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City Council Report

 

City Council Meeting: September 24, 2013

Agenda Item:  11-A

To:               Mayor and City Council

From:           Gigi Decavalles-Hughes, Director of Finance

Subject:        Resolution Waiving Past Due Business License Taxes, Penalties and Related Fees

 

 

Recommended Action

Staff recommends that the City Council adopt the attached Resolution waiving past due business license taxes, penalties and related fees for individuals or businesses operating residential rentals of three units or less and artists who create artwork on location at the Santa Monica Airport but do not sell the art on site, for all past fiscal years including the 2013-14 fiscal year.

 

Executive Summary

A recent review of business license operations revealed that the City has not been requiring individuals or businesses that own/sublease and rent three or fewer residential units, or artists who create artwork on location at the Santa Monica Airport as part of their livelihood but do not sell the art on site, to secure a Business License.  Beginning immediately, these businesses will be required to obtain a business license. Given that the practice of not requiring business licenses for these business activities was based on staff’s previous interpretations of the Santa Monica Municipal Code (SMMC) and not the fault of the participants, the attached resolution waives past due business license taxes and associated penalties and fees for all past years including the 2013-14 fiscal year, to provide staff time to identify the affected individuals and companies.

 

Discussion

 

A recent review of business license operations revealed that individuals or businesses that own/sublease and rent three or fewer residential units, or artists who create artwork on location at the Santa Monica Airport but do not sell the art on site, have not been required to obtain a Business License from the City, as are all others that do business in Santa Monica.  To maintain a fair and consistent application of the law towards all members of the community, staff recommends that, effective immediately, these individuals and businesses will be required to obtain business licenses by filing a business license application; however, they will not be required to pay the taxes that are past due.  

 

As staff continues its efforts to identify unlicensed businesses operating in the City, staff is required to collect all license tax that is owed for past years for any business that is being brought into compliance.   These taxes are past due and are a collectable debt.  In addition to all prior years, taxes for the 2013-14 fiscal year became past due as of August 31, 2013 and are a collectible debt.  However, since non-payment of business license taxes was not the fault of the individuals or businesses engaged in the business activities outlined in this report, adoption of the attached resolution will eliminate the City’s requirement to seek payment of these past due taxes and related fees and penalties.  City Council has the authority to waive a collectable debt owed to the City by resolution.    

 

As part of staff’s efforts to identify unlicensed businesses, staff will be conducting educational efforts to inform these businesses of the requirement to obtain a business license over the course of the next year. 

 

Artists at the Santa Monica Airport

In the case of artists who create art at the Airport but do not actively sell their art from the same location, the fact that the sales are not taking place at the Airport location does not negate the fact that a business activity is taking place.  The SMMC defines a business as “Any business, commercial enterprise, trade, calling, vocation, profession, occupation, or means of livelihood, whether or not carried on for gain or profit.”  An artist who creates art as a hobby is clearly not required to obtain a business license.  However, any artist who creates art as a means of livelihood is required to obtain a business license.  If an artist sells his or her art at a physical location outside of Santa Monica (e.g. an art fair), the artist would be able to apportion their taxes accordingly, by reducing the total amount of gross receipts attributable to Santa Monica.

 

There are approximately 60 artists either leasing or subleasing space at the Airport who would potentially be eligible for a waiver of tax under the proposed resolution.  Artists who do not fall under the specific conditions noted in the resolution and who are unlicensed would not be eligible for the waiver provided in the request; they would therefore be required to pay past due taxes and penalties. 

 

Artists reporting less than $40,000 in worldwide gross receipts annually would be eligible to claim the small business tax exemption and pay no tax.  Artists who report gross receipts of $60,000 or less would be subject to business license tax of $75 annually.  If gross receipts exceed $60,000, artists would pay $1.50 for every $1,000 in gross receipts in excess of $60,000.  Staff will be performing outreach to identify these individuals and businesses and educate them on the requirement to obtain a business license.       

 

Residential Rentals – Three Units or Less     

The SMMC clearly establishes a business classification and tax rate for the rental of residential property of more than three units when such rentals are for residential use and where such units are located on the same or an adjoining property.  However, even though the SMMC does not include the rental of residential property of three units or less in the same classification as the rental of residential property of more than three units, it does not specifically exempt these businesses.  Santa Monica Municipal Code (SMMC) Section 6.04.020 requires a business to obtain a business license unless specially exempted by law.

 

Although information is not available from the County Assessor’s office on the number of properties with two or three units or the number of single family homes that serve as rentals, staff has determined from a report issued on March 22, 2013 by the Rent Control Department that there are 1,080 rent controlled two and three unit properties that are required to obtain a business license.  Since this only includes rent controlled properties, the total number of two and three unit properties is likely more than1,080.  In addition to two and three unit properties, a search of a residential rental website displayed 96 single family homes and condos for rent with rents ranging from $950 to $40,000 per month.    

 

Individuals and businesses that collect less than $5,000 in total monthly rents, and therefore $60,000 or less in gross receipts, would be subject to business license taxes of $75 annually.  Any business that reports less than $40,000 in worldwide gross receipts annually would be eligible to claim the small business tax exemption and pay no tax.   Staff will be performing outreach to identify these individuals and businesses and inform them of the requirement to obtain a business license.

 

Financial Impacts & Budget Actions

There is no immediate financial impact or budget action necessary as a result of the recommended action. Staff will return to Council if specific budget actions are required in the future. Staff estimates that with a 75% compliance rate in FY 2014-15, the City would generate an additional $86,000 in business license tax revenue.

 

 

Prepared by: Salvador M. Valles, Business & Revenue Operations Manager

 

Approved:

 

Forwarded to Council:

 

 

 

 

 

 

Gigi Decavalles-Hughes

Director of Finance

 

 

Rod Gould

City Manager

 

Attachment: 

A.    Resolution