Home-Based Businesses: The Latest Taxing Twist

Six months after Los Angeles officials legalized home-based businesses and urged thousands of small firms to get permits, they have suddenly reversed course.

Now, those same companies may not need to get a permit after all.

Home-based businesses that have zero impact on their neighborhoods don’t have to get a $25 home-occupation permit, City Atty. James K. Hahn said in a memo Friday.

That means thousands of quietly operating businesses--not just writers who filed a lawsuit last week seeking exemption from the registration rule--don’t have to get the permits. They still must pay city business taxes, however.

Hahn’s legal opinion is the latest twist in an ordinance that was hastily amended in April over a tax provision and then challenged in federal court on constitutional grounds by the Writers Guild of America.

The memo has sown widespread confusion, stunning city building and permit workers who had argued they needed extra staff to process the permits. Employees in the City Clerk’s office, which began issuing permits in March, are scrambling to figure out how to refund money to people who got the permits but don’t need them now.

The attorney representing the Writers Guild said he is at a loss about how to counsel writers about the permit.

And Councilwoman Laura Chick, who labored for two years to pass the ordinance, said she felt like “Alice in Wonderland,” fallen down a rabbit hole and faced with nonsense.

“Belatedly, after working with us for two years, the city attorney has basically redefined the home-occupation ordinance,” said Chick, who introduced a motion Tuesday to make the city’s rules agree with Hahn’s opinion. “It’s mind-boggling. [The ordinance] is turning out not to be common sense, but convoluted.”

And she said the $25 fee may have to be thrown out altogether.

“If a huge percentage of home-occupation businesses don’t come under the ordinance anyway, why then do we need to worry about charging the $25 fee to hire more building and safety inspectors?” Chick said.

Hahn issued the memo because Chick and Councilman Michael Feuer wanted to know if writers and artists were required to register as home-based businesses.

Before the city legalized home-based businesses in March, home-based businesses could be shut down if neighbors complained.

The issue came to a head as thousands of these companies sprang up with the spread of personal computers and corporate downsizing. Chick and other council members recognized that zoning regulations needed to change.

The ordinance required that all home-based business operators register, pay a $25 fee and meet certain conditions to ensure they did not violate the residential nature of their neighborhoods.

Home-based businesses were also required to pay city business license taxes. The taxes, a little-known and largely unenforced regulation in place since the 1920s, caused an uproar among small businesses--especially when they found out they owed three years’ unpaid back taxes.

The back taxes were rescinded during a six-month amnesty, but the ordinance still drew the ire of the Writers Guild of America. In a federal lawsuit filed Sept. 8 against the city, guild attorney Gary Bostwick argued that the law infringed a writer’s constitutional rights to free speech and privacy.

Hahn’s memo targeted the guild’s concerns, but it applies to all home-based businesses, officials said.

The memo said a home-based business that, for example, attracts few clients to the neighborhood, has few business-related deliveries, no employees and does not advertise, most likely has no impact on the neighborhood. Thus, it can be deemed an “accessory use” and not a separate land use requiring a permit.

Chick said she was pleased that the city’s ordinance exempts large numbers of businesses, but she added, “Why wasn’t this part of the ordinance from the beginning?”

“As a City Council member, I’m not a legal expert. I have to rely on city attorneys,” Chick said. “I’m not taking any of the blame on this.”

The city attorney’s clarification won’t stop the Writers Guild lawsuit, said guild attorney Bostwick, who added, “Nobody knows what an accessory use is.”

Meanwhile, businesses that didn’t file for a permit may have another problem awaiting them: taxes.

According to the City Clerk’s office, only 5,782 of about 20,000 home-based business owners in Los Angeles filed permits.

But Assembly Bill 701, which passed the Legislature last week, allows California’s Franchise Tax Board to give state tax information to cities so they can track down individuals who paid state business taxes but failed to pay city business taxes.

Unless Gov. Pete Wilson vetoes the bill, which does not appear likely, computerized databases could begin searching for home-based business city-tax scofflaws as early as Jan. 1.

“What’s really going to hurt people is when the city says, ‘Hey, I’ve got another tax bill for you,’ and the businesses are not used to paying,” said home-based business expert Paul Edwards. “That’s really where the issue is.”

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Times staff writer Vicki Torres can be reached at (213) 237-6553 or via e-mail at vicki.torres@latimes.com