License Tax Crackdown Brings 1,000 Businesses into Compliance

By Olin Eriksen
Staff Writer

April 21 -- A citywide crackdown launched in November has brought more than 1,000 Santa Monica entrepreneurs operating without a business license into compliance, with more than half taking advantage of a month-long amnesty period that ended April 15, City officials said.

That still leaves 11,346 individuals who may be on the hook for unpaid taxes and hefty fines after failing to respond to notices the City began sending out last November, according to City finance officials.

"That's the number of cases that have not been resolved," said Steve Stark, the City’s finance director.

Although the list "contains many names who do not require a license," those found to be in violation must now pay the business license tax plus penalties -- which in some cases means hundreds, even thousands of dollars, Stark said.

"The amnesty period expired April 15," said Stark, "so we are back to enforcing the code."

Possible offenders were first contacted in November when their names showed up on a list of individuals compiled by comparing local business licenses with individual State income tax records under a 2001 State law.

The program, and the amnesty in particular, Stark said, "have been effective to bring people into compliance," as well as to weed out those individuals who should not pay anything at all.

Since the program was launched, 1,004 people have paid a total of $598,000 for businesses licenses, said Stark, adding that BMI -- the outside firm that runs the program for the City -- receives 30 percent of all fees collected.

During the amnesty period, 550 individuals have come into compliance, paying a total of $228,790, Stark said.

Penalties for all those who have paid have either been waived or refunded by the City, Stark said.

The month-long reprieve from fines came after the City received between 50 and 100 complaints from individuals -- many of them screenwriters, music teachers and instructors -- who said they were startled to receive letters notifying them that they had to pay the license tax and back penalties.

The list was compiled by BMI, which dug through State Franchise Tax Board records that include the name, address, social security or taxpayer identification number and business activity code for State income tax payers.

The new program was the result of a State law that gives cities to right access State Franchise Tax Board data to help identify businesses that pay business taxes but may not have licenses.

"The City received a new tool that gave us the ability to seek out those businesses that need to comply," said Stark. "It's just another tool we have, and this is an ongoing process."

Since the program began, BMI has determined that 2,525 people do not owe any license fee, Stark said, adding that a large number of the outstanding cases will yield similar results.

While Stark hailed the program as a success, he admitted there is some talk by City Council members of "revisiting the business license code."

Council Member Kevin McKeown said he would be in favor of repealing the license tax entirely for some businesses that earn less than $60,000 a year.

"We've got to compare the revenue we are generating versus the harm we are doing," said McKeown. "A lot of these people are people who work in the entertainment industry.

“They're screen writers who have sold maybe one screenplay or painters who have maybe sold one painting," he said.

No exemptions would be given to "full-fledged" businesses that operate out of someone's home, such as an accounting business, McKeown said.

"What we won't be touching here is storefront businesses," he said.

While McKeown hopes the issue will be taken up by the council this summer, he is unsure the backing for the proposed changes is there.

"What I'm looking at here is… not retroactive,” he said. “I'm not even sure if we are going to have the four votes to push through the changes."

Some businesses, according to City staff, "may have been in operation for years, but since the City had no means of identifying their existence in the past, they were never previously notified of the requirement to obtain a business license."

A City ordinance calls for a "penalty of 10 percent a month not to exceed 100 percent of the business license tax due" to businesses operating without a license, according to the February staff report.

"Many of the businesses contacted through the discovery process owe 100 percent penalty," the report said.

This year, the new program is expected to generate $680,000 of new revenue, Stark said.

That amounts to 3.6 percent of the total $18.6 million expected to be brought in by the business license fee program as a whole, compared to $17.9 million last year, Stark said.