"Shall the Palo Alto Municipal Code be amended to establish a business license tax in order to help maintain the City's ability to fund basic City services?"
This measure would adopt a Business License Tax to be paid to the City of Palo Alto by each business located in or doing business in Palo Alto. Revenues from the tax would be deposited in the City's general fund, which is used to fund police and fire protection, senior and youth programs, street repairs, parks and recreation, and library programs.
Click here to read frequently asked questions, or
click here to view Business License Tax resources.
The table below compares Palo Alto's estimated tax to a broad range of Peninsula cities that already have a business tax in place. Since cities have different tax structures making an "apples to apples" comparison difficult, the table shows a comparison based on the assumption that the business has 5 full time employees and generates $1,000,000 in gross receipts. The table is also broken out by business category.
Business License Tax Information [ TOP ] Frequently Asked Questions [ TOP ] City's Budget Deficit
1. How has the national recession affected Palo Alto?
Palo Alto experienced sharp declines in sales, hotel, and documentary transfer taxes, as well as declines in permit revenues producing a $10 million deficit for Fiscal Year (FY) 2010. To close this deficit, permanent and temporary expenditure reductions were included in the Adopted Operating Budget for FY 2010. These included $3.7 million in departmental service level reductions, $1.4 million in revenue enhancement, and the temporary suspension of General Fund transfers to the Capital Improvement and Retiree Medical Liability Funds of $2.2 million. Also included was $3 million in permanent employee compensation reductions to be negotiated. The economy has continued to worsen beyond all expectations and despite these cuts, the City anticipates it will face continuing budget deficits in the next couple of years.
2. Why was the revenue gap so large for Palo Alto this year?
In addition to the national crisis that caused revenues in general to decline, the State of California recently "borrowed" $2.44 million in City local property tax revenue (our largest source of revenue) to help plug the gap in state funding. The State is legally required to repay these borrowed funds by FY 2013, but the City has concerns with the State's ability to repay. Because the proposed business license tax is a local tax, it cannot be borrowed or taken by the State.
Strategies for Reducing Deficit3. What is Palo Alto doing to control its own costs?
To close the FY 2010 deficit, permanent and temporary expenditure reductions were included in the Adopted Operating Budget for FY 2010. These included $3.7 million in departmental service level reductions and $3 million in permanent employee compensation reductions to be negotiated. It is expected that at mid-year, additional spending cuts will have to be made.
4. Will this tax be levied right away?
As a consequence of the weak economy, the proposed business license tax ordinance includes a delayed implementation. The first payment will be due on January 1, 2011, and will reflect the period of July 1 through December 31, 2010. The first tax payment will be at a reduced rate of 50% of the proposed tax rate. This means, that for the first payment due in 2011, the actual tax amount will equate to a 25% rate for the first year.
5. How much revenue is this tax projected to raise?
Once the full tax rate has been phased in, staff has projected the business license tax will yield approximately $3.3 million in gross revenue annually.
6. What does the City plan to use the tax revenue for?
The revenue will be deposited into the City's General Fund and used for City services such as police and fire protection, senior and youth programs, street repairs, parks and recreation, library programs, infrastructure projects and other valued community programs.
Business Tax General Overview7. What is a business tax?
A business tax is a tax collected by the City for the privilege of conducting business within the City of Palo Alto.
8. Do other cities have a business license tax?
Nearly all cities in California levy a business license tax.
9. How is the business tax calculated?
Under the proposed ordinance, most businesses will be taxed based on the number of full-time equivalent employees. Businesses engaging in multi-family rental will be taxed based on number of units and businesses leasing commercial property will be taxed on a square foot basis. Please refer to the rate schedule below.
10. How does Palo Alto's proposed tax compare to other cities in the area?
The table below compares Palo Alto's estimated tax to a broad range of Peninsula cities that already have a business tax in place. Since cities have different tax structures making an "apples to apples" comparison difficult, the table shows a comparison based on the assumption that the business has 5 full time employees and generates $1,000,000 in gross receipts. The table is also broken out by business category.
The table below reflects the tax range of Palo Alto and neighboring cities with similar taxing methodology. The difference is that Palo Alto does not use headcount but full-time equivalent to calculate the tax amount. Cities such as Menlo Park, San Mateo, and East Palo Alto are not comparable because they use the gross receipt taxing methodology.
11. Will this tax cause local businesses to close or relocate?
The cost of doing business in Palo Alto is based on a number of factors, including: commercial rental rates, utility costs, regulatory fees and local business tax rates. Currently, the largest cost of doing business in Palo Alto (compared to other cities) is the cost of renting commercial space. On the other hand, businesses in Palo Alto pay an overall lower cost for utilities compared to businesses that are in PG&E's gas and electric service areas and their respective water district. Other business costs are comparable to other cities. If Measure A passes, a small business with 5 full-time equivalent employees or less would pay $75 to $455 per year in local business tax, depending on their size and classification. This payment is comparable to local business tax rates in other surrounding communities. See table below for details.
12. Does this tax disproportionately burden small businesses?
No. Since this tax is based on number of employees, businesses with fewer employees pay less tax than the same type of business with a greater number of employees. For instance, a retail business with 5 full time employees would pay $211/year and a retail business with 20 full time employees would pay $721/year. Likewise, a software company with 2 full time employees would pay $170/ year and a software company with 50 employees would pay $4,730. Any business (large or small) that employs a large number of part time employees is permitted to use a full time equivalent approach in calculating number of employees. Under this approach, a business adds up number of hours worked by an employee (trackable through standard payroll software) and divides by 2,080 (full time schedule). The proposed ordinance establishes a maximum tax of $20,000 and $30,000 depending on the business sector. Based on surveys of other nearby cities, it is common to have a tax cap.
