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Business License Tax
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Cities have become increasingly aggressive and creative in applying business license taxes to real estate license activities,
and every indication is that the pressure on municipal revenues will increase. The law is clear that municipalities can tax
business activities within their jurisdiction, but the power is limited to a tax apportioned to the level of activity
actually performed in the jurisdiction. Cities have begun to apply tax ordinances to real estate sales more broadly than
before, have begun to treat each independent contractor salesperson as a separate business (thus owing a separate tax) and
have begun to utilize aggressive contract collection companies to pursue real estate licensees.
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Current Status
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Cities are hiring municipal auditing companies (MACs) to help them collect delinquent business license taxes (BLTs).
Curtailing the use of the MACs by the cities – by confronting cities with an authoritative legal opinion that using MACs to
perform actual tax collections is prohibited by law – may be a best course of action.
The Government Affairs Team at PWR is working hard to defeat business license taxes in many cities.
The city of Anaheim agrees with PWR and the REALTORS® that a business license tax is not a solution to generating funds for
the city. We hope to move forward on this issues using Anaheim as an example by which other cities may look upon when
deciding on this matter.
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Discussion
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All cities have as part of their inherent "police" powers the authority to raise revenue by taxing the privilege of
doing business within the jurisdiction. Over the years the courts have affirmed that power, so long as the tax levied
is properly apportioned to the amount of business activity actually carried out in the jurisdiction. For this reason,
a flat fee BLT is inconsistent with the law -- but often not challenged by Realtors® and other businesses because the
flat fee is so nominal that any apportioned fee is bound to end up being more expensive and more difficult to comply with.
In order to comply with the law, more progressive cities have sought to assess a tax based upon a business' gross receipts
generated within the jurisdiction. Note that simply assessing a multi- jurisdictional business based on its gross receipts
is just as legally flawed as imposing a flat fee, unless the gross receipts are those earned within the jurisdiction.
Unfortunately for cities, any apportionment of activity in a service oriented business like real estate is necessarily
arbitrary and hard to validate.
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The Problems
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Multiple Jurisdictions. If a real estate licensee practices across multiple city boundaries, an inappropriately apportioned
tax will tax the same income in multiple places and effectively force the licensee to pay a much higher tax rate. In some
urbanized areas a single licensee may practice in (or just pass through) as many as a dozen different jurisdictions, all of
which would like to collect a tax.
"Double" Taxation of Salesperson Commissions. If a city concludes that an independent contractor is a business
separate from an employing or supervising broker, it is encouraged to tax the commission proceeds flowing to the salesperson
from the employing broker. If the city does so, these proceeds will have already been included in the gross receipts
attributed to the employing broker prior to the pass-through of the commission split.
Heavy-Handed Enforcement. Some cities have attempted to creatively apply existing BLT ordinances to previously untaxed
sales activities, and have even sought back taxes and penalties from licensees from whom they never before attempted to
collect. The problem has also been worsened by contract (commission based) collection companies that aggressively interpret
existing ordinances and apply them as broadly as possible. See “Municipal Auditing Companies,” prepared for January 2006,
and September 2005 Taxation Committee for additional information.
The only options to change the result in business license rules are to use political power to defeat the tax ordinances at
the local level; change the status of real estate practitioners so that they become members of a non-taxable category; or go
to state law and change the way the tax itself is applied.
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Options
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1. Do Nothing. Existing policy; requires fighting inappropriate taxes at the local level, does not change® Realtors cities' authority to tax or the licensees' independent contractor status.
2. "Have our cake and eat it too" - Change the characterization of real estate salespersons and broker associates to that of "employee" for BLT (Business License Tax) purposes, while at the same time preserving the status of "independent contractor" for all other purposes.
3. Business Entity taxation - Prohibit the application of a BLT to a regulated business entity except at the office address(es) shown in the regulatory records of the business.
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