CITY OF LOS ANGELES CALIFORNIA

Transcription

1 ANTOINETTE CHRISTOVALE DIRECTOR of FINANCE CITY TREASURER CITY OF LOS ANGELES CALIFORNIA i-t* }f OFFICE OF FINANCE 200 N. SPRING ST. ROOM CITY HALL LOS ANGELES, CA (213) I#, la'vpf.dii'a ERIC GARCETTI MAYOR August 3, 2015 Honorable Budget and Finance Committee 200 N. Spring Street, Room 303 Los Angeles, California Attn: RE: Richard Williams, Legislative Assistant Business Tax Reform Recommendations Dear Honorable Committee Members: Since the inception of the Office of Finance (Finance) as a City department in 2000, Finance has collaborated with former and current Mayoral administrations, City Councilmembers, two Business Tax Advisory Committees, and others in the introduction, review, analysis, and implementation of numerous meaningful business tax reform measures. These actions have resulted in $890 million in aggregate tax relief, simplification, and fairness to the City s businesses. A detailed report of the reform measures implemented is attached. As the City s tax administration agency, Finance continually evaluates operational procedures and seeks to employ industry best practices in pursuit of the department s goal to offer superior customer service and programs to taxpayers. Consistent with this focus, Finance has identified four specific operational areas that provide opportunities for improved delivery of intended tax relief to taxpayers or creating fairness and simplifying the tax compliance efforts of businesses subject to the City s gross receipts tax. Given that existing Los Angeles Municipal Code (LAMC) ordinances may require amending action from the City Council, with approval from the Mayor, Finance offers the following tax reform proposals for your consideration. Small Business Exemption The City currently provides a Small Business Exemption (SBE) to businesses with total taxable and non-taxable gross receipts of $100,000 or less (or $300,000 or less for individual Creative Artists ). Per ordinance, in order to be granted the SBE or the Creative Artist Exemption (CAE) a business that meets the qualifying gross receipts threshold must: 1) timely register for a Business Tax Registration Certificate (BTRC); and 2) timely file subsequent annual Business Tax renewals. Finance has found that some businesses that potentially might qualify for the SBE or CAE, unfortunately, lose their ability to claim the exemption due to their failure to register with the City or their failure to timely file a Business Tax renewal. Given that many of these businesses tend to be less knowledgeable or sophisticated with regards to tax matters in general, the failure to register for a BTRC or to file an annual tax renewal oftentimes may be inadvertent. As a matter of fairness and to honor the intent of the SBE and CAE, Finance recommends that the LAMC be amended to authorize a one-time grace period to any business that would otherwise qualify for the SBE or CAE but either fails to timely register or fails to timely file an annual tax renewal form. The one-time grace period would serve to educate a business regarding its registration and renewal filing AN EQUAL EMPLOYMENT OPPORTUNITY - AFFIRMATIVE ACTION EMPLOYER

