Some tech firms face higher bill
Twelve years after Los Angeles adopted a lower tax rate to attract Internet and multimedia companies, the cash-strapped city is telling many tech businesses that they don’t qualify for the discount and billing them millions of dollars in additional taxes.
Shopzilla.com, a comparison-shopping website based in West Los Angeles, was slapped with $2.74 million in additional taxes. Now it’s considering moving to Santa Monica, a couple of blocks away.
“It’s a shortsighted view by the city,” Shopzilla Inc. President Bill Glass said. “You go 400 yards, you’re in Santa Monica. We don’t need to be here for any reason. Moving is no small decision, but for that kind of money. . . .”
In 1997, Los Angeles adopted an 80% business tax discount for Internet and multimedia companies, saying it wanted to better compete with neighboring cities for the businesses it viewed as the future of the region’s economy.
“Los Angeles will be the capital for multimedia into the 21st century,” then-Mayor Richard Riordan said.
Now, a decade into the 21st century, some companies say the city has done an about-face.
Since 2004, the city has informed about 30 businesses that they do not qualify for the multimedia and Internet discount, said Antoinette Christovale, director of the city’s Office of Finance, which oversees tax collection.
Christovale said businesses selected their own tax classification from among myriad choices, subject to audit by the city. The 30 businesses moved out of the multimedia category represent less than 1% of all businesses audited by the city, she said.
Still, the surprise bill that landed last fall at Shopzilla -- and concerns expressed by other Internet companies -- has prompted City Councilmen Bill Rosendahl, Eric Garcetti and Greig Smith to propose redrafting the tax code to give Internet companies a break.
Rosendahl, whose district includes Shopzilla’s headquarters, said he was outraged to learn that the city had slapped the company with the enormous retroactive tax bill.
The company, which also runs bizrate.com, employs 220 workers and is a significant contributor to the local economy, spending an estimated $500,000 a year at local restaurants for daily catered lunches for its employees, company officials said.
“I just think it’s outrageous to even think about wanting to collect that kind of back money,” Rosendahl said. “We need to do everything we can to keep Shopzilla in the city of Los Angeles. We need smart-growth industries that pay good wages.
“We have the biggest deficit in the city’s history right now. The last thing you want to do is discourage anyone from coming into Los Angeles to do business.”
Another company that’s taken issue with city business taxes is Internext Media Corp., which operates search engine abcsearch.com.
Told that it didn’t qualify for the multimedia rate, the company filed a lawsuit against the city last year to recover $291,000 in taxes it says it shouldn’t have been required to pay. The case is scheduled to go to trial in December.
It’s not just the multimedia discount that has Los Angeles businesses concerned. Creators Syndicate Inc., which syndicates cartoons and columns to media companies, is considering moving out of the city after the Office of Finance moved it to a higher tax bracket. The company said the action conflicted with a 1994 city ruling that said the company belonged in a lower tax bracket.
Creators Syndicate recently paid a retroactive tax bill of more than $100,000, money it hopes to recover through an appeal.
“I love L.A., but we could be headquartered anywhere,” said Richard S. Newcombe, the company’s president and chief executive. “They have to do something.”
Robert “Bud” Ovrom, Los Angeles deputy mayor of housing and economic development, acknowledged that the city needed to work to reverse its reputation as an unfriendly place in which to do business.
A good start, he said, would be rewriting the language of the 1997 tax-break law so that it more clearly defined the type of companies to which it should apply.
The law provided the discount to multimedia companies and businesses engaged in “the development of online and Internet services and the design of websites for clients.”
The dispute between the city tax office and Shopzilla centers on whether the firm meets the definition spelled out in the law. The company is a comparison-shopping site that directs customers to online merchants.
“The bottom line is these technologies changed faster than tax law,” Ovrom said. “After they wrote the tax law in 1997, there were businesses that sprung up that weren’t envisioned.”
Shopzilla said the decision should be easy for the city.
“The main point about Shopzilla, Google or other Internet companies is we do not exist but for the Internet,” said Shopzilla’s general counsel, Blythe Holden. “We do not provide any services other than online or via the Internet. How can we not qualify?”
Among those concerned about what the city is doing is Riordan, who 12 years ago viewed L.A. as a potential center for high-tech companies.
“We wanted to get all of these companies into Los Angeles because they were the companies of the future,” Riordan said. “You’re not doing any good by taxing them; you’re just driving them away.”
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