Bill on Sharing State Tax Data Takes Aim at Home Businesses

You could be a barber in Bel-Air. Or a seamstress in Sherman Oaks. Or perhaps a veterinarian in Venice.

If you haven’t paid your city business taxes, the city of Los Angeles wants your name. And it wants the state of California to turn you in.

According to the state Franchise Tax Board, there are at least 260,000 Los Angeles businesses paying state taxes. City of Los Angeles records show only 200,000.

The discrepancy of 60,000 was at the center of a legislative debate last week in Sacramento that could ultimately provide Los Angeles and other California cities with millions of dollars in previously untapped taxes.

State Assemblyman Gil Cedillo (D-Los Angeles), author of a bill, AB 1992, that would require the state to share its tax information with cities, says the benefit to Los Angeles could be as much as $65 million.

“That would pay for a lot of improved city services,” Cedillo said. “But it is also a matter of tax equity and fairness to make sure that everyone knows they pay their fair share.”

Cedillo argues that the state already shares the information with the IRS, other states and even the government of Mexico--so why not Los Angeles and other cities here in California?

City tax officials want to compare lists and determine who was paying state taxes but ignoring the relatively modest city requirements.

Los Angeles collects $300 million in business taxes annually, but only a small percentage comes from individuals or home-based businesses. However, because of computers and the Internet, home workplaces have become a pillar of the modern economy, adding even more importance to the Sacramento tax debate.

“This is a precedent for the dot-com economy that all cities are watching carefully,” said David Jones, lobbyist for the League of California Cities.

The league supports the Cedillo bill but not a companion bill, AB 83, by Assemblyman Tony Cardenas (D-Sylmar). The Cardenas bill is tailored to the Los Angeles screenwriters community, which has been the most vocal opponent of the city business tax in recent years.

“The bottom line is that the home-based screenwriters want to declare to state and federal authorities that they are a business, allowing them to write off their home office, cell phone and car lease,” said Jones. “But they want the local governments to call them an ‘employee’ so they don’t have to pay local business tax. Our problem is that if home-based screenwriters are allowed this break, then why not home-based lawyers or home-based software writers or home-based anything?”

Part of the reason for the discrepancy between the state and city tax lists is that, until a new city ordinance was passed in 1997, it was technically illegal to operate a home-based business in Los Angeles.

“There was this historical oddity,” said state Sen. Debra Bowen (D-Marina del Rey), “that people couldn’t pay their business license tax because their business--even if it was just selling Tupperware--was illegal.”

In recent years, attempts to require the Franchise Tax Board to identify the missing businesses have been blocked by the Writers Guild of America, which represents the 5,500 screenwriters who populate the American movie capital.

The writers bristled at the city’s contention that they were operating businesses when they were sitting at home, waxing creative at their computer keyboards. In 1997, the Writers Guild filed a federal lawsuit challenging the constitutionality of the Los Angeles city ordinance requiring the writers to register with the city and pay a business tax.

Tensions ebbed after the guild won significant modifications for its members in Los Angeles, where the $25 business registration fee was eliminated, and West Hollywood, where writers were exempted from city taxes.

In a breakthrough that guild spokeswoman Cheryl Rhoden said “would have been unheard of a year ago,” an attorney for the guild actually spoke on behalf of the Cedillo bill in hearings Wednesday before the state Senate Tax and Revenue Committee.

The trade-off, negotiated by Los Angeles City Councilman Mike Feuer, was city support for the companion bill.

Despite opposition from Republican committee members who worried about privacy issues, the Cedillo bill requiring the state to hand over its tax information cleared the Tax and Revenue Committee on Wednesday. But the companion Cardenas bill, which addressed the concerns of the screenwriters, got left behind.

That could mean the issue will flare again next month when the Legislature comes back into session.

The League of California Cities insists that it will not support the Cedillo bill as long as it is linked to the Cardenas measure.

“We consider it an unwarranted intrusion into local affairs,” said lobbyist Jones. “Local business license taxes are almost the only locally collected and spent revenue source left for California cities.”

However, for the first time in the five years that the legislation has been addressed in Sacramento, most parties are optimistic that the key bill on sharing state and city tax data will pass.

Guild spokeswoman Rhoden said the organization is happy with the position taken by Los Angeles and is hoping to work out a similar understanding with other California cities.

“We are one city down,” said Rhoden, “only 90 more to go and hopefully we will be able to make some changes that will make everyone happy.”

Feuer is confident that a major hurdle has been cleared. “I think we are getting much, much closer than we have ever been,” he said.

Jones remains skeptical. “It’s still way too cloudy,” he said. “There is still a lot of time. The big test will be in the governor’s office. If it is still linked to AB 83, we have letters of opposition from over 200 cities.”