Business Licensing and the Rental Housing Industry
Business license taxes have long been available as a discretionary revenue stream for local governments. From a legal standpoint, local legislative bodies have virtually unfettered discretion to adopt business licensing requirements and to assess fees (or taxes) in conjunction with them. As a result, nearly all local communities now require businesses to be licensed for the privilege of conducting business within the community. While multifamily rental housing has long been considered a “business” for the purposes of licensing requirements, historically it has been less common for single-family and duplex rental properties to be categorized in this manner. In the ongoing struggle for local governments to create additional revenue streams, however, it is quickly becoming the norm for communities to impose business licensing requirements on all rental properties regardless of their character or number of units.
Authority to Impose Business Licensing Requirements
A business license is a permit granted by a governmental body, which allows the recipient to engage in an occupation subject to compliance with specified conditions. Payment of a fee is customarily required before the privilege represented by the license is granted. Revenue collected from business license taxes is generally used to cover the cost of government services and need not be specifically related to regulation or oversight of the business activity. In fact, business licensing revenues are one of the few revenue streams available to local governments that may be devoted to so-called “general expenditures.” This means the taxing authority has complete discretion over how these funds are spent and are not constrained by spending rules requiring that the expenditure be related to the enterprise from which it was derived.
There is clear statutory authority for the imposition of business license taxes. In particular, California Government Code Section 37101 and California Business and Professions Code Section 16000, et. seq., authorize municipalities to tax “any business” conducted within their territorial limits.
In addition to the statutory authority, case law is also well settled in the area of business license taxes. And despite assertions that renting property as a dwelling place is not a taxable occupation, the term “business” embraces everything from which one can be employed or derive income in exchange for the provisions of goods or services. In a very early case on the subject, which has not been changed by subsequent decisions, the court determined that a city’s ordinance requiring payment of license fees proportionate to gross receipts by persons engaged in the business of renting or letting any rooms was enforceable. The court opined that a legislative body has wide discretion in enacting license taxes and that, unless unreasonable, the determination of such a body should be final. Moreover, in Clark vs. City of San Pablo, the court determined that the operation of an apartment house is a business that may be taxed under the general authority granted to it by state law. Indeed, courts have consistently rejected arguments that the nature of the property (single family versus multifamily) should determine whether a business license tax may be imposed. Rather, the only limitation is that the tax has to be reasonable—a very low legal threshold.
Calculating a Business License Tax
Methodologies used to determine the amount of a business license tax typically include either a flat-rate calculation (per unit, per property, per number of employees or per parcel number) or one based upon a percentage of gross receipts. In California, few localities use a flat-rate calculation. The significantly more common methodology calculates tax liability based upon a percentage of gross receipts derived from the enterprise; for example a fee of 3% to 5% of gross receipts or a flat-fee assessment per a prescribed increment of gross receipts (for example, $50 per every $25,000 in gross receipts) are some of the common calculation methods in use in jurisdictions throughout the state.
Another factor that is taken into consideration when determining the calculation of a business license tax is how to treat the location of the property. Some taxing authorities tax each unit, while others look at parcel numbers (without regard to the number of units on the parcel) and still others tie tax liability to a business permit. These considerations are complicated when a property management company operates its business office in one jurisdiction yet does not manage any units in that same area, or when a small independent owner has several single-family rentals in the jurisdiction.
There are many potential gray areas in developing tax liability calculation methodologies. As such, this area alone represents the best opportunity for property owners to work with a local jurisdiction to mitigate the impact of a business license tax on their businesses.
Collections
During the latter part of 2006, CAA began to receive isolated reports of local jurisdictions that started collecting business license taxes seemingly “out of the blue.” In other words, property owners who had not previously received a tax bill received bills for several years of back taxes. While most local tax ordinances do contain a statute of limitations specifying how far back the tax may be collected, these local governments reached back as far as they could to “back bill.” While local governments have argued that the mere failure of the government agency to send a bill does not relieve the taxpayer of the obligation, there is truly a question of fairness here.
As communities across the state continue to adopt new business licenses taxes or to expand existing ones, CAA will continue to monitor this issue through its network of affiliated local associations and work to impose fair collection strategies.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Monica Williamson is CAA’s vice president of public affairs. Copyright © 2007 by SF Apartment Magazine. All rights reserved.