Costa Mesa could reap a four-fold increase in business license tax revenue if it updated how it taxed businesses on their gross sales receipts, Finance Director Bobby Young told the City Council at a Tuesday night study session.
Introduced as a starting point for the council to work off, the tiered tax structure Young proposed could see Costa Mesa's business license tax revenue leap up to $3.6 million a year from the annual $850,000 it brings in now.
The city's current business tax structure has seven tiers, with a maximum of $200, which applies to about 2,075 of the city's 11,525 businesses. Costa Mesa hasn't changed its business license tax structure since 1985.
Young told the council that under the current system, "If you're $600,000 or $50 million, you're paying the same $200."
Young's model has eight tiers, and the range within each tier is far wider with a maximum tax of $10,000, which applies to about 75 businesses that have more than $25 million in gross sales receipts.
There are three ways Orange County cities handle business license fees, Young said. They go the way of Costa Mesa and tax based on gross receipts, they do spin-off of that idea by taxing per $1,000 of sales receipts, or they tax based on how many people a business employs.
Young's model isn't exactly fair, Mayor Eric Bever suggested. He said gross sales tax receipts can be misleading. A gas station may have substantial gross receipts, but its profit margin is hair-thin compared to a retailer, he said.
Mayor Pro Tem Jim Righeimer suggested taxes based on gross receipts were impractical, to which Councilwoman Wendy Leece agreed. Both said they were open to adopting a model like Newport Beach's business license tax structure, which has a max of $1,500 and adjusts with total employees.
"What has impacts is employees, not revenue," Righeimer said.
The council has until July 31 to approve a proposed change to the tax structure if it wants residents to vote on it in November.
Council members asked Young to return to the July 17 council meeting with a tax scenario based on Newport Beach's per-employee structure, as well as more data on how to modify Costa Mesa's current model.