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Gross receipts tax or sales tax? Beemer or Porsche?

Beverly Hills BMW Mark Bolster Los Angeles Times June 8, 2010

How much in sales tax does Los Angeles get on each car sold by a dealer located within city limits? Does the city get all 8.75% in sales tax? But wait, there are special rules for car sales; doesn't all the tax money go to the city in which the buyer lives and registers the car, not the city where the dealer is located?

The questions come up because of the proposal by Mayor Antonio Villaraigosa and City Councilmen Eric Garcetti and Mitchell Englander to eliminate one kind of tax on car dealers -- the gross receipts tax, also known as the business license fee -- in order to get dealerships to leave nearby cities like Beverly Hills and come to Los Angeles. The three went to Beverly Hills on Tuesday to celebrate next year's move of a Porsche dealership to Westwood. A BMW dealership recently moved from Beverly Hills to the Miracle Mile.

Yes, Los Angeles has a pretty high sales tax rate -- 8.75%, representing the statewide rate of 7.25% plus an additional 1.5% imposed locally by the county and the city for things like the Measure R transportation fund. Some of that goes to the city. Some goes to transportation and some to the county.

The three pols on Tuesday suggested that Los Angeles could recoup approximately 1% on the gross sales of new-car dealerships so that, for example, $100 million in sales at Beverly Hills Porsche would amount to $1 million in sales tax receipts for Los Angeles' general fund.

But not quite. Their estimate is too high, by 25%. Cities get only 0.75% from the sales tax (the other 0.25% goes to the county for transportation), so Los Angeles' gain from having Beverly Hills Porsche move across the municipal boundary, assuming the same $100 million in sales, is only $750,000: Still nothing to sneeze at, especially if multiplied by an additional dozen or so dealerships. The idea is to entice them, and their sales tax revenue, into town by waiving their 0.127% gross receipts tax. And, of course, 0.127% of $100 million is less than 0.75%. But the point here is not merely the rate; it's that the dealerships don't pay anything to Los Angeles if they're not located within city limits.

Some critical comments on the mayor's Facebook page (and kudos to him and his people for keeping them up there) say big car dealers don't need tax breaks. And, OK, let's say that's true. But if you want your city to get a cut of the sales taxes instead of some other city, you may have to offer them something, like a tax break.

Ever since Proposition 13 capped property taxes, cities have fought each other to attract big-box stores and car dealerships, because they need to replace their lost property tax revenue with big sales tax figures. But lawmakers in Sacramento wanted to reduce cities' incentive to swipe car dealers from each other, so the law is different for cars than other retail sales. If you buy a laptop or a power mower from a big-box store in Los Angeles, the city will get that 0.75% in sales tax plusthe city's chunk of the additional 1.5% extra in local sales tax (if you're keeping score, that's a total of 8.75%: 3.6875% in base state sales tax, plus two separate 0.25% items and two separate 0.5% state items under various ballot measures, emergency funds, etc., plus 1.0625% to the state to backfill various swipes it made from local funds under the 1990s version of realignment -- there's 6.25% in state sales tax plus that 0.75% for cities and 0.25% for county transportation -- now we're at 7.25% in state sales tax -- plus an additional 1.5% that we passed locally under various city and county ballot measures).

For car sales, though, the city's portion of the local 1.5% goes not to the municipality where the dealer is located but instead to the city where the purchaser lives. So what matters for that portion of the sales tax -- that 1.5% -- is whether the buyer lives in Beverly Hills or Los Angeles, not whether the dealership is located in one city or another.

But still -- there's that 0.75%. That does in fact depend on where the dealership is located (there is a lot of confusion and misunderstanding on that point). So bringing car dealers back to Los Angeles could be good for the city's sales tax receipts, just as it would be bad for the neighboring cities' receipts.

Now, will waiving the gross receipts tax get more dealerships to leave Beverly Hills -- or Glendale or wherever else -- for Los Angeles? That's another question.

ALSO:

L.A. councilman says business tax report had editorial spin

L.A.'s taxing question

--Robert Greene

Photo: Beverly Hills BMW on voting day in June 2010. Credit: Mark Boster / Los Angeles Times

 

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