City Prepares to Collect From Tax-Evading Businesses

Los Angeles, making good on its 1985 tax amnesty warning that delinquent firms should “get to us before we get to you,� will soon go after tax evaders that have business relationships with the city, officials said Monday.

“It is absolutely outrageous for businesses that evade city business taxes to be rewarded with city contracts,� City Controller Rick Tuttle said. Such deadbeat firms, he said, have an unfair advantage over firms that pay taxes.

Under the enforcement plan, the city will begin to withhold payments to delinquent businesses on Oct. 14. Tuttle’s office estimated that the city is owed at least $9.7 million in back taxes, penalties and interest--enough to buy 740 police cars or 60 fire trucks.

Businesses that have a “physical presence� in Los Angeles, like an office or sales representative, are subject to municipal tax. Depending on the nature of the business, the basic tax rate ranges from $1 to $5 for every $1,000 of taxable gross receipts. Delinquent firms are assessed additional monthly interest charges and penalties of up to 40% of the tax they owe.

In fiscal 1986-87, about 235,000 firms paid a total of more than $200 million in business taxes.

Business License Tally

A sample survey conducted by Tuttle’s office showed that 69% of the providers of medical service, 65% of businesses with personal service contracts (like consultants) and 37% of the providers of products and materials do not have city business licenses. This is a strong indicator, Tuttle said, that many are evading the municipal tax.

The circumstances have made firms that abide by the law “double victims,� Tuttle said.

First, they have, in effect, been subsidizing city services for those that fail to pay, he said. And because the tax would normally be factored into a firm’s overhead costs, companies that have been ignoring it have potentially been able to offer lower bids for city contracts. “When honest taxpaying firms are bidding for city jobs, they are at a competitive disadvantage,� Tuttle said.

Officials described the $9.7-million estimate of taxes owed as conservative, noting that it was based on a single year’s tax. Many companies are believed to be three years in arrears, Tuttle said.

The city controller said he believes that many firms have knowingly violated the law because the 1985 tax amnesty program received wide publicity. That program allowed for a 90-day period in which the city forgave interest and penalties. Although some officials predicted that the effort would net $2 million to $3 million, it brought in $13.2 million.