City of L.A. wants taxes they’re not entitled to

Yesterday, David posted a note about Martini Republic’s rant about the City of Los Angeles shaking down its citizens for business taxes. Basically, the city has been sending letters to anyone who had a 1099 last year, saying that said 1099 recipients may owe them money. I was one of the lucky recipients of one of these letters the other day. I had one 1099 that I filed with my tax return last year, which was payment for a talk I gave in Boston. (I have given similar talks for the past 4 years, out of the state, with 1099s every year.) The city sent me a form asking me to either fill out an application for a business tax license or to complete a section on the back of the application that explains why I am not liable for city tax. Their FAQ on the topic pretty much says that I’m not, given that I didn’t perform any service in Los Angeles that I received a 1099 for (note: this is the same section of the FAQ quoted by Martini Republic) – emphasis added:

Q: I receive a 1099 form instead of a W-2 for my work. Am I required to have a City of Los Angeles Business Tax Registration Certificate?

A: Those that work as an “independent contractor” and are paid by 1099 versus W-2 may be liable for City of Los Angeles Business Tax. Persons that perform work in the City of Los Angeles as an independent contractor as defined by LAMC Section 21.00, Subsection (j) are normally considered to be engaged in business and are liable for the City Business Tax.

The kicker is that the section on the back that asks for an explanation of why I’m not liable says that I also need to sign the front of the form. The signature panel on the front of the form says that by signing, I am acknowledging that everything above my signature is correct. On a blank form. That I don’t need to fill out because I am not doing business in Los Angeles.

This seems ever-so-slightly counterintuitive to me. Why would I sign something that says I certify that everything above it is accurate, when everything above it does not apply to me? Seems like a recipe for disaster to me, since anyone who came across the blank, signed form could conceivably fill it out with all manner of damning yet incorrect information. I’m faxing the whole shebang to my accountant to be sure, but I’m planning to put “not applicable” in every single blank space on that form. After all, I definitely certify that everything on the business tax application is not applicable to me!

Anyone else receive a letter like this? Have you responded? If so, or even if not, what was the outcome?

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13 Replies to “City of L.A. wants taxes they’re not entitled to”

  1. I got one just this weekend – because I earned exactly $750 independently last year. It doesn’t seem worth it to go to an accountant for me – I’m just hoping not to owe vast sums. We’ll see…

  2. Yeah, I got one of those too and called. Turns out I’m not liable, ( the rep on the phone said so) so I sent the form back stating so and haven’t heard anything since. I’m keeping my fingers crossed.

  3. LA City Business Tax Registration fees are based on the gross income of the business and can be very confusing. If you don’t respond, the amount owed can increase substantially. It’s better to return with an “N/A” than not to respond at all. Also, there are staff members in the Office of Finance (OoF) who can assist. (If you call 311, you can ask for the OoF to be connected to someone.) You can also go to your respective council office for assistance, if you have someone there who is responsive enough and knows who to call. There are people in the OoF that will respond quite promptly when contacted by the Council Office.

    The reason you received the letter, by the way, is becuase of a voter passed proposition that allows cities to request from the State information on people who have filed 1099 or other business tax returns based in that city.

  4. i got tagged for $600 because of this. And it’s a nightmare for sports teams and professional theater companies, because they are subject to tax in every city they play in.

  5. I haven’t yet gotten one of these letters, but I’m worried I will…as a freelance writer, this sort of thing would (a) apply to me and (b) hit me really effing hard. Hopefully, LA City Nerd, I don’t make enough money to qualify…

  6. It is important to fill out and return your City of LA Gross Receipts tax forms. The good news is, since the Garcetti-Greuel tax reform passed in 2005, many small business and independent contractor (1099) taxpayers have no tax due at all. In tax year 2006, anyone who earned under $50,000 had no tax due. This year, that limit went up to $100,000. The Office of Finance estimated that two-thirds of all business tax payers were exempted through this move.

    You do still have to file, but if you get the forms in on time, it’s very likely you’ll owe no tax at all.

  7. What Josh said.

    They just want you “on paper” if you live in the the City of LA and run any kind of business, but most people won’t owe anything. The first year you can earn $50,000 in sales TO THE CITY, then the next year I think it’s $100K.

    (By TO THE CITY I mean if you have a mail order business they only care about orders sold/delivered within the City limits. Sell all you want everywhere else and they can’t touch that.)

    I went and got my license last year (volunteered) because my accountant said they are coming after everyone who files a Schedule C and it’s better to go yourself than be fined for non-compliance.

    It’s free and relatively painless. There’s an office on Wilcox in Hollywood but I can’t remember where. LA City Nerd, Can you help me out?

  8. Josh is correct. I’ve gotten those letters for the past couple of years as well. The first year I ended up shelling out about $250 and I had made about $11,000 in 1099 that year. The next year I waited too long to fill out the paperwork and just sent it in April at the same time I did the rest of my taxes. By that time the $$ amount had gone up to 50K and I would have owed nothing if I’d gotten my act together in time. I just paid the $50 in fines and called it a day. Next year I’ll send in the form on time.

    The certificate they send you looks just like the licenses on display at your local nail salon. I proudly hang it above my desk because it cracks me up.

  9. I received this letter. If it is your first letter and you find yourself in exempt status, be advised they will still require the “minimum tax” due for the first year of business. Apparently I’m exempt under nexus rule (less than seven total days of operation). Otherwise, I would have owed the minumum tax plus interest and penalties for 2005. Not fun, and not cheap.

  10. I do not own or operate a business in the city of Los Angeles. I do not sell anything in the city of Los Angeles. I do not perform any services in the city of Los Angeles. Why would I be even liable for a “minimum tax”?

    I earned a small amount on a 1099 for a talk I gave in another state. How is that taxable by the city of Los Angeles? Have they, unbeknownst to me, extended their borders so far east that the city now encompasses Boston? If not, I don’t see how that income is taxable by the city of Los Angeles.

  11. Your Boston and other non-city-cliented income is not taxable, but if you live in LA and you run a business out of your house (aka freelancing) they want you to have a license. There is no way around this save to have at least a mailing address (that you use for the IRS) outside the City limits.

    As previously stated, you will likely never owe them and the license is free, but if you just blow it off you will get nailed and they will charge you a penalty, not for not paying but for not having a license.

  12. See, that’s the thing, though – I don’t run a business out of my house. I work for a large corporation, and once a year I speak at a conference that’s produced by an outside company, on a topic that’s 100% about the job I do for said large corporation. I still don’t see how that activity is considered something that I need a business license from the city of Los Angeles for.

    If it is, then the law needs to be changed.

    I’m not planning to blow it off – I am going to fill out the paperwork as required – but I still think it is utterly ridiculous. I understand wanting a business license from actual freelancers, but if some guy that works at a big firm downtown as a salaried employee goes to his mom’s house in Cleveland once a year and dresses up like a clown and puts on a puppet show for kids for a marginal admission fee, I don’t see why that should be taxed. That’s essentially what I’m doing. Except it’s a powerpoint show. For grownups.

    But I do wear a clown suit.

  13. If you generate 1099 income/file a Schedule C on your taxes, that’s enough for them to consider that you DO run a business out of your house. ANYTHING that’s not W2 they want you on record with them. Period.

    If you want to avoid this in the future, find a way to get paid for the conference through your main W2 employer or work out some other way ut of the 1099.

    That’s what they are seeing, and that’s ALL they are seeing. They don’t care what you do for the money. Although I would like to see the clown suit.

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