Businesses hate the city of L.A.’s gross receipts tax, but now that Los Angeles Mayor Eric Garcetti is talking about alternatives for that dreaded tax, will they like the proposed replacements any better?
Executives in neighboring cities say the answer is a resounding “yes.”
Business owners in several cities that use other types of taxes – chiefly a fee for each employee – told the Business Journal they’re generally satisfied with what they pay, and there seems to be little clamor to change or reduce taxes.
Take John Symes, president of Pasadena’s Symes Automotive Group, which operates three car dealerships in that city. The company pays the city $31 for each of its 190 employees – that works out to just $5,900 annually.
“As taxes go, ours is pretty reasonable,” Symes said. “When we look at Los Angeles, we are thankful that our tax is per employee and done the way it is.”
While Symes would not give revenues for his dealerships, assuming that cumulative revenues are in the tens of millions of dollars, he would be paying at least $20,000 in annual gross receipts taxes in Los Angeles. (Or he would have until two years ago, when Los Angeles eliminated its gross receipts tax on new car dealerships in a bid to lure more to the city.)
Pasadena is one of two dozen cities in Los Angeles County that tax businesses based on the number of employees a firm has in the city, according to data compiled by L.A. economic development consultant Larry Kosmont, who co-authors an annual cost-of-doing-business survey.
Those per-employee taxes tend to be lower than those based on gross receipts, Kosmont said, because a gross receipts tax is taken from top-line revenues, regardless of profits.
“It’s hard to find an advantage in gross receipts tax for a business,” he said.
But there’s another factor at work as well: whether a city views its business tax as a revenue generator or simply as a way to recover costs for servicing businesses.
Many cities generate revenue through other taxes, such as sales taxes and hotel bed taxes; for them, the business tax is merely intended to recover costs for processing business permits and other city functions related to business. As such, Kosmont said, taxes in those cities are set low enough to induce more businesses to set up shop, in turn creating other taxes for the city.
But in Los Angeles, the business tax is a significant revenue generator. The gross receipts levy is one of the largest sources of revenue controlled by the city, comprising roughly 10 percent of the general fund or about $450 million. That explains both why the business tax is high and why some city leaders are loath to eliminate it.
“It’s such a huge chunk of their revenue stream, which is why it has been so difficult to cut,” Kosmont said.
Nibbling at edges
For years, businesses and business groups in Los Angeles have been seeking to scrap the gross receipts tax entirely. The city has nibbled at the edges, temporarily eliminating the tax for startups and exempting new car dealerships, but most businesses haven’t gotten a break.
Two years ago, a commission proposed phasing out the gross receipts tax over 15 years. Garcetti campaigned on a pledge to eliminate the business tax, but in his first budget proposed only a 10 percent reduction over three years.
But now a plan to scrap the tax is back on the table as Garcetti tries to get business support for his proposal to raise the city’s minimum wage. Earlier this month, he proposed replacing the gross receipts tax, possibly with a per-employee tax or a levy based on the square footage of a business.
Garcetti unveiled his proposal in a meeting with the Los Angeles Times editorial board and has not otherwise spoken about it publicly. A Garcetti spokesman declined to comment further on the mayor’s plans.
Nonissue
The Business Journal canvassed businesses in local cities with other business tax systems, and that informal survey showed a huge gulf between Los Angeles and its neighboring cities. In many cities, the local business tax is a nonissue.
“I don’t even notice the tax,” said Sam Kartounian, who owns two TicTime watch stores in Redondo Beach. The two stores have six employees between them; at the city’s rate of $18 a year for each employee plus a $99 base fee, Kartounian pays $207 in business tax. Under L.A.’s gross receipts system, Kartounian’s tax would be at least double that amount.
Likewise, Sandy Potter, owner and founder of Pasadena women’s clothing boutique Atelier Femme, said the business tax she pays is relatively insignificant. Besides herself, she has only one full-time employee and four part-time employees. At $31 for each full-time equivalent employee, her business tax is likely around $100 a year.
“The per-employee method is working in Pasadena and works for my business,” Potter said.
Among cities that use the head-count tax, rates per employee range widely, from $1.27 to $120. Most cities have a base fee of at least $100 and cap the tax, typically at 100 employees. Head-count taxes are the county’s most common type of local business levy.
Next most popular is a gross receipts tax, which is used in Los Angeles and 21 other cities. Los Angeles has the highest gross receipts rate: $5.07 for every $1,000 in receipts for professional services, auto parks and health maintenance organizations. The lowest rate in the city is $1.01 for multimedia, Internet and wholesale businesses.
Most other cities charge closer to $1 for every $1,000, though the lowest rate is a mere three cents for every $1,000.
Six cities have flat fees on business, ranging from $11 a year to $100, and five cities have no business tax.
Fifteen cities have a combination of systems. For example, most businesses in Beverly Hills pay a gross receipts tax, but doctors’ offices and law firms pay flat fees. Manhattan Beach uses just about every possible method, depending on the industry: gross receipts, a flat fee, square footage and head count.
Gross receipts hits
Garcetti’s office has reached out to Kosmont to look at alternatives to the gross receipts tax, which Kosmont said is particularly burdensome for some types of companies. For instance, a garment contractor gets taxed on total revenue coming in, even though two-thirds of its revenue go straight to subcontractors that cut and sew garments.
“Businesses that have a high volume of revenue and lower volume of employees are especially hard hit by the gross receipts tax,” he said. “These days, with so many companies trying to limit the number of employees they hire, the gross receipts tax looms especially large.”
That’s why car dealers like Symes are so vehemently opposed to gross receipts taxes.
“If Pasadena were ever to switch to gross receipts, it would devastate the car business here,” he said, noting that an attempt in that city to enact a gross receipts tax failed years ago amid opposition from car dealers and major engineering firms.
Still, gross receipts taxes are popular with cities, likely because they are easy to collect and track. About 10 years ago, as cities sought to crack down on business tax scofflaws, the state Legislature passed a law allowing cities to get state Board of Equalization sales tax data. Cities now routinely check that data to make sure businesses report sales accurately.
And despite all the disadvantages for business of a gross receipts tax, some business owners say they prefer it. Jeff Haas, owner of Culver City home-theater installer Haas Entertainment, gets charged a rate of $1 for every $1,000 in gross receipts. He said the tax takes into account business cycles.
“If you’re having a good year and your sales are up, you can afford to pay more tax,” Haas said. “I think under an employee head-count system, it would be more difficult for me to figure out, because my employment levels fluctuate throughout the year.”
This story has been corrected from an earlier version.
