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Home My WebLink AboutItem 2a: Report, discussion and direction on business license policies and information recieved from the State Franchise Tax Board. Rcr riqr, In,u por.nJ Au f19O3 �aaity of MEMORANDUM Development Services Department DATE: August 21, 2012 TO: Honorable Mayor and City Council FROM: Jason Kruckeberg, Assistant City Manager/Development Services Director t.J By: Jim Kasama, Community Development Administrates Silva Vergel, Business License Officered, SUBJECT: REPORT, DISCUSSION AND DIRECTION ON BUSINESS LICENSE POLICIES AND INFORMATION RECEIVED FROM THE STATE FRANCHISE TAX BOARD Recommended Action: Maintain Current Policies and Continue Follow Up on Data Exchange with the Franchise Tax Board SUMMARY On July 9, 2012, the City Council requested information on the City's current business license policies; in particular, with regard to real estate agents. Arcadia Municipal Code (AMC) Section 6211 requires anyone conducting or transacting business in the City, including independent contractors, to obtain a City of Arcadia Business License. Many real estate agents are independent contractors, as opposed to being an employee. This is also the case with many hairdressers, manicurists, gardeners, and swimming pool cleaners. AMC Section 6211 has been in effect for many years and the requirement of a business license has remained unchanged. In April 2011, the City of Arcadia began participating in an information exchange program with the State Franchise Tax Board (FTB) that enables the identification of entities that are not fulfilling the requirements of the respective agencies. The Business License Office began sending letters to those entities that the FTB information indicates are doing business in the City of Arcadia, but for which a business license could not be located. Many of these entities are independent contractors that are using their residences as their business mailing address. BACKGROUND Arcadia Municipal Code (AMC) Section 6211 states: "6211. - LICENSE REQUIRED. There are imposed upon the business trades, professions, callings and occupations specified in this Division license taxes in the amounts Business License Policies August 21, 2012 Page 2of3 hereinafter prescribed. No person shall engage in business or transact and carry on any business, trade, profession, calling or occupation in the City, without first having procured a license from the City so to do and without fully complying with any and all other provisions of this Code. This Section does not apply to adult businesses; . . . massage therapy businesses; . . ." This Code Section has been in existence since November 1948, and many cities use similar language for requiring a business license. In January 2009, Senate Bill 1146 authorized the State Franchise Tax Board (FTB) to exchange their tax filing information for business licensing information from cities through a reciprocal agreement. Since both are typically required of a business, the data exchange allows the respective agencies to identify entities that are not fulfilling the respective requirements. The City of Arcadia began participating in this program in April of 2011. Currently, 107 cities are participating; including the following cities in the San Gabriel Valley: Alhambra, Bradbury, El Monte, Monrovia, Montebello, Pasadena, South Pasadena, and West Covina. The City's data is sent to the FTB in June, and in December the FTB sends their information. In December 2011, the City received the FTB's data for the 2010 tax year. This provided the names of approximately 10,000 tax filers that reported business activity with an Arcadia address. Based on the number of current business licenses, it appeared that there could be up to 5,000 businesses that are operating without a license. The information indicates that most of these businesses are being operated from a residence, and many of these entities are independent contractors that are using their residences as their business mailing address. DISCUSSION Per AMC Section 6211, anyone that operates a business in the City must obtain a City Business License. An "Independent Contractor" is defined by the California Labor Code as, "any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished." Individuals that are independent contractors are considered self- employed, and are required to obtain a business license. Indicators that someone is conducting a business include the following: • They receive an IRS Form 1099 • They include a Schedule C with their tax return • They have a Seller's Permit from the State Board of Equalization • They have an active registration with the Secretary of State • They receive business mail 'Business License Policies August 21, 2012 Page 3 of 3 An individual that receives an IRS Form 1099 as opposed to a W-2 is an independent contractor, and not an employee. In addition, anyone that is not an employee, and provides a service and/or product, whether it is from a commercial location or a residence, is self-employed and/or an independent contractor, and may or may not receive an IRS Form 1099. Examples of independent contractors or self-employed individuals are consultants, cosmetologists, gardeners, hairdressers, pool cleaners, realtors, and sales representatives. Since April 25, 2012, the Business License Office has mailed the attached form letter to approximately 2,000 persons and entities that were in the FTB database, but not in the City's business license records. Letters have been mailed to all of the numerical streets, and all streets beginning with the letters A, B and C. Because the FTB data is based on 2010 tax year filings, many of the entities are no longer in business. In those cases, no further action is being taken. If the business is still active, a business license is required, but penalties, such as late fees, are being waived. FISCAL IMPACT The initial business license fee for an independent contractor is currently $112.40, and the annual renewal fee is $87.40. To date, the FTB letters have resulted in an increase in business license fees of approximately $20,500. It is estimated that annual business license revenues received as a result of the FTB exchange program will be $100,000. RECOMMENDATION It is recommended that the current policies and business license requirements remain in place, and that the FTB data exchange program be continued. Approved: Dominic Laz tto City Manager Attachment: Form Letter ' CITY OF ARCADIA • DEVELOPMENT SERVICES DEPARTMENT/BUSINESS LICENSE :' 240 West Huntington Drive rie Arcadia,CA 91066-6021 coo`14 11.1 (626)574-5430 r o�A (626)821-4336 Fax www.ci.arcadia.ca.us Date Address SUBJECT: Business at(address),Arcadia, CA—Business License Dear(name): The City of Arcadia has begun receiving information from the State of California Franchise Tax Board(FTB) regarding businesses within the city. This is the first time that this information has been received;and,henceforth the City will be receiving data from the FTB annually. FTB provided data from the 2010 tax year, which indicates that you were operating a business affiliated with the subject address. Operating a business may involve any of the following: 1. Receiving IRS form 1099 instead of a W-2 2. Filing a Schedule C 3. A Seller's Permit issued by the State Board of Equalization with an Arcadia address 4. Receiving business mail In looking through our records, it does not appear that you have a City of Arcadia Business License. Per Arcadia Municipal Code Section (AMC) 6211 a business license is required for anyone that operates a business in the City. Please refer to the Frequently Asked Questions on the back side of this letter for additional information. If you already have a business license from the City of Arcadia, please provide me with the name of the business and the Business License number at the bottom of this letter and return it to me either by mail or fax at(626) 821-4336. I will promptly correct our records so that you do not receive further notification. If you are no longer conducting business,per the above four(4)items,please indicate that at the bottom of this letter and return it to me either by mail,fax to(626)821-4336 or email me so that I can remove your name. If you do not have a business license from the City of Arcadia and are operating a business in the City, please visit the City's website at www.ci.arcadia.ca.us and download the appropriate applications. Please refer to the enclosed flyer for the required documentation and applicable fees. The penalty for operating without a license (per AMC 6214.3.1) will be waived if your completed application with payment is received by(date). Thank you for your attention to this matter. If you have any questions, or if I can be of any assistance, please contact me at svergel(a,ci.arcadia.ca.us or(626)574-5430. Sincerely, Silva Vergel Business License Officer Enclosure Business Name: Business License No.: