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San Fernando
Thursday, Mar 28, 2024

Businesses Take Advantage of Tax Amnesty Period

Businesses Take Advantage of Tax Amnesty Period By JACQUELINE FOX Staff Reporter Maybe it’s the spirit of giving that began with the events of Sept. 11. Maybe it’s the holiday season. Or perhaps it’s the fact that the city’s office of finance will soon link up with the State Franchise Tax Board’s computer system to track down businesses that have not paid their city business taxes. Either way, city officials heading up the business tax amnesty program say they are well on their way to reaching their goal of collecting $20 million owed by business tax scofflaws before the Dec. 31 deadline. At the same time, San Fernando Valley business tax reform advocates are preparing what they consider the next set of changes they hope to get the city of Los Angeles to make. The large number of business owners turning themselves in, along with a new statewide measure and a recent decision by the Los Angeles City Council to eliminate taxes on inter-company transactions, reflect significant progress for the city’s Business Tax Advisory Committee (BTAC) established two years ago to make recommendations for business tax reform. It also encourages Valley business leaders as they begin what they call the next phase of their campaign to reduce taxes levied against companies by the city of Los Angeles. The amnesty program is one of six measures signed by Mayor James Hahn in August marking the first phase of a multi-pronged plan to overhaul the city’s business tax laws. The six reform measures were crafted by BTAC, co-chaired by Mel Kohn, a partner with the Encino accounting firm of Kirsch Kohn & Bridge LLP and one of many Valley business leaders pushing for reform of city business taxes. According to city finance officials, as of Nov. 23, 2,091 business owners had come forward to pay back taxes plus interest under the three-month amnesty program, which began Oct. 1. Antoinette Christovale, the city’s director of finance, said her office had collected roughly $2 million in back taxes as of Nov. 30. The last time the city offered a tax amnesty program in 1995 it collected roughly $800,000 during the same period. Christovale said the city’s campaign informing business owners of the amnesty program played a significant role in the turnout this year. But that campaign also included letters to taxpayers directly from the Franchise Tax Board notifying them it would begin sharing tax information with the city Jan. 1 under a statewide measure introduced by Assemblyman Gil Cedillo (D-Boyle Heights) and signed into law by Gov. Gray Davis in October. Currently, taxpayer returns are confidential. So, it’s possible many are rushing to get into compliance to avoid future exposure under the new law. And, if they do so by the Dec. 31 deadline, they also avoid paying a 40-percent penalty on the back taxes owed. “We aren’t sure what is having the biggest impact, but that’s a significant increase in collections over the previous period and, if the numbers continue, we should be able to reach our goal,” said Christovale. Now, high at the top of BTAC’s to-do list is a push to reduce the number of rates and categories for taxing businesses from 60 to roughly 10. One of the more menacing of those is the “miscellaneous” category, which many small start-up tech firms often find themselves lumped in because of the relatively new kind of products or services they provide, said Kohn. At the low end of the scale is the category for construction firms and manufacturers, who typically pay $1.18 per $1,000 of gross receipts. But the miscellaneous category, which generally includes professional service firms, such as attorneys and accountants, requires businesses to pay $5.91 per $1,000 in gross receipts. BTAC also estimated that roughly 20 percent of the businesses in Los Angeles are taxed at two or more rates, with some as many as five. BTAC will also attempt to eliminate that practice. “The biggest problem is if you don’t have a category at all, or if your business is considered a new category,” said Kohn. “They get thrown right into the highest rate category, and that’s just not fair.” BTAC is working to also eliminate so-called pass-through taxes. Under the current system, a contractor is taxed on revenues paid by the principal client. But most larger projects involve subcontractors, who are also taxed on revenue they earn from the contractor. So, in essence, the city is collecting taxes twice for the same job. Walker said that battle could be longer and tougher to win than the most recent one because there are so many different types of pass-through taxation situations in existence, and because it represents so much revenue to the city that it will not willingly give up. “Our whole philosophy is not to blow a hole in the city’s revenues,” said Walker. “So, it could take a while. The politicians are impatient with us because we move slowly. But we aren’t politicians, we are simply trying to do what we can to make changes that are adequate and fair. And, we have to try and figure out how to analyze the cost of (the programs) and exactly what industries will be affected.” BTAC also wants the city to tax businesses based on their net income rather than gross receipts, something its members recognize is an uphill battle because it is possible state laws would have to be changed. “We think the city council is in between a rock and a hard place. It would be unconstitutional for them to arbitrarily make that change on their own,” said Kohn. “But we are continuing to study it and see exactly what can be done.” According to Phyllis Perkins, taxpayer advocate with the city, a position created along with the new reform measures, the majority of those who have come forward in the amnesty program say they didn’t know they owed the city money. Perkins said in most cases business owners file their initial paperwork with the State Board of Equalization. But because the state has not routinely shared that information with local municipalities, there has been no solid way of tracking new businesses at the local level. The Cedillo bill aims to bridge that gap. It is also expected to generate an additional $50 million annually for the city, which now collects roughly $300 million in business taxes each year. Officials estimate that roughly a third of the businesses in operation do not pay local taxes. Although the state is opening up its system to local municipalities, it will still be up to the city to track the information being made available. “The state isn’t going to automatically start sending information to us,” said Perkins. “It will be up to the city to access the data it needs and make its own assessments of who’s up and running and where they are.” In line with terms of the amnesty agreement, the city won’t release the names of businesses who have complied, what the average amount of back taxes being paid is, or even whether these are mostly small mom-and-pop shops or larger firms. Kohn agreed the upcoming changes at the state level are probably the best explanation for such a high turnout for the amnesty program this time around. “You have more compliance today than in 1995,” said Kohn, “but certainly having the public being made aware of the Cedillo bill and the new relationship between the state and the city is very effective. That’s why we pushed so hard for that to clear: just the knowledge that the matching is something that (business owners) are going to think twice about, and they will think twice about not paying.” The city also approved BTAC’s recommendation concerning so-called double taxation for multi-layered companies. Until recently, a subsidiary of a larger firm could be taxed on revenues it recorded as payment for a service or product it provided to its own organization. “We’ve manage to get that unfair practice of taxing inter-company transactions out of the way,” said Jack Walker, a tax lawyer with the firm of Latham & Watkins and BTAC member.

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