InternetLitigators represents clients in cities all of over the United States and many other countries. This includes clients in the City of Los Angeles. As of 2001, out of the 20 largest US Cities only three imposed a Gross Receipts Tax upon their businesses. See Chart. Of those Gross Receipts Taxes, the City of Los Angeles was by far the highest. The City of Los Angeles’s tax rate is variable depending upon the type of business conducted. In 2009 the City of Los Angeles Gross Receipts Tax ranged from a low of $1.01 to a high of $5.07 for each $1,000.00 of Gross Receipts earned within the City. By way of illustration, on Gross Revenue of $20 million that is a range from $20,200/yr to $101,400/yr depending upon the classification that you are placed in.
Another factor that can greatly effect your overall tax liability is the allocation of gross revenue between operations that you may have within the City and outside the City. With regard to web hosting, the city may argue that it is the location of your web hosting servers that is determinative and not your sales, customer service or web design services. This is an unpleasant reality currently facing Los Angeles Data Centers. Specifically, the City of Los Angeles has become aggressive not only in increasing its audit percentages but in attempting to reclassify businesses previously accepted as falling within reduced tax classifications. In addition, the City of Los Angeles has become aggressive in expanding the definition of revenue that is earned within the City. For businesses in the City of Los Angeles this can be a shocking combination. There are numerous reports of companies simply leaving the city rather than deal with these reclassifications thereby resulting in what appears to be a net loss to the City as the result of their efforts.
The InternetLitigators team of attorneys recently prevailed against the City in an administrative hearing against just such a claim. Our litigation team successfully argued that web hosting, when combined with the standard web development services provided by most if not all web hosting companies does fall within the definition of a “multimedia business” according to the City of Los Angeles guidelines and historical notes for that exception despite the City’s assertion to the contrary. If the City complies with the ruling of the hearing officer we will successfully have avoided the trouble and expense of litigation against the City for our client.
Bottom Line: In the event of an audit, we recommend that you closely evaluate the purported gross revenue which serves as the basis for any assessment and the methodology used for reaching those figures. We recommend that you evaluate your “out of city” operations and perform your own allocation between “in city” and “out of city” revenue sources. Finally, we recommend that you closely evaluate your possible entitlement to classification within any of the reduced tax classification categories. Seek the assistance of a CPA and legal counsel familiar with the city’s administrative procedures and classification guidelines.
| Tax Rates For 20 Largest U.S. Cities (2001) | |||
| City | Business Income Tax Rate | Business Gross Receipts Tax Rate | Resident Income (Wage) Tax Rate |
| New York City | 8.85% | 0% | 3.65% |
| Los Angeles | 0% | .59% | 0% |
| Chicago | 0% | 0% | 0% |
| Houston | 0% | 0% | 0% |
| Philadelphia | 6.5% | .24% | 4.54% |
| Phoenix | 0% | 0% | 0% |
| San Diego | 0% | 0% | 0% |
| Dallas | 0% | 0% | 0% |
| San Antonio | 0% | 0% | 0% |
| Detroit | 1.6% | 0% | 2.75% |
| San Jose | 0% | 0% | 0% |
| Indianapolis | 0% | 0% | .70% |
| San Francisco | 0% | 0% | 0% |
| Jacksonville | 0% | 0% | 0% |
| Columbus | 2.0% | 0% | 2.0% |
| Austin | 0% | 0% | 0% |
| Baltimore | 0% | 0% | 2.51% |
| Memphis | 0% | .20% | 0% |
| Milwaukee | 0% | 0% | 0% |
| Boston | |||
| Source: City of Philadelphia Controller’s Office
Note: In cases where cities use a variable tax rate, the highest rate is displayed. |
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The 2009 City of Los Angeles Tax Classification Table can be found here.
Copyright (c) 2010 – JACO Product Development LLC – All Rights Reserved.
Jeffrey A. Cohen is the founder of InternetLitigators and a partner in the El Segundo, California office of Cohen & Richardson, LLP. Mr. Cohen can be reached at JCohen [at] InternetLitigators.com. Mr. Cohen’s practice is focused upon the representation of Internet and technology companies. The reader is cautioned that the information contained herein is not legal advice and is not a substitute for legal advice. There is no attorney client relationship created by this information.