How Many Landlords Don’t Pay Business Tax?

In my previous post I dispensed with the landlords’ disingenuous argument that the city’s business tax drives up their cost of operating rental housing. Their demand for a 7% allowed annual rent increase because of a 1.2% business tax is ridiculous on its face (and poor logic), I said. Then I closed with a question: the landlords complain about the business tax, but how many actually pay it? I surveyed rental properties in my neighborhood and found that 1-in-10 landlords not only pay no tax, they aren’t even licensed to conduct business, according to city records.

A Little Bit About the Business License

According to the Beverly Hills Municipal Code, every business must obtain a license “prior to the commencement of business operation.”

No person shall transact, engage in, carry on or permit the operation of any business in the city without first registering and obtaining a current valid registration certificate from the department of finance administration (3-1-201: REGISTRATION REQUIRED).

The Code also specifically requires landlords who are “engaged in the business of conducting or operating a hotel or apartment house or leasing or renting of any residential property” to be registered as a business in Beverly Hills (3-1-219: BUSINESS CLASSIFICATIONS). Moreover, each owner must pay a separate business tax for “each establishment or location within the city at which registrant conducts business” (3-1-208: SEPARATE REGISTRATION). The emphasis is mine: it means that each rental property must be its own business. When a property changes hands, the new owner must re-register that address as an apartment leasing business.

Finally, the city enumerates 216 business types across 7 categories and each has its own tax rate. One of them is Class E: Apartment Rental/leasing business. Every landlord is required to pay the tax on the “annualized actual gross receipts of the prior calendar year” for each property.

However it is clear from search of city records using the city’s online business records search that there are many – perhaps as many as a hundred – apartment rental businesses are not registered at all. None of them would be paying taxes on their taxable income.

How did I discover that some landlords never bothered to register their business? First I did a quick inventory of parcels on both sides of three blocks of Reeves Drive. Excluding condominiums I found that 9 out of the 63 residential rental properties were associated with no licensed apartment leasing business. (This was about two weeks into the rental unit registration period, so presumably there may have been a few more.)

I thought that must be an inaccurate number. Could 10% of apartment rental businesses be unlicensed? So I phoned the business tax office because they might have access to information that the public doesn’t. The representative there walked with me though a few searches, but no additional business was identified for the unlicensed properties.

Sensing that the city knew there were unlicensed businesses, I asked how the city would find them to get them licensed. “Well, when they register their properties [for the rental unit registry] they have to give a business license number.” I asked if the department was seeing an increase in business license registrations since the rental unit registration period opened on July 22nd. “Oh yes” was the reply.

To verify my numbers I took a look at another, larger sample area: 100 south blocks between Reeves and Maple. This included 87 residential properties of which 10 were condominiums and thus excluded. I searched for each of the following terms:

  1. Address (‘100 Main’) and street name (‘Main’) in the business location field;
  2. Street name and building number in the business name field (‘Charleville’ and ‘9425’ to find ‘9425 CHARLEVILLE LLC’);
  3. Searching both the business-name and location fields for the street name sometimes returned many records that were then searched for the building number;
  4. If no record was found, I then reviewed all of the 126 Class-E apartment leasing businesses (as of early August) for an entity that looked relevant; and finally,
  5. I searched city permits to identify an owner and turned back to the business records search for a business by that name.

What I found was 8 of 77 total rental properties (10.3%) had no associated business entity and thus paid no business tax.

Again, that was early August. Looking today I see that Class E apartment leasing business license registrations are up by a third. The tax representative was right! Unlicensed landlords are coming out of the woodwork. Rental unit registration closes on September 22nd so presumably we’ll see more newly-registered apartment leasing businesses (and more landlords unhappy about having to pay the business tax that they have complained about).

One more thing to add: have landlords that did register their businesses under-reported their gross income from rents, fees, non-refunded deposits, cleaning charges and so on? Remember, this system was the honor system. New businesses registrations are to estimate their coming year’s gross income while existing businesses report their past year’s actual gross income. Did the city ever check? Probably not: no systematic business tax audit was part of the program.

Perhaps the main reason the landlords don’t want to be part of the rental unit registry is because now, for the first time, their actual rents are recorded. Presumably an accurate tax bill can then be mailed to end the honor system of tax reporting.

A bonus: I expect that new business registrants, and existing businesses reporting accurate income,  will provide a very significant boost to city tax receipts. The rental unit registry may well pay for itself and the entire rent stabilization program from these taxes without asking landlords for a penny more than they were long obligated to hand over – but perhaps often didn’t.

Update: The City Has Had the Means to Identify Unlicensed Landlords But Never Did

Landlords unlicensed to do business in the city has been a known problem for many years. Tenants’ rights organizers identified the problem more than two decades ago; then ten years ago the city itself noted the problem when it suggested a fix: create a rental unit registry and an inspection program. It would identify business tax cheats, according to the staff report, but the proposal went nowhere.

Then, like today, the city employed a contractor to identify unlicensed businesses as part of a program to recover uncollected taxes of all kinds. Yet landlords got a pass.

I noticed the program to identify unlicensed businesses when I reviewed a September 29th City Council meeting agenda. One item up for pro-forma approval was a contract with a city vendor retained to identify unlicensed business and recover uncollected taxes. I was gratified to see that vendor HDL has suggested an array of tools that it could use to identify scofflaws and ensure compliance with our business tax law. Read the contract proposal in the staff report.

No doubt a dollar spent on the vendor’s services will return multiple dollars in uncollected present and past taxes (and penalties). And it would have been great to have such tools available in years past when as many as 10% of landlords decided not to license themselves as a business and the sector as a whole got a pass from the city on compliance.

HDL contract discovery provisions
Contractor HDL promises to bring an array of tactics to uncover unlicensed businesses. Turns out they said that back in 2013 too.

But the city’s contractor HDL has been on the job since 2013. In fact when it was first contracted in 2013 it promised to bring all of those same whiz-bang tools to the task. The contract renewal repeated all of the original contract’s promised to crack down verbatim.

A call to the city the morning of the meeting met with a patient reply from a supervisor in our business tax office, who explained that the books were in considerable disarray (which was evidently exploited by unlicensed landlords for years without penalty) and that, over the past four years, HDL has been using its time to create systems why which we can hold accountable those who operate unlicensed businesses – including landlords. (He didn’t dispute my estimate of 10% unlicensed.)

When the item came up for discussion at City Council that evening, I detailed my limited look into landlord licensing and asked whether the city should expect better performance from the contractor, HDL. Yes we should, Council agreed. With that City Council agreed to renew the vendor’s contract.

Between the registry and the renewed attention on unlicensed landlords, I have noticed that the number of businesses licensed as ‘apartment renting and leasing (included in class E businesses) has steadily marched upward. On August 12th (the date of my initial look at business licensing) there were 127 licensed landlords. By the end of September that number had increased to 185 and today it stands at about 200. (The numbers include landlords who might have been classed in another licensed category – at a different, presumably lower tax rate – which is part of the bureaucratic messiness thta contractor HDL is supposed to clean up.)

For all their hyperventilating about registry ‘bureaucracy’ and ‘wasted millions’ in the city’s effort to create a rent stabilization program, it seems that landlords who have had a free ride on effective regulation in Beverly Hills simply don’t want that to end. And I expect that we will know the extent of tax avoidance once all landlords are licensed, and once actual current gross receipts (subject to tax) are tallied and compared with reported gross receipts in years past…at least for those who were licensed.

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