Opinion: Can L.A. be slightly less bad for business?*
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*Updated at bottom of post with additional links.
Mayor Antonio Villaraigosa said Monday that he wants a change in city business tax law. It’s late. Is it too late?
Maybe you saw the July 10 op-ed in the Wall Street Journal and in Reason Magazineby Rick Newcombe of Creators Syndicate, who wrote that Los Angeles’ tax bureaucracy was driving his business from town.
In a nutshell, city tax authorities issued a ruling in 1994 that set the company’s business tax classification (more on that in a minute), then changed its mind 13 years later and reclassified the company into a higher category.
So Creators Syndicate suddenly has to start paying higher annual business taxes? No, that’s not even the big deal here. The problem is that the ruling applies retroactively, so the company owes back taxes for years starting in 2004, according to Newcombe’s op-ed. But even that’s not the big deal. Because the company, ahem, ‘underpaid’ for several years, it owes interest. And penalties. As if the Creators Syndicate had been cheating, rather than relying in good faith on the city’s earlier ruling.
That’s very L.A., and very bad for business. On Monday, Mayor Antonio Villaraigosa acknowledged that the practice was neither fair nor reasonable, and he called for a change in city law, with retroactive effect for companies caught in a Creators Syndicate-type situation (although the mayor did not name the company).
For any actual change, it has to go through the City Council, which must hold hearings and adopt an ordinance.
We hear a lot of complaints about the city’s business-unfriendliness. Sometimes it’s overblown, but not in this case. Newcombe, in his article, implies that the city re-figured his tax classification because it suddenly needed more money in 2007. That sort of conspiracy theory has become quite popular. I have no proof, but I suspect that something less sinister but still damaging was at work. The city is geared to run like a (not-so-well-oiled) machine, and has adopted administrative laws, structures and policies that put actual people last. City Hall works at its own pace, no matter the consequences.
Villaraigosa’s letter to his finance director, which is dated last Wednesday and was issued as part of a press release Monday, is instructive. ‘I find no fault with the action your office has taken in such cases,’ he writes, and in fact the tax bureaucracy was probably following the law to the letter. But shouldn’t someone -- Finance Director Antoinette Christovale, the city attorney, or anyone else involved in this dispute that goes back to the 1980s -- shouldn’t someone have raised a red we’re-being-bad-for-business flag before this company wrote in the pages of two national publications that it could no longer stay in L.A.?
About those tax classifications: Every business has to self-report in one of nine classifications. The city audits, and may determine that the category is wrong and that higher back taxes are owed. In this case, though, there was an audit, a ruling, and a follow-up audit with a reversal of the ruling years later, so the back-taxes order wasn’t based on self-reporting. It was based on the city’s ruling.
Los Angeles is actually better than it used to be on business taxes. Until a City Council overhaul within the last decade, there were more than 60 classifications, and several of them could apply if your business did several different things (such as sell both clothing and automobile servicing, as Sears did). But there’s apparently ample room for continued improvement.
Text of the mayor’s letter to Christovale:
It has been brought to my attention that there have been occasions, albeit rare, when a company has been given a certain business tax classification as the result of a city audit, and then had that classification changed as the result of a subsequent city audit, even though that company’s business model has not changed. I also understand that such a change in classification by the city can result in the company owing penalties and back taxes. I very much appreciate and respect the hard work you and your staff do in professionally interpreting and enforcing our tax code. As the law is currently written, I find no fault with the actions your office has taken on such cases. However, as a matter of good public policy, I do find fault with the law itself. If a company ‘self classifies’ and a subsequent city audit concludes that the classification was in error, I fully understand and agree that the classification should be changed and that ‘back taxes’ are owed. However, if a business is continuing to operate exactly as it has always operated, then I believe it is reasonable that the city should continue to respect the classification the city granted. Moreover, when the classification is established as the result of a city audit and the company has relied in good faith on that city-designated classification, I do not think it is fair or reasonable for the city to charge back taxes, if a subsequent city audit changes that original city determined classification. Accordingly, I would like you to prepare and submit to the City Council for its consideration, an amendment to the tax code to prohibit the city from collecting back taxes owed as a result of an administrative Board overruling an earlier Board decision. You should also propose a rule against reclassification, provided there is no change in business model or operation, for a fixed period of years beyond the ordinary three-year audit cycle. This proposed code amendment should be narrowly written to address this type of factual case. If a company substantially changes its business model or operations, obviously no such protection from reclassification should exist. I believe this code amendment should be written in a way as to retroactively apply to any companies currently caught in this situation. Please bring forward this proposed code amendment within the next 30 days. Thank you for your prompt attention to this matter. Very truly yours,
*UPDATE: Here is Newcombe’s post from today. Here is Stuart Pfeifer’s June 20 Times story with good background on the city’s reclassifications. Here is Rick Orlov’s July 20 story in the Daily News on the Creators Syndicate situation. Here is Saturday’s Daily News editorial calling for a revamp of the city’s business tax structure.
Photo: Richard Derk / LAT