2 Honorable Budget and Finance Committee August 3, 2015 Page 2 of 4 requirements, and also allow the business to receive the SBE or CAE. Finance proposes that the recommended ordinance amendment be effective for the 2016 Business Tax period, which begins on January 1, The annual revenue impact should Finance s recommendation be approved is estimated at $2.5 million (SBE). In order to provide additional relief to a larger pool of businesses, while minimizing the impact to the City s General Fund, Finance proposes that the SBE threshold be increased incrementally from the current level of $100,000 in total taxable and non-taxable gross receipts to $250,000 as of January 1, 2016, $500,000 as of January 1, 2018 and $1,000,000 in total taxable and non-taxable gross receipts as of January 1, Precedent for a SBE qualifying threshold of up to $1,000,000 can be found in San Francisco s newly enacted gross receipts tax. Increasing the threshold for small businesses in the City has been discussed over the years by lawmakers and would improve the City s reputation as supportive to entrepreneurial and mom-and-pop businesses. The impact of the proposed incremental increase of the SBE threshold over a period of five years is estimated at $54 million in tax relief for an additional 72,700 small businesses with a graduated affect to the City s General Fund. A breakdown of the impact is as follows: Year 1- Increase in threshold from $100,000 to $250,000 Estimated number of additional businesses who qualify - 39,000 Estimated additional SBE tax credits - $15 million Proposed Effective Date - January 1, 2016 Year 3 - Increase in threshold from $250,000 to $500,000 Estimated number of additional businesses who qualify - 20,000 Estimated additional SBE tax credits - $17 million Proposed Effective Date - January 1, 2018 Year 5 - Increase in threshold from $500,000 to $1,000,000 Estimated number of additional businesses who qualify - 13,700 Estimated additional SBE tax credits - $ 22 million Proposed Effective Date - January 1, 2020 New Business Exemption In addition to the SBE, the City provides a New Business Exemption (NBE) to qualified businesses that establish a first fixed location within the City. The NBE was amended in 2010 to provide a three-year Tax Holiday for qualified businesses. Otherwise qualified businesses are required by ordinance to timely register for a BTRC to receive the NBE. Finance has encountered businesses that would have qualified for the three-year NBE but by ordinance were denied one or more years of the tax exemption due to their failure to timely register for a BTRC. Although prudent tax administration encourages the timely registration of businesses, the spirit of the NBE Tax Holiday must also be considered. Therefore, it is Finance s recommendation that the LAMC be amended effective January 1, 2016 to authorize Finance to grant the NBE to an otherwise qualified business that has failed to timely register for a BTRC. The projected annual revenue impact from this proposal is $6.1 million. In addition, NBE eligibility is slated to expire for businesses that move to the City on or after January 1, The program has experienced continued and growing interest and is a main cornerstone of the City s toolkit to attract new businesses. As such, it is Finance s recommendation that the Tax Holiday provisions of the amended NBE be extended to a sunset date of December 31,2022. The seven year window would provide greater long range planning and certainty to qualifying new businesses contemplating relocation to a first fixed location in Los Angeles of a three year exemption from the City s Business Tax. AN EQUAL OPPORTUNITY - AFFIRMATIVE ACTION EMPLOYER

3 Honorable Budget and Finance Committee August 3, 2015 Page 3 of 4 Unlimited Carryover of Non-refundable Business Tax Account Credits The LAMC authorizes the cash refund of Business Tax overpayments provided that a valid refund claim has been submitted to the City by a taxpayer within one year from the date of the claimed overpayment of tax. Business Tax credits that do not meet the criteria for a cash refund are generally eligible to be used over a maximum three-year period to offset subsequent tax liabilities. As Finance s general audit cycle encompasses three annual tax periods, the possibility exists that the identification of a Business Tax overpayment may occur after the allowable three-year period in which a non-refundable credit can be applied to a subsequent tax liability. This would negate the ability of a business to utilize a non-refundable account credit. To address this potential inequity, Finance recommends that the LAMC be amended effective January 1, 2016 to provide Finance with the authorization to allow nonrefundable Business Tax credits to be utilized by a business to offset subsequent Business Tax liabilities for an unlimited time period until the exhaustion of the credit. Based on Finance s initial analysis, the enactment of this proposal is not anticipated to have a material revenue impact. Nevertheless, providing Finance with the authority to allow non-refundable Business Tax credits to be used until exhaustion will provide administrative fairness and relief to affected businesses. Combined Annual Business Tax Renewal Reporting Businesses with multiple locations within the City are required by the LAMC to register and obtain a BTRC for each fixed location. Such businesses are also required to file an annual Business Tax renewal form for each location, which may create a burdensome effort to comply with the City s annual renewal requirements. To address this issue, Finance is proposing to implement for the 2017 Business Tax renewal period enhanced E-filing services that would allow a multi-location business to file one combined annual renewal and remit one aggregate payment. These steps would significantly simplify tax reporting requirements for many businesses. Although this proposal does not require Council action to amend or implement an ordinance, Finance may seek Council approval in the fiscal year budget to fund potential programming costs that may be necessary to modify and expand Finance s current E-filing services. Recommendations That the Council, subject to the approval of the Mayor: Instruct the Office of the City Attorney to amend Los Angeles Municipal Code Sec effective January 1, 2016 to authorize Finance to allow a one-time grace period to grant the Small Business Exemption or Creative Artist Exemption to otherwise qualified businesses that either fail to timely register for a BTRC or fail to timely file an annual Business Tax renewal. Instruct the Office of the City Attorney to amend Los Angeles Municipal Code Sec effective January 1, 2016 to increase the Small Business Exemption threshold from $100,000 to $250,000, then incrementally to $500,000 as of January 1, 2018, and $1,000,000 as of January 1, Instruct the Office of the City Attorney to amend Los Angeles Municipal Code Sec effective January 1, 2016 to authorize Finance to grant the New Business Exemption to otherwise qualified businesses that fail to timely register for a BTRC. Instruct the Office of the City Attorney to amend Los Angeles Municipal Code Sec to extend the New Business Exemption sunset date to December 31, AN EQUAL OPPORTUNITY - AFFIRMATIVE ACTION EMPLOYER

