Power bills.
“We use the 20,000 number as our base estimate,” said Sylvia Nesbit, an assistant director with the tax and permit division of the City Clerk’s Office. “What percentage of that will actually come in is difficult to say.”
Some predict that the number registered under the amnesty program will be small.
“First of all, many, many people don’t know that a license is required of them,” said Paul Edwards, a Santa Monica-based writer who with his wife Sarah has authored eight books on running home-based businesses. “People who are in business as writers, psychotherapists, fitness trainers, etc. don’t know they qualify as a business.”
Edwards said that even in cities such as Portland, which has a much lower business tax rate than Los Angeles, compliance for home-based businesses is only about 40 percent.
“In the best of places there’s a 40 percent compliance rate. In Los Angeles, where it’s going to be more expensive and where there’s a history of a lack of knowledge, my guess is that compliance is going to be below 10 percent,” he said.
City officials are looking into other ways to catch home-based businesses not paying their taxes such as sharing information from the state’s Franchise Tax Board. If the city has access to state tax records, it could locate those businesses and force them to pay their business license taxes.
Edwards said that approach to signing up home-based business will likely be more effective than the voluntary amnesty program.