City paying house calls to collect on business tax
By DIDIER DIELS Special to the Daily Press
Residents be warned: If you sold so much as a shabby old pair of sneakers last year, City Hall wants a piece of your sole.
City Hall requires that every individual who earns money from home pay a Santa Monica business tax.
Mark Humphrey recently learned that the hard way. The freelance writer got a letter last month from an auditing firm hired by City Hall informing him he owed $703.99 in back taxes, penalties and fees for using his home as an office.
Humphrey, who lives in Santa Monica and works full-time for KCCS Productions in Weatherford, TX, earns a few extra thousand dollars each year as a freelance writer and roughly $200 for mailing out CDs he produces as a hobby.
On this supplemental income, Humphrey already paid taxes to the federal and state governments but never realized he also owed Santa Monica, or that by writing from inside his Third Street apartment he was “conducting business” in the city.
“It may be that they’re perfectly within their rights, but it sure does seem unfriendly,” said Humphrey.
Just how many Santa Monicans discovered this year that their home activities qualify as businesses, or that they owed the city money, is unknown. City officials were unable to disclose how many residents had been charged for the first time, or how much that money amounted to. Also unclear is just how much the city paid the auditing firm MuniServices to track down the working-from-home residents.
For decades, municipal laws have defined a business as any entity doing business in any form or quantity within city limits.
That definition includes individual residents earning money, no matter how small the amount, from employment such as freelance writing, arts and crafts, or any other source.
“Technically speaking, half the homes in Santa Monica qualify for this,” said Samuel Moses, a Santa Monica accountant. “If you had a yard sale or sold a homemade candle, you qualify.”
Many individuals working from home for years have paid the $75 annual registration fee and any taxes owed, according to Steve Stark, City Hall’s finance director. But a recent change in California law has allowed the city to catch, charge and fine Santa Monica residents who haven’t paid, including those who never knew they were supposed to be paying.
Under a California State Assembly bill passed in 2004, municipalities were given access for the first time to state tax records, allowing them to see if residents were paying business tax to the state that they also owed their own city.
Santa Monica then hired MuniServices to cross-reference the long list of those paying a business tax to the state to the list of businesses registered with the city. Anyone not registered was sent a letter, then a bill. Humphrey got the initial letter on Oct. 13, informing him he needed to license his business with Santa Monica and supply the history of his income for the last three years.
City Councilman Kevin McKeown said he would be asking City Hall’s finance department staff as early as Tuesday to investigate whether or not the cost of paying MuniServices was more than the tax actually earned for the city.
“If it’s a fairly small amount of money — and I think it is — we might eat it up in administrative costs anyway,” McKeown said. “Besides, the annoyance of this is obviously huge.”
McKeown plans to propose in March an amnesty for Santa Monica residents who had been unaware of the tax before the letters from MuniServices went out in the fall. He also would advise anyone charged to pay the tax now and seek a refund later.
The Los Angeles City Council, after drawing similar ire for enforcement of the business tax, voted in November to extend amnesty to home businesses who had not previously paid the tax. The council also voted to eliminate the tax for anyone making less than $100,000 in total income.
In Santa Monica, no one earning less than $60,000 in total income has to pay the tax beyond the annual $75 business license registration fee.
“No one knows about this, because no one bothers to find out,” Moses said. “I try to inform my clients, but I don’t bash them over the head with it. It’s like speeding. If you want to go to Vegas at 70 miles or 100 miles an hour, it’s your option. If the cop doesn’t pull you over, you get there faster.”
Moses said that enforcement of the business tax, even after the California Assembly bill went into effect, remained spotty at best and the penalty for not registering, in some clients’ minds, was still worth the risk.
The actual tax rates vary depending on the type of work performed. “Professionals,” the broad label that includes Humphrey, are required to pay $5 out of every $1,000 in income.
“It’s like giving out jaywalking tickets,” Moses said. “It’s another way to earn money without publicly raising taxes. The law is on the books, but the cities really only enforce it when they need the money.”
Originally published in the Santa Monica Daily Press print edition on February 5, 2005. Read the original PDF.