Business owners operating in California are likely aware of state employment tax and workers’ compensation insurance requirements. Many, however, might be unaware of local business tax and related requirements.
Local Business Taxes and Fees
Local government entities often require a general “business tax” or fee for a “business license,” as well as taxes and fees for specific operations and professions.
Nearly all businesses doing business in the City of Los Angeles must register with the Office of Finance. Most new businesses in Los Angeles are exempt from paying business taxes for the first three years of operation (although the business owner still must register with the Office of Finance). Notably exempt from local Los Angeles business tax requirements are most new businesses, many small businesses, and creative artists.
A “person” engaging in business in San Francisco must file a Business Registration Certificate, if that person meets one or more of the following conditions:
(1) The person maintains a fixed place of business within the City; or
(2) An employee, representative or agent of the person maintains a fixed place of business within the City for the benefit or partial benefit of the person; or
(3) The person or one or more of the person’s employees, representatives or agents owns, rents, leases, or hires real or personal property within the City for business purposes for the benefit or partial benefit of the person; or
(4) The person or one or more of the person’s employees, representatives or agents regularly maintains a stock of tangible personal property within the City, for sale in the ordinary course of the person’s business; or
(5) The person or one or more of the person’s employees, representatives or agents employs or loans capital on property within the City for the benefit or partial benefit of the person; or
(6) The person or one or more of the person’s employees, representatives or agents solicits business within the City for all or part of any seven days during a tax year; or
(7) The person or one or more of the person’s employees, representatives or agents performs work or renders services within the City for all or part of any seven days during a tax year; or
(8) The person or one or more of the person’s employees, representatives or agents utilizes the streets within the City in connection with the operation of motor vehicles for business purposes for all or part of any seven days during a tax year; or
(9) The person or one or more of the person’s employees, representatives or agents exercises corporate or franchise powers within the City for the benefit or partial benefit of the person; or
(10) The person or one or more of the person’s employees, representatives or agents liquidates a business when the liquidators thereof hold themselves out to the public as conducting such business.
(San Francisco Business and Tax Regulations Code section 6.2-12. Nexus: Engaging in Business Within the City.)
According to the City of San Francisco Treasurer and Tax Collector, the first year’s registration fee for new businesses is based on the tax due on its estimated annual payroll expense as reported on the application for business registration. Businesses pay registration fees based upon their total payroll expense attributable to San Francisco. The tax rate on payroll expense is 1.5%. Businesses that have less than $1 of estimated tax on payroll expense (including businesses with no employees) within San Francisco will pay the Minimum Registration Fee of $25. Nonprofit organizations with federal 501(c)3 status must register, but are not required to pay a registration fee, provided that they can show proof of nonprofit status from the IRS.
The City of Sacramento does not issue business licenses; however, it does collect Business Operations Tax each year. Sacramento also requires certain businesses to register specific types of operations which require local fees, taxes and registration in California municipalities. Examples include taxicab operators, amusement arcades, billiards/pool halls, bingo parlors, cardrooms, Christmas tree lots, fireworks sale booths, , and tow operators. Delinquency penalties are applied for late or non-registration.
Sacramento County does issue business licenses to regulate businesses operating in the unincorporated area of the County (the areas of the County not within city limits). The license is not a business tax and is not based on business revenue.
San Francisco’s Strict Employer Ordinances
For companies who employ individuals performing work in in the San Francisco City/County limits, the following three local ordinances have significant impact: Health Care Security Ordinance; Paid Sick Leave Ordinance; and Minimum Wage Ordinance. The Office of Labor Standards Enforcement (OLSE) enforces these labor laws.
Health Care Security Ordinance (HCSO)
Employers with 20 or more employees (and non-profit employers with 50 or more employees) must spend a minimum amount on health care for each employee who works eight or more hours per week in San Francisco.
In May of 2012, commercial janitorial services company, GMG Janitorial, Inc., was ordered by the City of San Francisco to pay more than $1.3 million to 275 of its current and former employees who were denied health care expenditures to which they were entitled under the HCSO. The order in an administrative appeal by additionally requires the company to comply with the city’s employer spending requirement and to pay an administrative penalty of nearly $67,000.
At the time of the GMG order, the OLSE had issued dozens of determinations resulting in restitution for over 5,000 San Francisco workers, but this was the first case to reach an administrative appellate hearing.
City Attorney Dennis Herrera, whose office represented OLSE in the administrative hearing, stated, “This is a significant legal victory — not just for the employees who were systematically denied benefits to which they were entitled, but for all the competing businesses that play by the rules.” “This decision sends a strong message that San Francisco’s Health Care Security Ordinance has teeth, and that city leaders are committed to enforcing it.” The case is: In the Matter of GMG Janitorial, Inc. and City and County of San Francisco Office of Labor Standards Enforcement, Administrative Appeal Hearing, Office of the Controller, Case No. HCSO-359.
The California Board of Equalization provides suggestions for applying a surcharge to products and services to cover the expense of incurred by the HCSO.
An employer is subject to the HCSO, and the Paid Sick Leave Ordinance (PSLO) for any calendar quarter if it meets the following three conditions:
· Employs one or more workers within the geographic boundaries of the City and County of San Francisco;
· Is required to obtain a valid San Francisco Business Registration Certificate (see above Local Business Taxes and Fees); and
· Is a for-profit business with 20 or more persons performing work. (This includes all persons working for the entity, regardless of where they are located.)
Starting in 2014, the Patient Protection and Affordable Care Act, commonly called Obamacare, will require organizations with more than 50 employees to either offer “affordable coverage” or face penalties starting at $750 a year per full-time worker. Therefore, the HCSO will not be superseded by Obamacare for those organizations with between 20 and 50 employees working within the city limits.
Paid Sick Leave Ordinance (PSLO)
The PSLO entitles all employees who work in San Francisco, including part-time and temporary workers, to paid time off from work when they are sick or need medical care, and to care for their family members or designated person when those persons are sick or need medical care. For every 30 hours worked, the employee is entitled to one hour of paid sick leave.
For employees of “small businesses,” i.e. those for which fewer than 10n persons work for compensation during a given week, there is a cap of 40 hours of accrued paid sick leave. For employees of larger employers, there is a cap of 72 hours of accrued paid sick leave.
Minimum Wage Ordinance (MWO)
Businesses with employees in San Francisco must pay the San Francisco minimum wage, which as of 2013 is $10.55 per hour. An employer is subject to the MWO if one of their employees, in a particular week, performs at least two (2) hours of work for an employer within the geographic boundaries of the city, and qualifies as an employee entitled to payment of a minimum wage from any employer under the California minimum wage law. (San Francisco Administrative Code section 12R.)
Not only does the State of California have one the most burdensome tax and regulatory structures in the country, but as shown above, some of its local entities do as well. The above are merely examples of the taxes and expensive regulations placed upon California businesses by local entities. For help navigating this tax and regulatory maze, contact the Law Office of Williams & Associates, P.C.