4 Honorable Budget and Finance Committee August 3, 2015 Page 4 of 4 5. Instruct the Office of the City Attorney to amend Los Angeles Municipal Code Sec to authorize Finance to allow non-refundable Business Tax credits to be utilized to offset a taxpayer s subsequent Business Tax liabilities for an unlimited time period until exhaustion of the credits. 6. Instruct the Office of Finance to determine programming costs and submit a budget package for fiscal year for such costs that would be necessary to modify the department s existing on-line E-filing services to provide the capability for multi-location businesses to file one combined Business Tax renewal beginning January 1, 2017 and remit one aggregate payment. If you have any questions, please contact Ed Cabrera, Assistant Director of Finance at (213) Sincerely, Antoinette Christovale, CPA Director of Finance/City Treasurer Attachment cc: Ana Guerrero, Mayor s Chief of Staff Matt Szabo, Deputy Mayor of Budget and Innovation Noreen Vincent, Senior Assistant City Attorney Beverly Cook, Assistant City Attorney AN EQUAL OPPORTUNITY - AFFIRMATIVE ACTION EMPLOYER

5 Establishment of the Business Tax Advisory Committee (BTAC) Small Business Exemption Fiscal Year Filing BTAC was established to make recommendations to the Mayor and City Council to: Simplify and improve the Business Tax System Increase compliance to make the tax system fairer to all who pay Business Tax This ordinance and subsequent amendments established the following exemptions: No tax is required to be paid by a person for any small business whose total taxable and non-taxable gross receipts do not exceed $5,000 Subsequently amended to provide no tax is required to be paid by a person for any small business whose total taxable and non-taxable gross receipts do not exceed $50,000 Subsequently amended to provide no tax is required to be paid by a person for any small business whose total taxable and non-taxable gross receipts do not exceed $100,000 This ordinance provides that the annual business tax shall be measured by the calendar year unless it receives a waiver from Office of Finance /01/01 07/01/05 Finance, with existing resources, served as lead City Department in providing support and tax data to BTAC Tax Relief $135M 01/01/01 Tax Simplification Tax Reform Fund This ordinance: 07/30/01 Established the Tax Reform Fund Purpose of Fund was for receipt, retention and disbursement of all monies allocated to it by the Council and Mayor out of the initial and continuing revenue from any future business tax and payroll expense tax amnesty program and any other monies designated by the Council and Mayor. Provides that expenditures from the Fund are exclusively to finance business tax reform. Business tax reform is limited to the offset of General Fund losses resulting from changes in business tax rates, changes in the business tax classification structure or other business tax 08/24/02 09/14/03 $66M to fund tax reform *Cumulative Impact as of December 31, 2014 Page I 1

6 ordinance changes; the development and implementation of system and operational reforms that benefit business taxpayers by making the City a more hospitable business environment; and the recovery of City costs associated with the implementation of business tax reform. Expenditures from the Fund are to be authorized by the Mayor and Council. Subsequently amended to provide that the following shall be allocated to the fund: An amount equal to 25 percent of the initial and continuing net revenue attributable to the 2001 business tax and payroll expense tax amnesty program; and The initial and continuing net revenue attributable to the revenue program initiated pursuant to information obtained as a result of the enactment of Revenue and Taxation Code Section (AB 63) received in the applicable reporting period shall be allocated to the fund. Subsequently amended to provide: That the Fund be annually budgeted by the Mayor and Council; The amount shall be 75 percent of tax amnesty and AB 63 receipts received in the most recent completed fiscal year. Whistleblower Program This ordinance provides a reward for informants, not to exceed 10 percent of the principal tax, interest, and penalty covered, for information resulting in the recovery of business taxes. 8/19/01 Equity & Fairness Related Entities/ Company Transfers This ordinance provides that for related entities whose ownership interests in both value and voting power are at least 80 percent in common, an exemption from business tax will be provided for amounts received from or charged to related entities 8/19/01 Tax Simplification *Cumulative Impact as of December 31, 2014 Page I 2

