By Kurt English | NB Indy
Readers who have businesses located in Newport Beach may be aware of Newport Beach’s high business license tax.
According to the city’s website, the first part of the current business license fee is $159 for businesses located in Newport Beach.
But that’s not all.
The city also claims it is entitled to be paid an additional tax on each of the company’s employees. The city demands an additional $8 per employee per year up to $797 for businesses that collect sales tax.
But if your business sells to wholesale customers and doesn’t collect sales tax, then the city demands a doubling of the per-employee tax and wants an additional $16 per employee up to $1,595.
Violation of California Usury Laws?
The Newport Beach municipal code says that the city’s business license tax is a debt. The city demands a 25 percent interest penalty each month for the first four months the license is due and unpaid.
However the California Constitution limits interest charged in California to ten percent. So the Newport Beach city interest penalties could be argued to violate California’s usury laws.
Even if the city finds a loophole in the state usury laws, the city’s philosophy is to charge higher interest penalties than most of the readers would be allowed to charge in California.
Harassment
If you have a business and you’re not aware of this, Newport Beach has a well-deserved reputation in recent years of trying to bully businesses like yours to pay their business license tax. I have represented clients with businesses in many cities. But other than Orange, Newport Beach is the most aggressive city in harassing companies claiming business licenses are due even when there is no justification.
Comparison to Other Cities
How does the Newport Beach city business license fee compare to other cities?
Ultra-liberal Los Angeles exempts most new businesses started through 2015 from business taxes during the first three years of operation. Irvine charges a business license fee of $50 per year. That is a much better deal for businesses than Newport Beach, and most of Irvine is closer to the freeways. Costa Mesa charges home businesses a one-time fee of $50.
Laguna Woods, Dana Point and Laguna Niguel don’t have city business license fees. I asked Robert Ming, Laguna Niguel City Council Member and candidate for Orange County Supervisor, why Laguna Niguel doesn’t have a city business license fee. He answered that “we want businesses to come to Laguna Niguel.”
The Damage Done by High Taxes
The more something is taxed, the less of it there is. The city of Newport Beach acts as if it wants private businesses to hire fewer employees. Employees located in Newport Beach would spend money at Newport Beach businesses, and the city would get its portion of those sales tax revenues.
In a future article, I’ll discuss changes Newport Beach should make to its business license tax.
Kurt English is a lawyer and lives with his family in Newport Beach.
Kurt:
The very first issue you raise with respect to NB’s business tax is that it only accounts for 2.43% of the city’s overall revenue. That is just as bad as the left side of the coin which is always saying things like, “its only a few billion dollars–less than 1/10th of 1 percent of the federal budget, a drop in the bucket, less than the cost of a latte per person per day” (one of my personal favorites–I don’t drink over-priced lattes thank you very much).
It costs money to run a government. “A billion here, a billion there, and pretty soon you are talking about real money.” It was meant to be a joke, but it is so sadly true.
Don’t get me wrong. I object to out-of-control taxing and spending as much as anyone. I am a CPA; card carrying Libertarian, member of the Howard Jarvis Taxpayer’s Association. No one who knows me would argue against my small-government pedigree.
I just believe a much better argument can be made. I started my own CPA firm in Newport Beach in 1990 and I have been here ever since. One of my first experiences with the city business tax was when a city employee visited my newly opened office on Newport Blvd. and took one each of the business cards that we had displayed at the receptionist’s desk. There were three. One for me, another CPA who I was in the process of buying out over a period of 10 years and an EA who came with the practice that I was buying from the other CPA. Nothing was said to me. It was just in, grab the cards and out–very stealth. I later got a bill from the city for 3 business licenses. The burden was on me to prove that the other two guys were working for me. Ultimately they only made me buy one license. Thanks guys.
Later, when I got married, my wife was a self-employed Acupuncturist. The year before we were married, she worked in a medical group someplace in Los Angeles. I don’t even remember the name of the city. We were married in August and she moved here from LA and left that medical group. In March or April of the following year, when I filed our joint tax return, I reported her income on Form Schedule C. I didn’t bother to fill in the address on the Schedule C because she was no longer working there and I figured the IRS just wanted the income reported and taxes paid. Guess what? Here comes a letter from the City of Newport Beach demanding that she get a business license. It turns out that the IRS reports all that information to cities across the country. I don’t know how other cities use the information, but NB sends you a bill. I ended up not having to pay that one because she wasn’t conducting business in the City of NB, but once again, the burden was on me.
I had another client, who was renting a house next door to ours, a few years back bought a house in San Clemente and moved out. That same year he had gotten involved in some type of internet multi-level marketing deal. Big shock, it didn’t pan out, but he ended up getting paid a few thousand bucks (which naturally cost him even more to generate) and they sent him a 1099. I just reported it as miscellaneous income on his tax return. You guessed it. The city sent him a bill, with penalties, for the city license. I don’t think he ever paid it because by that time he was already living in San Clemente and out of the internet multi-level marketing business.
Many of my clients have rental property in Newport Beach. The IRS says their rental activities do not “rise to the level of a trade or business.” Therefore, any losses are limited or suspended altogether. However, the city of NB considers the very same rental activity as rising close enough to a “TorB” to tax it–that’s for sure. It’s a “heads I win, tails you lose” type of deal.
I could go on forever, but I have to get back to work now. It’s only April 25th and CA Tax Freedom Day doesn’t come until April 30th according to the Tax Foundation. I don’t know if my city business tax is included in that or not. I just know that right now, I am still working for the government.