13. Are there any persons or businesses that are exempt from tax?
The proposed ordinance contains a number of exemptions, including: minors, non-profits organized under Section 501(c)(3) of the Untied States Internal Revenue Code, disabled veterans, owners of less than three (3) rental units and any other person or business exempt under state or federal law. Also any employee who performs the bulk of his or her work outside of the City of Palo Alto is not covered by the ordinance.
14. Are minors subject to the tax?
No, minors are exempt from the business tax. While technically a minor must file an exemption form under the ordinance, City staff will issue a guideline clarifying that an exemption form will not be required of minors.
15. How do I define an employee?
An employee is anyone engaged in the operation or conduct of a business and includes but is not limited to owners, corporate officers, partners, independent contractors (under certain circumstances) and employees.
16. Are independent contractors included as employees under the City's proposed BLT ordinance?
Independent contractors are not considered employees provided two conditions are met:
(1) the independent contractor has a Palo Alto business license, and
(2) the hours worked by the independent contractor for the business owner seeking to exclude the contractor as an employee are included in the tax paid by the contractor (or his or her employer) to the City.
As an example, a Palo Alto technology business hires an accounting firm which is located in a neighboring city to do its books. The accounting firm has one employee working 3 months or 480 hours (480 hrs./2,080 hrs. = 23%) of their time at the Palo Alto technology business location. The accounting firm would pay $17.25 in business license tax (professional category, first employee $75 x 23%) and the technology firm would not be liable for the accounting firm's business license tax payment.
(Please refer to Section 4.61.020 of the proposed Ordinance for additional clarification).
17. The number of employees I hire changes from month to month. How do I calculate my employee base for purposes of the business tax?
A business can use one of three methods to calculate the number of employees: actual employee headcount; average monthly employee headcount or full time equivalent.
18. I employ many part time workers. Do I have to pay the full tax on each of my part time workers?
No, you can use the full time equivalent method. Under this approach a business adds up the total number of hours worked by all of its employees (including owners) and divides by 2,080 hours per year. For example, if a company has three employees whose total hours worked equals 2,080, this represents one full-time employee for the purpose of calculating the tax due.
19. How are tax rates determined?
Tax rates are determined based on the type of business you operate. There are five different business rate classifications. Please see attached rate schedule.
20. If I don't agree with my classification, how do I request a review for a change?
Requests for reclassifications must be submitted to the Business Tax Administrator for a determination. (Section 4.61.160 of the proposed ordinance)
21. What if my business is transitory or temporary in nature?
If your business operates in Palo Alto, you must obtain a business license. You only need to pay tax for the employees who work in Palo Alto.
22. Is my information confidential?
Yes. As with other tax information provided to the City, all information relating to your business affairs, operations or finances will be kept confidential by the City. The City, however; may release names and business addresses of persons and the general type and of businesses in order to promote local business activity.
23. Do I need a license if I work out of my home?
Yes. All businesses operating in Palo Alto must obtain a license. You can deduct any work performed outside of the City.
24. What happens if businesses operate in more than one city?
The business is taxed only on the portion of the business transacted in the City of Palo Alto.
25. I am a non-profit business; do I have to pay business tax?
No, not if you are organized under Section 501(c) (3) of the United States Internal Revenue Code.
26. Is there a tax liability for a business located outside the City of Palo Alto doing business within the City of Palo Alto?
With some exceptions, any business that is located outside the City of Palo Alto and that conducts business within the City will be required to pay some business license tax. Because they may pay less than the full tax, below are examples to illustrate the tax calculation.
For example, a landscaping business located in Palo Alto has one employee working 40% of their time within the City limits. The landscaping firm would need to pay $30 (personal business category, first employee is $75 x 40%).
27. Is there a tax liability for a business located within the City of Palo Alto, but conducting business outside of the City?
A business located within the City of Palo and conducting business outside of the City of Palo Alto is subject to the business tax. Businesses may be able to reduce their tax based on the percent of business conducted outside of Palo Alto.
For example, a graphic designer in a neighboring city works in Palo Alto for 60% of their time. This designer would need to pay $45 (professional category, first employee $75 x 60%) in business license tax.
If the graphic designer did all their work in the neighboring city then they would not be subject to the business license tax, even if the work were done for a Palo Alto client.
28. I own a piece of property in Palo Alto that I want to rent out. Do I need a business tax license?
All rental property is subject to the business license tax; however, residential units of three or less are exempt.
29. I rent a room in my house. Do I need a business tax license?
No.
30. How often do I renew my business tax license?
Business taxes must be paid annually on or before January 1. It is your responsibility to renew on time.
31. Does the City have the right to audit my financial records?
Tax laws typically contain audit provisions as an enforcement tool of last resort. Other existing taxes have audit provisions. The City will rely mostly on self reporting and voluntary compliance. The City does not plan to perform recurring business audits. The City may do a small number of audits each year where exceptional information is reported or data suggests review. Guidelines will be issued on audits. For home based businesses, the City would not enter homes to conduct audits.
32. Q. I don't see my question?
Visit www.cityofpaloalto.org/depts/clk for election information and www.cityofpaloalto.org/blt for specific details about the proposed City measure, Measure A, Business License Tax.
If you have specific questions, please e-mail us at blt@cityofpaloalto.org or call (650) 329-2317.
