Multistate Tax Alert: Los Angeles Business Tax Update
Filing deadline rapidly approaching; city promises vigorous post-amnesty enforcement
This External Alert summarizes the Los Angeles Business Tax (“LABT”), while highlighting the upcoming February 28th filing deadline and the intent of the City of Los Angeles (the “City”) to “vigorously pursue a range of enforcement actions following the [recently-expired] amnesty period.”1
Summary of the tax
The LABT is a gross receipts tax imposed on most businesses operating within the City. The tax separates business activities into a number of tax classifications, each with its own tax rate. In addition, the LABT is a location-based tax that requires taxpayers to register and obtain a business license for each business location within the City. The following is a summary of the more significant characteristics of the tax:
- Nexus is broadly asserted and applies to most individuals and businesses “engaged in business” in the City. This includes:
- Maintaining a fixed place of business within the City;
- Owning or leasing real property within the City for business purposes;
- Maintaining inventory in the City;
- Regularly soliciting business within the City;
- Performing work or services in the City on a regular and continuous basis involving not less than seven working days per year; and
- Operating a motor vehicle on City streets for business purposes.
- Tax rates for the various tax classifications range from $1.01 (for wholesalers and retailers) to $5.07 (for professions and occupations) per $1,000 of gross receipts.
- When a taxpayer is involved in two or more business activities, a single primary tax classification election is generally available, allowing tax payment under a single tax rate if at least 80 percent of the taxpayer’s gross receipts fall within that tax classification.
- The statute of limitations for assessments is generally three years but is extended to six years where there has been a substantial understatement of tax (at least 25 percent) and to eight years for non-filers.
- A Voluntary Disclosure Program (“VDP”) went into effect in October 2011 and currently limits the look-back period for non-filers to five years. Without the VDP, the maximum look-back period is eight years.
- Claims for refund due to an overpayment must be filed within one year from the date of payment to receive a cash refund. After one year, taxpayers are entitled to a credit of the overpaid amount, which may be applied to offset any LABT liability for up to three years from the date of overpayment.
- Tax exemptions are currently available for qualifying New Businesses2 and qualifying Small Businesses.3 However, both exemptions require the taxpayer to register and file annual renewals with the City on a timely basis.
- The City allows for apportionment based on several City administrative rulings.
Current year LABT renewals along with the required payment of tax became due on January 1, 2014 and will be deemed delinquent if the filing and payment of tax is not made by February 28, 2014.4 Filings not received by February 28th will incur delinquency penalties of 5 percent of the tax due per month for the first four months of delinquency, plus interest. For example, the cumulative penalty due in the fourth month is 20 percent of the tax due. An additional 20 percent penalty is imposed for a maximum penalty of 40 percent of the tax due for long-term (five months and beyond) delinquencies, plus interest. A written request for a 45-day extension may be made for good cause without imposition of penalties so long as 90 percent of the liability is paid and the request is made on or before February 28th.
As the filing deadline approaches, taxpayers should revisit their LABT filing methodologies to ascertain whether their business activities in Los Angeles are properly classified and apportioned for LABT purposes.5
Strict enforcement of the LABT following the Tax amnesty program
During the prior year, the City instituted a Tax Amnesty Program from September 1 through December 2, 2013, whereby businesses were provided an opportunity to pay any outstanding tax, interest and fees owed to the City and have all applicable penalties waived with respect to the LABT as well as certain other City taxes.
The City has indicated that following the amnesty period, the Office of Finance will “vigorously pursue a range of enforcement actions, as applicable,” such as assessment of a 10 percent negligence penalty in addition to the delinquency penalties discussed above for potential total penalties of up to 50 percent of the liability; and expansion of the City’s audit program and on-site investigations.6
If you have questions regarding the LABT or other California local tax matters, please contact any of the following Deloitte professionals.
Deloitte Tax LLP, Los Angeles
+1 213 593 4455
Deloitte Tax LLP, San Francisco
+1 415 783 5547
Deloitte Tax LLP, Los Angeles
+1 213 688 5339
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As used in this document, "Deloitte" means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.
1 See, City of Los Angeles, Office of Finance, Tax Amnesty Program, accessible at: http://finance.lacity.org/amnesty/.
2 For those qualifying businesses that relocate or first establish a fixed location in the City on or after January 1, 2010 and before January 1, 2016, there is exemption from paying any tax to the City for the first two annual business tax renewals.
3 Any business that has total taxable and nontaxable gross receipts that do not exceed $100,000 in any year is eligible for the small business tax exemption.
4 Note that businesses with a tax liability of $50,000 or more must submit payment electronically by Automated Clearing House.
5 An incorrect classification or apportionment can result in a deficiency assessment.
6 See supra note 1.