City Hall Mailing Prompts Complaints Over Handling of Business Tax Issue

By HOWARD FINE

Staff Reporter

Last month’s surprise mailing of letters from the City of Los Angeles to people it suspects of evading payment of business taxes has sparked a firestorm of criticism and renewed calls for the city to overhaul the system.

Within days of the letter first hitting, the Valley Industry and Commerce Association re-launched its “Ax the Tax” Web site, calling for the city to scrap the current, complicated gross receipts tax and find some other way to tax businesses.

“Since those letters went out, we’ve gotten a lot of calls from angry business owners wanting to reform the city’s business tax,” said VICA chairman Fred Gaines. “We are now more convinced than ever that until the city gets rid of the gross receipts tax, it will not be a competitive place to do business.”

Earlier this year, VICA had started a campaign to get rid of the gross receipts tax, saying it results in L.A. businesses paying higher taxes than those in surrounding communities and causes so much confusion that many businesses simply choose not to pay.

The campaign was placed on the back burner as Mayor James Hahn introduced a set of business tax reform proposals over the summer and VICA turned its attention to secession.

The L.A. Area Chamber of Commerce, while not endorsing a scrapping of the gross receipts tax, said the confusion and controversy stirred up by the letter points up the need for the city to move faster on business tax reform.

“The city needs to get moving on this,” said chamber president and chief executive Rusty Hammer.

On Nov. 18, the Office of Finance sent out 151,000 notices to people who reported business income on their state tax returns usually on Schedule C forms but also on some 1099 forms but who are not on the business tax rolls. About 121,000 notices were sent to sole proprietors and 30,000 to corporations and partnerships.

This was the first tangible result of a new state law giving cities the ability to go after tax scofflaws by combing state income tax records. L.A. officials pushed for five years to get the law through, saying that scofflaws were costing the city tens of millions of dollars each year in business tax revenues.

Sketchy data

But the data that the city purchased from the state earlier this year was skimpy: it only included names, addresses and phone numbers. It made no mention of the amount of business income or the source of that income, two crucial factors in determining whether an individual or entity owes business taxes. This hampered the city’s ability to ferret out who should or shouldn’t be paying business taxes.

Also, the letter sent out contained very few guidelines for recipients to determine whether they should or should not pay business taxes. Thus, virtually every recipient had to call the Office of Finance, quickly overwhelming that office’s capability to handle the calls.

“This is the first year we got this data,” Mayor James Hahn said last week on KFWB-AM 980’s “Ask the Mayor” program. “I know we need to do a better job with this and we’re going to work out the bugs.

Hahn also acknowledged that the Office of Finance inadequately manned the phones once the mailers went out. During the first week, lines were constantly busy, frustrating countless numbers of callers.

Last week, the Office of Finance pulled in several hundred more people to man the phones and the public counter, according to assistant director Pam Mooney. She said that as of late last week, the average wait for a caller had been reduced to about five or six minutes.

Also, the office has posted on its Web site a list of frequently asked questions that will be sent out to the media and business groups in coming days and weeks, Mooney said.

One of the answers: If the Office of Finance does not receive a response by Feb. 28, 2003, the recipient’s file “could be forwarded to the City Attorney’s office for possible criminal or civil prosecution.”

A spokesman for the office of City Attorney Rocky Delgadillo said that office would not determine if civil or criminal charges would be filed until they get names forwarded to them after the deadline passes.

Waiver asked

In a related development, L.A. City Councilwoman Wendy Greuel last week sent a letter to Office of Finance Director Antoinette Christovale asking that her office waive penalties on past-due business taxes for business owners previously unaware of their tax obligation.

As the Office of Finance tried to bring the situation under control, criticism was mounting from several sides over how that office handled the process. The chief criticism: there was no test run to see how accurate the data were.

“It’s truly unfortunate that we didn’t do a sample test run to test the data and the city’s preparedness to handle the calls that would come in,” said Councilman Nick Pacheco, chair of the council’s Budget and Finance Committee, which has jurisdiction over taxation issues. “We will hold the Office of Finance people accountable for that.”

Hilda Delgado, a spokeswoman for the mayor, said late last week that Hahn, too, believes a test run with the data would have been appropriate. “The Mayor is investigating how the entire situation surrounding the letter was handled,” Delgado said.

Christovale was unavailable late last week due to illness. But Mooney admitted that her office “underestimated the magnitude of the response,” and said the office might consider doing future mailings in stages.

Pacheco said that as chair of the budget and finance committee he would personally talk to the Office of Finance to avoid a recurrence of these problems when the next data batch from the state is set to arrive in the next few months.

Negotiating with WGA

Another criticism was that the office did not wait for an agreement to be reached between the Writers Guild of America and the city over the extent to which writers would be exempted from paying business taxes to the city.

Writers made up a significant portion of the 151,000 recipients of the letter. Even when they were finally able to get through the jammed phone lines, often city officials couldn’t tell them whether they would be exempted. Thus, the standard response was: “Pay your taxes as if you would not be exempt. If you are subsequently determined to be exempt, the city will refund the money.”

As of last week, that agreement was still in the final stages of being negotiated.

Given all the problems, Hammer said next time, the city might consider farming out the business tax collection process to a private vendor. “A lot of government agencies have done this with traffic fines, overdue library books, etc. It has worked very well,” he said.

But many of the problems with the collection process may not be able to be resolved until the business tax itself is overhauled.

“This letter showed just how antiquated the city’s business tax system is and how much it needs fixing,” said Larry Kosmont, an economic development consultant who has advised the city on business tax issues. “The program needs to be rethought from top to bottom.”