By Olin Ericksen
Staff Writer

May 25 -- As it prepares to approve a budget next month, the City Council Wednesday night will consider exempting small businesses from a local license tax and penalties that added more than a half million dollars to City coffers in the last six months.

The proposed exemption -- which gives a tax break to any local business that makes less than $40,000 per year, including many home-based businesses -- will remove a financial burden from fledging entrepreneurs and small operators, said officials who back the change.

The ordinance would "provide a benefit to all small businesses, including start up businesses and various home businesses," states the report prepared by City finance officials.

"Artists and writers with low or fluctuating gross receipts would benefit from this ordinance,” finance officials said. “Moreover, the proposed ordinance is fair and relatively simply and unobtrusive to administer."

All businesses must still continue to register for an annual business licenese in order to operate, officials said.

The move comes nearly six months after the Santa Monica launched an audit program that sifts through state income tax records to catch businesses that owe the City taxes and back penalties totaling hundreds to thousands of dollars.

The program -- legalized under a 2001 state law that give cities the right to review individuals’ state income tax records -- was protested by several small Santa Monica businesses blindsided by the tax and penalties.

"Our members were caught completely unaware by the taxes and penalties," said Cheryl Rhodes, an assistant executive director of the Writers Guild of America West that claim thousands of members in Santa Monica.

"We're happy that Santa Monica has begun to rethink this," said Rhodes. "There's nothing like experience to make you take a second look at things."

Despite a month-long amnesty period earlier this year that helped push the number of compliant businesses to over 1,000, more than 11,000 possible violators remained on the list as of late last month.

Exempting businesses that earn less than $40,000 per year will eliminate nearly 75 percent of those ordered to pay the City under the audit, with many of them individuals who work from home, according to the staff report.

The proposed threshold will also mean the City will forgo nearly a half million dollars per year in future revenues, according the staff report.

Artists, screenwriters and others in the entertainment industry, many of whom work from home, have protested the tax and penalties that they say unfairly burden their profession and discourage their presence in Santa Monica, said Rhodes.

The screenwriters guild -- the heaviest lobby against the audit -- suggested that the City follow Los Angeles' lead and exclude their profession entirely by exempting "all creative talent in the entertainment industry earning gross receipts of under $300,000 per year," states the report.

"These taxes are being applied to individuals who in no way consider themselves a business," said Rhodes. "These are people who are (contract employees) earning a paycheck from studios outside Santa Monica, but live in Santa Monica."

City staff opted instead for the $40,000 threshold to avoid giving preference to a single industry and trying to define "creative talent," while also preserving the right to collect what could be a possibly lucrative revenue stream in the future.

"The (Los Angeles) exemption is extremely high and will deprive that city of very substantial revenue," states the report.

"The policy rationale underlying the very high exemption threshold for one class of businesses is unclear," the report continues. "Moreover, the conceptual boundaries of the special class are vague. In short, the Los Angeles system is very costly to that city and is difficult to rationalize and administer."

While Rhodes credited the City with acting swiftly and called the $40,000 exemption "a good first step," she said the guild "would like to see it go further."

It remains unclear how the City Council will vote on the item, but some council members have said the proposal is a marked improvement and accomplishes several goals.

"Santa Monica seeks sustainability, environmentally and economically, and removing the small home business tax would be an incentive for creating a more sustainable local lifestyle," said City council member Kevin McKeown, who said he favored a similar change, but at a threshold of $60,000.

"Any revenue loss to the City might be partly balanced by a bump in local sales tax, as Santa Monica neighborhood businesses gain home-working daytime customers," he said, echoing a point brought up in the staff report.

While Rhodes said they will back the proposed changes, even if the item is passed, it will not be the end of the fight.

"We think it is a good thing," said Rhodes. "But this is just the beginning of an ongoing dialogue."