Landlords have said the business tax is too high. We dispensed with that disingenuous argument but their claim suggested a question: are they all actually paying the business tax? A quick crosscheck of rental properties south of Wilshire and the business license database suggested maybe 1-in-10 landlords are not even licensed to conduct an apartment leasing business!
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 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). EAch owner must pay a separate business tax for each location at which the registrant conducts business (3-1-208: SEPARATE REGISTRATION). When a property changes hands, the new owner must re-register that address as an apartment leasing business at the start of the new year.
The Class E: Apartment Rental/leasing business tax rate is one of 216 business types across 7 categories each with its own tax rate. The 1.2% tax is levied on “annualized actual gross receipts of the prior calendar year.” Come January those receipts are declared and the tax is paid.
However using the city’s online business records search it seems that there are many apartment rental businesses that are not registered to do business. Perhaps as many as a hundred citywide. A business that is not registered is not paying taxes on their income. And that income includes ancillary revenue (like late fees) and coin laundry machines.
I took 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 property addresses were associated with no licensed apartment leasing business.
I thought that must be inaccurate; could 10% of apartment rental businesses be unlicensed? So I phoned the business tax office because they might have access to nonpublic information. The representative there walked with me though a few searches, but no additional businesses turned up for those properties.
To verify my numbers I took a look at another, larger sample area: the south 100 blocks between Reeves and Maple, which included 87 residential properties (10 were condominiums and were excluded). I then searched:
- Address (‘100 Main’) and street name (‘Main’) in the business location field;
- Street name and building number in the business name field (‘Charleville’ and ‘9425’ to find ‘9425 CHARLEVILLE LLC’);
- Manual review of all Class-E apartment leasing businesses for a match; and,
- Examination of city permits to identify an owner entity name which was then searched anew in the license database.
What I found was 8 of 77 total rental properties (10.3%) had no associated business entity. Thus those owners paid no business tax.
That search was done in early August; looking again in September, well into the registration period, the Class E apartment leasing business license registrations are up by a third. That is a big jump considering that no apartment buildings were added to the rental housing stock in those few months!
I asked the business office about the additional licenses. “Well, when they register their properties [for the rental unit registry] they have to give a business license number.” Was the department seeing an increase in business license registrations since the rental unit registration period opened on July 22nd? “Oh yes.”
Seems like unlicensed landlords are coming out of the woodwork now that the rental unit registry is up and running.
The next question to ask whether landlords with registered businesses had been under-reported their gross rental income and other revenue. The business tax is calculated on that income, of course. And it’s a logical question because the business office says there is no systematic business tax audit. It is on the honor system.
Now, for the first time, their actual rents are recorded by the registry and presumably an accurate tax bill can then be mailed. That would end the honor system of tax reporting! A bonus: the rental unit registry may well pay for itself and the entire rent stabilization program from these taxes.