Why Do We Give Some Landlords a Pass on the Business Tax?

An earlier post looked at landlord complaints about the Beverly Hills business tax on apartment leasing. We followed up with a post about the 1-in–10 landlords who evidently aren’t paying the tax because they are licensed to do business. This post looks at the city’s side: the failure to police landlords properly. We’re simply letting too many landlords off the hook without paying the business tax!

The City Has Never Held Unlicensed Landlords to Account

Many years ago, a local tenants’ rights organization called-out the city for not ensuring that landlords licensed their apartment leasing businesses as required. Those landlords also failed to pay the business tax. Perhaps even over decades! Simply because the city had no record of what properties were leasing apartments. It was one of the first tips that Renters Alliance received when we reached out to tenants about landlords: some are not licensed.

How could it be? The city depends on the business tax (among other revenue sources) to fund key city services. And the business tax is no small share of those total revenues: consistently one-fifth of all general fund revenue comes from the business tax.

Last fiscal year the finance department expected the business tax to contribute $45.5 million of the $223M total general fund revenue. And the apartment leasing business tax (class E) contributes about 14% of the total business tax. In the last fiscal year landlords paid $6.3 million in business tax.

Class E business tax FY 2016-17
Apartment leasing taxes are a significant proportion of business taxes and contribute meaningfully to the city’s general fund.

But if one-in-ten landlords were not licensed to do business, and thus were not paying that tax, it could cost the city roughly $600,000 each year in lost revenue. That is equivalent to additional five code enforcement officers (benefits included). We’ve heard landlords complain about the city not having enough code enforcement officers. And we have a simple answer: get your competitors to pay their share of the business tax!

Why is Tax Not Collected?

Ten years ago the city knew it had this problem. A 2006 report concerning the creation of a registry and inspection program noted that not all landlords were licensed to do business. One of the arguments then for a rental unit registry was to require tax licensing and thus help to surface business tax cheats. (The registry proposal went nowhere with City Council.)

For years the city employed a contractor to identify unlicensed businesses as part of a program to recover uncollected taxes of all kinds. Great idea! Indeed that was a surprise, because if a contractor ha indeed been on the job then why weren’t those cheats caught? Our rough estimate of $600k in recovered taxes would pay for that contractor several times over.

This all came to light for us when we spotted a contract to monitor uncollected business taxes in a September 29th City Council meeting agenda. The item up for consideration was a contract renewal for the vendor. The staff report said that vendor HDL has an array of tools to identify scofflaws and ensure compliance with our business tax law. That was the right vendor to hire, the staff report added, just like we had done year-after-year.

Reading the contract and the staff report raised a question: Wouldn’t it have been productive to have those tools available in prior years too? What was the contractor using then? With those tools probably none of those one-in-ten landlords could have escaped the required business license. And the vendor, HDL, has been on the job since 2013.

So we looked back at old contracts — as far back as 2013. In fact when first contracted HDL promised to bring all of those same whiz-bang tools to the task. And the current contract renewal simply repeated all of the original contract’s language verbatim. A real cut-and-paste job!

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.

As we observed in an earlier post (How Many Landlords Don’t Pay Business Tax?) the city conducts no systematic audit to verify that the landlord’s reported gross is accurate for tax purposes. So it’s all about ensuring that all landlords are licensed.

We Took Our Concern to City Council

A call on the morning of the Council meeting to the city’s business office met with a patient reply. A supervisor explained that the books were in considerable disarray when it came to the business tax, and that over the past four years vendor HDL has been using its time to create the proper systems. Once those systems are in place the city can hold scofflaws accountable, and they were doing that now. To repeat: The vendor had taken the prior four contract terms to put those systems in place.

When the item came up for discussion at City Council that evening, a councilmember took up our invitation to call it out for discussion. We briefly recapped our limited look at landlord business licensing; noted the current HDL contract that was up for approval despite years of questionable past performance; and then asked whether the city should expect better performance from the contractor this time around. Council agreed: Yes we should. (Then City Council agreed to renew the vendor’s contract.)

Ever since, the business office has been cool to subsequent inquiries about landlords who may not be licensed to do business. We have also found the city’s search tool to perhaps not be 100% reliable. Apparently the problems there continue.

2019 Update

Holding a business license is a precondition to register a rental property. So we would expect the number of Class E licensed rental leasing businesses to match the number of rental properties registered (nearly all are registered now). So checked the city’s business license search tool periodically to see how many landlords were licensed. Indeed there has been an increase.

Date Class E licensed
2017 August 12 127
2017 September 18 169
2017 September 29 185
2017 October 30 199
2018 April 26 370
2018 November 28 1017
2019 February 12 990
2019 March 6 998
2019 May 18 1000

Yet there are approximately 1100 rental properties in Beverly Hills and each one must have a business license. So why does the number of licensed business, at least according to the online search tool, hardly break a thousand?

We posed a few questions to the business office:

  • Why are 10% of apartment leasing businesses not licensed according to city data? We got an opaque answer. “The business listed in the online database are all licensed in good standing.” Are the rest not in good standing then? Or simply not licensed at all? We simply can’t get that answer.
  • Are those 100 non-licensed properties registered in the RSO rental unit registry? In May of 2019 there are about 100 rental properties not showing a license, according to the online license database. If the business license is a precondition for registration, how could they be registered? The business office referred us to the rent stabilization office. The rent stabilization office referred us to the business office. You get the picture.
  • Is the city taking precautions to identify business tax avoidance schemes? We found a couple of mom-and-pop rental properties that also have a property management business licensed at the same address. But those management companies were not familiar names, and they appear not to manage other properties. The tax rate on property management companies is a small fraction of the leasing tax rate. Are these vehicles for routing rents throught the lower-tax rate management entities? On this we could not get an answer from the business office either.
  • Why are so few property management companies licensed to do business in Beverly Hills? Many clearly do business here; the tax rate is relatively low. Moreover, management companies are included in rental property registrations — so they are on the city’s radar. The business office says a manager has to physically visit the premises to trigger the license requirement — a huge loophole. Is anybody from the business office checking?

On the latter question, we decided to track the licensing of property managers over time. And we do see some increase, however from a very, very low base… of just 19 firms licensed a couple of years ago.

Date Class G licensed
2018 August 5 19
2019 February 21 60
2019 April 11 66
2019 May 18 66

With 1100 apartment buildings in Beverly Hills, how could there ever have been only NINETEEN managers licensed and paying the business tax? Another good question for the city’s business office.

It is one thing for some landlords to hyperventilate about registration “bureaucracy” and “wasted millions” for a Rent Stabilization Program. And then to cheat on the business tax. We expect some tax avoidance. But it’s another thing entirely for the city not to even try to hold those landlords accountable.