Taxing Home Businesses Creates a New Dilemma

It’s official. The city of Los Angeles no longer requires home-based businesses to register and pay a $25 fee. The City Council last week rescinded a regulation that had outraged many business owners and spawned two lawsuits.

Councilwoman Laura Chick is to be commended for pushing to make it legal to operate a home-based business in the city. And she deserves praise for recognizing that the controversial registration provision served no purpose and for persuading the council to ditch it.

But the law still requires home-based businesses to pay city business taxes, and that is keeping a Writers Guild lawsuit alive.

Whether to tax home-based businesses is a question lawmakers beyond Los Angeles are addressing. The state Legislature and the cities of Beverly Hills, Malibu and San Francisco also face this dilemma. Is a home-based business really a business or just a person earning an income?

Writers Guild spokesman Mark Ryavec argues that screenwriters are temporary employees of the major studios. He compares them to telecommuters who work for major corporations from home. As proof, he notes that many screenwriters, composers, graphic designers and artists receive W2 wage and tax statements. Thus they should pay no city business taxes, he says.

Los Angeles City Atty. James Hahn doesn’t buy it. He points instead to the 1099 forms many writers file for outside income, or nonemployee income. Individuals with 1099 forms are running businesses, the city attorney says, and they should pay city business taxes.

This debate could be nullified if a proposed home-based business bill makes it through the state Legislature this year. The Writers Guild and Ryavec persuaded Tony Cardenas (D-Sylmar) to sponsor Assembly Bill 2065, which would exempt some home-based businesses from paying city taxes and from being required to register with any California city.

The bill originally would have exempted all home-based businesses, but Ryavec and the Writers Guild agreed to narrow it to individuals engaged in “creative activity.”

It was a pragmatic move to get some benefits for the folks he represents, Ryavec says. There was also legal precedent--cases involving constitutionally protected freedom of speech--to back up an exemption for writers.

The bill passed the Assembly and awaits a hearing this month in the state Senate Revenue and Taxation Committee before going to the full Senate.

This measure would create inequities among home-based businesses.

Suppose three people decide they want to produce an Internet gardening magazine on their home computers. One person writes about flowers, one person does the coding to mount the magazine electronically and one person creates advertising brochures to give out at garden shops to promote the magazine Web site.

Who would pay taxes under the proposed state law?

The code writer and the advertising writer would pay taxes, but the flower writer would be exempt, even though all three sit at home punching away on a computer.

“It wasn’t our choice to limit the bill” to creative businesses, Ryavec said. “But we had to face the fact that every city in the state opposed the bill. . . . The bill was not going to move until it was narrowed.”

The city of Los Angeles, which had opposed the bill, is now neutral, he says.

The dilemma in which the cities find themselves has been created in part by new economic realities. As corporations over the last decade laid off employees and then hired them back as consultants to do the same job, a vast army of home-based businesses was created. Because many of these people are in their 40s and 50s and find ageism hinders them from getting hired elsewhere, their best hope to earn a living is to design a business card, crank up the computer in the back bedroom and call themselves a “consultant.”

Are they running a business and thus should pay taxes?

No matter what piece of paper they use to record income, W2 or 1099, what they’re really selling is their individual labor. Like the day laborers who stand on street corners waiting for odd jobs, these otherwise unemployed consultants are not running a business. They’re earning an income.

It’s a fine point, but one that a roomful of small-business owners at this year’s Los Angeles Times Investment Strategies Conference understood. They gasped when Louis Barajas, a city of Commerce small-business consultant with his own company, articulated the idea.

If you’re thinking of selling your business and retiring, Barajas said, your “business” has to be something apart from your labor. If your operation has a staff, an office, inventory, equipment, clients and a reputation and can be sold and run without you, then you have a business. But if your enterprise could not exist without you, if you’re working 60 hours a week and can’t leave it for six weeks at a time without negative consequences, then all you’ve created is a job, Barajas said.

Maybe city and state lawmakers ought to think about that point when they scramble to tax entrepreneurs who are only “in business” to survive. Maybe that’s why so many of these “business owners” are outraged at the idea of city business taxes.

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Vicki Torres can be reached via e-mail at vicki.torres@latimes.com. She will be featured at The Times’ Small Business Strategies Conference at the Los Angeles Convention Center Oct. 17 and 18.