How L.A. Can Help its Businesses

Local governments have been trying to help their residents through the coronavirus pandemic, and that’s great. But the city of Los Angeles has been particularly lax in helping its businesses. Here’s something meaningful the city of Los Angeles could do: declare a gross receipts tax holiday. In case you’re not familiar with it, the gross receipts tax is just that. It is a tax put on a company’s gross receipts or what most of us call revenue. The tax rates range from $1.01 for each $1,000 in revenue all the way up to $4.50 per $1,000, depending on what kind of business you have. (Professional service providers such as accountants and lawyers pay the top rate, wholesalers pay the bottom rate and most other kinds of businesses pay a rate in between.) The first reaction many people have is something like, “$1.01? That’s not bad.” But remember: That’s a tax not on income but on revenue. The difference is huge. Let’s look at an example. Say you have an apartment complex and you normally get $5 million a year in revenue. If you have a profit margin of 3 percent, that means you have income of $150,000 a year – if your apartments were in Glendale or Santa Clarita. But if your complex were in the city of Los Angeles, you’d have to pay L.A.’s unusual gross receipts tax. The rate for those who rent property is $1.27 per $1,000, so your tax would be $6,350. Your income would be reduced by that amount, so you’d have $143,650 in income. OK, still not bad. But these aren’t normal times. Maybe the gross receipts from your apartment building will be only $3 million this year. On the one hand, since your revenue is down your gross receipts tax bill would be reduced to $3,810. But you’re probably looking at a net loss from operations. And it doesn’t matter if you lose $10,000 or $1 million this year, you still have to pay that gross receipts tax. Again, it’s a tax on revenue, not on income. Even if you have no income from your enterprise or suffer a net loss, you still have to pay the tax. That’s completely unlike an income tax and why some argue that the tax is fundamentally unfair. I picked an apartment owner for a reason. That’s because in the city of Los Angeles, landlords are not allowed to evict tenants who have lost income due to the coronavirus pandemic. And the tenants don’t have to repay past-due rent at least until about a year from now but probably longer. That’s great for the tenants; clearly many need help. But it can be disastrous for apartment owners, who also need help. Many of them are looking at reduced revenue and quite possibly net losses for a long time. The city has shoved huge liabilities onto landlords. It seems only fair to give them a break – temporarily – from the gross receipts tax. Business have long complained that the gross receipts tax is just that: gross. The city of Los Angeles has long promised to do something about it, especially since most other cities don’t levy such a tax. But the city has done nothing meaningful. This is a chance for the city of Los Angeles to help its businesses. Suspend the gross receipts tax until the pandemic has ended.