Six tax-reform ordinances signed last month by Los Angeles Mayor James Hahn are supposed to make the San Fernando Valley and Los Angeles a lot more business-friendly. But some say there is nothing friendly about one ordinance that establishes a whistle-blower program offering cash rewards to those who rat out business owners who haven’t paid their taxes. The reforms were formulated by the Business Tax Advisory Committee (BTAC), formed by former Mayor Richard Riordan and co-chaired by Mel Kohn, a partner with the Encino accounting firm of Kirsch Kohn & Bridge LLP and co-chairman of the group, and approved by the Los Angeles City Council. Although the measures signed by Hahn are generally lauded as significant steps toward simplifying the city’s business tax system, some say asking businesses to drop a dime on their competitors is going too far. Under the whistle-blower program, informants would get 10 percent of the total amount of back taxes, interest and penalties that the city manages to collect as the result of their information. “I don’t like that. People trying to be policemen and inform on others would make mistakes,” said Ricky Gelb of Gelb Enterprises. “I could go out every weekend to the swap meets, for example, and make a list of people who are operating illegally, but that’s not the way to collect back taxes. It’s misguided.” Gelb suggested, as an alternative, the city use its own resources and let its fingers do the walking. “The city folks should just get out and use the white pages and the yellow pages and go through and make sure that those advertisers are registered,” he said. “That’s a good place to start.” But Antoinette Christovale, the city’s finance director, whose office is overseeing the implementation of the ordinances, defended the plan. “It’s important to remember that it’s the members of the Business Tax Advisory Committee who recommended these ordinances, not our department,” said Christovale. “There are many business owners out there who are paying their share of business taxes (that) aren’t very happy with those who don’t. So we support it.” Christovale’s office estimates that roughly one-third of the city’s businesses do not comply with the laws, although she did not know how much money the city loses as a result. The city estimates it could reap as much as $20 million through the program and an additional $4 million annually. Christovale said the city collected $348 million in business taxes during the past fiscal year. Gelb also suggested city, county and state agencies should be exchanging information on business owners, particularly independent contractors and home-based businesses, to track down the tax scofflaws. In fact, said Christovale, the city is working on a plan to coordinate with other agencies, including a strategy to exchange data with the state Employment Development Department. She added that a measure introduced in the legislature by state Assemblyman Gil Cedillo of Los Angeles calls for the sharing of data between the city and the state Franchise Tax Board. Another ordinance adopted establishes a three-month tax amnesty program. Between Oct. 1 and Dec. 31 of this year, those who come forward would not have to pay penalties, just the back taxes owed plus interest. Gelb said three months is simply not enough time to get the word out for a program of that kind. He suggested the period be extended to six months. “Big company owners are going to hear about this, but it’s the small mom-and-pop shops who won’t be as plugged in, don’t read every headline in the newspaper, and those are the individuals we are talking about in many cases,” said Gelb. But Christovale said the amnesty program would be well publicized in the media, on the city’s Web site and cable TV, and through mailers from the state Franchise Tax Board. “And,” she said, “we don’t want to give people too much of a window because they tend to forget.” The city last offered a business tax amnesty program in 1995 when it collected close to $20 million, the figure it’s using to guess at how much it would get from a similar amnesty now. “I certainly don’t think it’s our intent to offer very many (amnesties), so I think it’s important that they take advantage of the opportunity while it’s here,” said Christovale. Another ordinance passed by the council will benefit larger corporations, in particular, by exempting intra-company financial transfers. Until now, businesses were taxed on revenues received and taxed again when the money was transferred to another division of the company. “This is a big step, particularly for the larger corporations,” said Kohn. Kohn said his colleagues on the panel had hoped to see the law changed that allows the city to tax businesses on net earnings, instead of gross receipts. The current system, most business owners agree, is unfair because gross receipts don’t reflect real earnings. “That’s a big one for us,” said Gelb, “but every time you bring that up they say it’s unconstitutional.” Christovale said the city is, indeed, prohibited from taxing net revenues because they are considered income, and the state Franchise Tax Board already taxes income. “If the state constitution would allow us to do it, we would tax on net sales, not gross sales, but our hands are tied,” she said. Christovale said she expects BTAC members to continue to lobby for changes to that aspect of the system, but it will likely be an uphill battle. The other three ordinances: – Establish a tax settlement bureau for fast-tracking the resolution of tax claims. – Hold administrative review hearings before a one-member review officer, as opposed to a three-member Board of Review panel now. – Lower interest rates on outstanding balances and make them equal to the amount awarded a taxpayer for overpayment. The current interest rate charged for non-payment is 15 percent while refunds for overpayment are 7 percent. From now on, those will both be tied to the current federal short-term rate plus 3 percent, which would put both rates at roughly 7 percent today. Hahn, who signed the measure at the office of the Economic Alliance of the San Fernando Valley in Van Nuys, said additional reforms are being considered. Those include extending the business tax exemption period for new businesses from one year to two and reducing the number of tax rate categories from 68 down to about 10. And, said Kohn, the panel will recommend the elimination of taxes on so-called “pass-through” revenues.
TAXES—Biz-Tax Reform Measures Generate Mixed Reactions