The Santa Monica City Council voted Wednesday, May 25th, to give a tax break to small businesses and home-based businesses in Santa Monica.

All businesses that earn $40,000 or less in gross receipts a year will be exempt from paying the annual $75 city business tax.

“We need to consider improvements to the tax policy,” said Santa Monica City Council member Kevin McKeown.

“There is an issue of economic justice in giving the exemption, because $40,000 in gross receipts means the business is truly a home-based business.

“If you consider office space rental costs in Santa Monica, nobody is going to have a storefront with $40,000 in gross receipts,” McKeown said.

Steve Stark, city treasurer and director of finance, said the city should expect a tax revenue loss of $318,000 to $537,000 because of the tax exemption, adding, “There is a range because the number of businesses in the city fluctuates from year to year.”

The tax revenue the city receives from businesses that earn $40,000 or less per year represents three percent of all business tax collections in the city.

Businesses would still have to pay an annual $19 license renewal fee and new businesses would have to pay a one-time $95 planning fee.

Councilmembers are considering reducing the $95 planning fee all businesses now pay to $30 for home-based businesses.

“The planning process is not complicated for home-based businesses,” Stark said.

“For home-based businesses, all that planning staff has to do is determine whether the business is located in a home,” Stark said.

New businesses that have yet to earn gross receipts are exempt from the $75 tax if they declare on a certification form that they expect to earn $40,000 or less in their first year of business.

Councilmembers unanimously voted for the tax exemption and said they are not worried about tax revenue loss.

“I think this is a good incentive to encourage people to work at home and create a more sustainable local lifestyle,” McKeown said. “People working at home don’t commute and don’t pollute.”

Businesses with gross receipts between $40,000 and $60,000 per year would have to pay the $75 annual tax.

Businesses with gross receipts over $60,000 pay more than the $75 tax rate.

These businesses pay an additional $1.25 to $5 for each $1,000 in gross receipts over $60,000.

Changes to the tax policy are the result of a yearlong citywide business tax audit.

An audit indicated that there is a significant number of small businesses and home-based businesses in the city.

The audit raised concerns among entertainment industry professionals who live in Santa Monica and are taxed because the city defines them as businesses even if they do not work every year.

Businesses that are subject to business taxes are defined in the Santa Monica Municipal Code as:

“Any business, commercial enterprise, trade, calling, vocation, profession, occupation, or means of livelihood, whether or not carried on for gain or profit.”

Cheryl Rhoden, assistant executive director of the Writers Guild of America, spoke to the City Council on behalf of her union and several other entertainment unions.

She faulted Santa Monica for using Internal Revenue Service 1099 forms as the only way to determine whether or not an individual is subject to a business tax.

Studios and production companies often give employees 1099 forms instead of W-2 forms.

“Writers may have had no income prior to the city’s August 31st application deadline for a business license,” Rhoden said. “If they don’t file by the deadline and ultimately make a sale later in the year, they are subject to penalties.

“The city is basically requiring them to take out a license to look for a job.

“This is just one of the problems that result when the city extends the tax to individuals who are simply not businesses.”

The city taxes businesses on gross receipts earned in a billing cycle between July 1st of one year to June 30th of the next year, Stark said.

August 31st business license deadlines come after July 1st.

To avoid penalties, entertainment industry professionals would have to apply for business licenses if they anticipate gross receipts later in the billing cycle.

Another option for entertainment industry professionals would be to apply for business licenses every year.

“Most other businesses seldom have zero income in a given year, but numerous employees in the entertainment industry do,” Rhoden said. “There are vast cycles of unemployment in the industry.

“Half of Writers Guild of America members earned no income last year.”

Susan McCarthy, Santa Monica city manager, said the city has a longstanding practice — for privacy reasons — of not asking businesses to identify their industries when business taxes are levied.

The city does not know who or what type of business is being taxed.

The only factor to determine whether or not a business pays the city’s business tax is gross receipts reported on a 1099 form.

Rhoden said another problem with using a 1099 form is the example of producers who receive large amounts of funds to spend on productions.

Even if producers have to spend all of the funds on the production and keep no funds for themselves, they are required to report all of the funds as gross receipts on a 1099 form.

Marsha Moutrie, Santa Monica city attorney, said the business tax is not an income tax.

Councilmembers could amend the ordinance to exempt entertainment industry professionals from business taxes.

“This is a tax on doing business in Santa Monica, not an income tax,” Moutrie said. “A City Council in the past chose to define the term business very broadly.

“Various kinds of amendments could be considered in the future to change the definition, but right now it is not a tax intended to reflect income.”

Stark reiterated that entertainment industry professionals who earn or expect to earn $40,000 or less in gross receipts in a billing cycle would be exempt from the $75 business tax.