7 Penalties/Interest Parity Assessment Review Officer/ Citizens Board of Review This ordinance provides that: A penalty of 5 percent of the principal amount be incurred on the first day of each of the first four months of delinquency instead of a 20 percent penalty incurred on the first day of delinquency. The interest rate of delinquent principal be equal to the Federal short term rate plus 3 percent rather than the rate of 15 percent. Interest on refunds will be at the same rate as that charged for delinquencies, rather than the fixed 7 percent rate. This ordinance provides: For administrative hearings, subsequent to assessments for delinquent business taxes, to be held before a single Assessment Review Officer in the Office of Finance, instead of the Board of Review. That the Board of Review be composed of the City Attorney, Director of Finance, and a public member (replacing the Controller as the third member). 8/19/01 Equity & Fairness 8/19/01 Equity & Fairness Settlement Bureau This ordinance provides that: 8/19/01 City Attorney A taxpayer may make an offer of settlement to the City Attorney of a billed claim for delinquent tax or a denied tax refund claim at any time prior to the commencement of litigation regarding the subject claim. Any pending offer or counter offer of settlement is terminated by the commencement of litigation. Amnesty Program During the period from October 1, 2001 thru December 31, 2001, a 8/19/01 taxpayer who applies for amnesty and pays the taxes and interest due to will receive a waiver of any penalty applicable to those taxes 12/31/01 $5.9M Revenue Collection $26M Revenue Collection *Cumulative Impact as of December 31, 2014 Page I 3

8 New Business Tax Exemption This ordinance provides that: A new business, with less than $500,000 in gross receipts, is exempt from paying a gross receipts tax its first year of operation. For its second year, a new business, with less than $500,000 in gross receipts is exempt from paying a gross receipts tax. Subsequently amended to apply to out-of-city taxpayers that establish a new fixed location within the City. Subsequently amended to provide a third year Business Tax Holiday exemption for qualified businesses and to remove the $500,000 gross receipts threshold for new businesses establishing a first fixed location within the City between January 1, 2010 and December 31, Subsequently amended to extend the Business Tax Holiday exemption from January 1, 2010 through December 31, /10/01 05/01/03 08/13/10 11/20/12 Tax Relief $115M MBIA Muniservices Contract Council adopted Finance recommendation, in collaboration with BTAC, to execute a contract with MBIA Muniservices to perform a study of Alternatives to the City of Los Angeles Gross Receipts Business Tax. 02/21/03 Tax Reform Analysis Single Category Tax Filing This ordinance provides that: When a business consists of two or more activities taxable on the basis of annual gross receipts and one of the activities generates at least 80 percent of the person s annual taxable gross receipts, that business may elect to have all of its taxable annual gross receipts reported and taxed at the rate applicable to the activity consisting of 80 percent annual taxable receipts. Business activity originating from one location and only if taxed on the basis of gross receipts. 01/1/04 Tax Simplification 12,765 accounts benefited *Cumulative Impact as of December 31, 2014 Page I 4

9 Motion Picture, Television and Radio Producers This ordinance provides that: The taxes imposed for the businesses in this section shall be $145 per year or fractional part thereof for the first $2,500,000 of the measure, plus $1.30 per year for each additional $1,000 of the measure of tax, provided that the maximum tax shall be $12,495 for all measures of tax greater than $12,000, /1/05 01/21/11 Tax Relief $42.1M Subsequently amended to provide that: This ordinance imposes a tax of $145 per year or fractional part thereof for the first $5,000,000 of the tax measure, plus $1.30 per year for each additional $1,000 of the measure or fractional part thereof in excess of $5,000,000. The maximum tax will be $9,245 for all tax measures greater than $12,000,000. Bad Debt This ordinance provides an allowance for the reporting of taxable gross receipts on either a cash or accrual basis and it exempts uncollected bad debt from taxation. 07/01/05 Tax Relief $3M Creative Artists Exemption This ordinance provides the following major Tax Exemptions: 07/01/05 Creative Artist o No tax is required if gross receipts are $300,000 or less Tax Relief $11.1M *Cumulative Impact as of December 31, 2014 Page I 5

