Due to the economic and physical disruption created by the COVID-19 pandemic, many businesses and employees limited or ceased operations within the incorporated City of Los Angeles (“City”) limits for the majority of 2020. As the annual renewal deadline of March 1, 2021 approaches, taxpayers whose City operations were substantially altered by the COVID-19 shutdown may benefit from reviewing their filing methodology to determine whether the basis for tax should be reduced in 2020 as compared to prior years.
Overview of the City of Los Angeles Business Tax
The City of Los Angeles Business Tax (“LACBT”) is a privilege tax administered by the Office of Finance and funds essential City services. The tax is based on the assigned Business Tax Classification and may take the form of a flat rate or sliding scale based on the number of employees, vehicles, or machines; however, most businesses are subject to a tax on gross receipts attributable to the City at a rate ranging from $1.01 – $1.425 per $1,000 of taxable receipts. For taxpayers who conduct business within and outside the City, special rules apply to determine the annual receipts that are sourced to, and therefore subject to tax by, the City. Click here to view the incorporated City boundary address lookup.
City Clerk’s Ruling Nos. 13 & 14
Ruling Nos. 13 and 14 apply primarily to wholesalers and retailers of tangible property. Under Ruling No. 13, taxpayers with no fixed place of business in the City, but who nevertheless carry on business activities in the City, calculate the measure of tax at 30% – 35% of gross receipts from sales to customers located within the City, depending on the method of delivery.
Under Ruling No. 14, taxpayers with a fixed place of business in the City who carry on business within and outside the City are entitled to a deduction from total gross receipts based on the location where certain activities are performed; for example, taxpayers may deduct 30% of the receipts of a sale to a customer located outside the City if the sale is solicited or negotiated at the customer’s location, and 5% of such total receipts if delivered on taxpayer vehicles to the customer location.
City Clerk’s Ruling No. 15
Ruling No. 15 applies to businesses engaged in the “Professions and Occupations” Business Tax Classification and generally applies to service businesses. Taxpayers who maintain a place of operations within the City but perform work outside the City are entitled to deduct 80% of such non-City receipts, with the assumption that various support functions, such as accounting, billing, collections, and administrative functions, account for the remaining 20% of attributable receipts and occur at the place of operations. Conversely, taxpayers whose place of business is located outside the City are entitled to deduct up to 20% of receipts from in-City customers under the same methodology.
The City has authorized an alternative formula “[w]here there are no measurable gross receipts” that can be clearly linked to in-City activities; this “cost of operations” method includes rent, depreciation, wages, and fixed charges as the basis for tax.
Application to Our Clients
In the wake of the state and local shutdown measures enacted in response COVID-19 pandemic, many businesses formerly located in the City transitioned to remote work environments in 2020. Furthermore, because of the higher cost of living in the incorporated Los Angeles City limits, many employees who previously commuted into the City now work from home and generate income from a place outside the City. The Office of Finance has not provided guidance regarding how COVID-related changes in business operations will be treated for purpose of apportioning taxable receipts to the City; thus, taxpayers may rely on the broad language of City Clerk’s Ruling Nos. 13-15, within which there may be reasonable positions to take to reduce the taxable gross receipts for the 2021 renewal.
If you believe a reporting methodology change to the LACBT filing may apply to one of your clients, please contact one of the following HCVT team members below for further questions or to discuss planning opportunities:
Doug Andersen | Partner | 562.216.5512 | douglas.andersen@hcvt.com
Hans Gustafsson | Partner | 626.463.7213 | hans.gustafsson@hcvt.com
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