10 Automatic Tax Rate Reduction This ordinance provides: A rate reduction of up to 4 percent commencing in tax year The maximum total rate reduction shall be 15 percent from the rates imposed as of December 31, That there shall be no tax reduction in any year in which the net revenue increase is less than one percent. 01/01/06 Tax Relief $562.2M Rate Consolidation This ordinance provides for a consolidation of similar gross receipts fund classes into nine fund classes with six tax rates, instead of /09/07 Tax Simplification Amnesty Program During the period from May 1, 2009 thru July 31, 2009, a 05/1/09 taxpayer who applies for amnesty and pays the taxes and interest to 07/31/09 due will receive a waiver of any penalty applicable to those taxes $20.6M Revenue Collection Re-establishment of the Business Tax Advisory Committee (BTAC) Classification of Internet Businesses BTAC instructed to report back on the following proposals: Additional reductions to the City Gross Receipts Tax Elimination of business taxes on strategic categories Increase the Business Tax Exemption eligibility cap Increase the New Business Tax Exemption eligibility cap Multi-media business exemptions Target Zones with revised business tax rules Tax exemptions and incentives for businesses that create high paying jobs to include film production, hospitality and healthcare This ordinance provides: Those Internet-based businesses (and other businesses) shall pay a tax rate of $1.01 per $1,000 or fractional part. Effective for tax years 2010, 2011, 2012, 2013 and Subsequently amended to extend the sunset date through the end of tax year /04/09 5/03/10 12/08/14 Finance, with existing resources, served as lead City Department in providing support and tax data to BTAC Tax Relief $800K *Cumulative Impact as of December 31, 2014 Page I 6

11 Taxpayer Bill of Rights The following principles established by Office of Finance: 1) Fair and consistent application of the law 2) Professional treatment 3) A clear explanation of rights 4) Confidential treatment of tax information 5) 6) 7) 8) 9) 10) An explanation of charges due Information about tax exemptions Administrative appeal if issued an assessment Installment of agreements Taxpayer representatives Taxpayer advocate assistance Offer In Compromise (OIC) OIC is available to taxpayers who are seeking a reduction in their tax 11/2010 liability due to a financial hardship. Established through City Adopted Budget /06/10 Taxpayer Outreach and Education Equity Outreach for Financially Distressed Taxpayers Professor Swenson Contract Council adopted recommendation to execute a contract with Professor Charles Swenson, to review and analyze proposed changes to the 03/2/11 Tax Reform Analysis City s business tax as proposed by BTAC in the amount of $50,000. Voluntary Disclosure Agreement This ordinance provides: 08/19/11 $3.5M Revenue (VDA) That under the VDA, the period during which a delinquency Collection determination may be made against a qualifying taxpayer, is limited to five years. Unregistered non-compliant businesses may voluntarily come forward to resolve delinquent taxes. Delinquency penalties may be waived subject to qualification and payment of outstanding principal tax and accrued interest. *Cumulative Impact as of December 31, 2014 Page I 7

12 Mutual Fund Taxation This ordinance provides an exemption for qualified mutual funds as follows: Full exemption to business tax periods commencing on or after January 1, Tax Period: January 1, 2012 but before Jan. 1, 2013 at 2/3 of the rate. Tax Period: January 1, 2013 but before Jan. 1, 2014 at 1/3 of tax rate. 01/01/12 Tax Relief $8M New Car Dealers This ordinance exempts from taxation all gross receipts from the retail sales of new passenger motor vehicles by a dealer of new passenger motor vehicles. Effective January 1, Tax Year 01/1/12 Tax Relief $7.7M Entertainment and Multimedia This ordinance provided: 01/01/97 Business Tax Limitations For businesses engaged in entertainment or multimedia Hollywood and North Hollywood Redevelopment Areas located in the Hollywood Redevelopment Area or the North Hollywood Redevelopment Area; A maximum of $25,000 plus 10 percent of the amount of tax in excess of $25,000 that would otherwise be due. Amnesty Program During the period from September 1, 2013 thru December 2, 2013, a 9/01/13 taxpayer who applies for amnesty and pays the taxes and interest due to will receive a waiver of any penalty applicable to those taxes 12/02/13 Tax Relief $6.9M $24.3M Revenue Collection Business Tax Rate Reduction and und Class Consolidation This ordinance amends the LAMC to: Reduce the business tax rate for the Professions and Occupations fund/class from $5.07 to $4.25 over three years beginning in 2016; Consolidate the L042 fund/class into the L041 fund/class; Consolidate the L044 fund/class and L045 fund/class into the L043 fund/class effective in /11/15 Projected Tax Relief of $90M When Fully Implemented *Cumulative Impact as of December 31, 2014 Page I 8