Writer Mallory Carra freelanced a little bit in 2012, and in 2014 she got a notice that the City of L.A. was assessing her “business taxes” for $30,000 in unreported income from 2012. That would have been great, but her freelance earnings in 2012 were about $500, and she could prove it.
“When I told that to the woman on the phone at the [Los Angeles city] finance department, she laughed,” Carra recalls.
Although little-known to people who work at home sewing, writing, designing, illustrating, party planning or tutoring, their perfectly legal pursuits are deemed “unlicensed” by L.A. officials, and they must register with City Hall. Then, these tens of thousands of residents are notified to pay an obscure annual city “business tax.”
After critics called the tax an onerous charge on often-struggling freelancers who actually assist L.A. with its worst infrastructure problem — by not commuting — the L.A. City Council created two exemptions: one for those with gross receipts of less than $100,000 per year, and another, following lobbying by the Writers Guild, for “creative artists” with gross receipts of less than $300,000.
But people exempted from the freelancer tax are getting nicked anyway, some for thousands of dollars. This is thanks to a “penalty fee,” exacted by L.A. Mayor Eric Garcetti's administration under Section 21.03 of the L.A. Municipal Code. The penalty is exacted if a freelancer fails to respond to a mailed “Tax Discovery Program” notice requiring them to exempt themselves — from a tax they have never heard of and don't owe.
Freelancer Lorelai Laird, who writes for the American Bar Association's ABA Journal, received a Tax Discovery Program notice in 2010. She tells L.A. Weekly she already knew about the tax through word-of-mouth. In contrast to San Diego and San Francisco, L.A. conducts almost no outreach to publicize its freelancer tax. But Laird, who earns less than $100,000 a year, already knew she was exempt.
“I thought they wouldn't bother with me, and if they did, I would just … get the exemption, and that would be that,” she says.
Laird didn't realize that the L.A. City Council had created a Catch-22 even more obscure than the tax. The Municipal Code mandates a Feb. 28 deadline by which freelancers who owe no tax must file for an exemption from the tax, every year.
If they miss the Feb. 28 deadline, “unlicensed” writers, creatives and others are held liable for serious penalties, even if the city later agrees the person owed no taxes. The late fee is based on imaginary taxes, in effect, that the city estimates are owed before a person proves he or she made less than $100,000, according to city mailers. The cost for ignoring the city is punishing: a 5 percent penalty on “taxes owed” after one month, 20 percent after four months and, upon failure to remit, collection fees up to 39 percent.
Those who actually do owe taxes also are charged interest, calculated atop the city's estimate of their unpaid back taxes.
Laird got a call from an L.A. city employee while she was in Connecticut — at her wedding. She was erroneously informed she owed thousands of dollars in back taxes, plus mounting interest and penalties.
Later, as Laird began trying to work out a payment plan for her “penalties,” she was troubled by her encounters with City Hall. “I had to call several times because the first time, a guy actually hung up on me,” she says. The city's old-fashioned telephone menus are “all designed for larger businesses that have locations and employees and whatnot, so it was hard to even find the right number to press.”
She visited the Office of Finance in person. After a series of meetings, Laird says she paid “several thousand dollars” —a high price to qualify for an exemption from a tax she never owed.
Laird now files for her exemption before Feb. 28 each year.
Mayor Eric Garcetti sometimes says he is leading L.A. to become the nation's top digital city. He could not be reached for comment on its old-style website, by-mail notices and phone system that place L.A.'s freelance tax program communications well behind Francisco and San Diego.
However, the Mayor's Office told L.A. Weekly: “We have been working closely with the Office of Finance to improve customer service, and aim to eliminate the penalties when businesses do not register … because they did not know they had to. We agree that punishing businesses” because they didn't know about registering “is neither fair nor helpful in making L.A. business-friendly.” The Mayor's Office says those changes were sent to the City Council in early August.
The L.A. freelance tax got its start during the dot-com crash of 2001, when now–City Councilman Gil Cedillo, then an assemblyman, carried a law written by L.A. elected leaders, Assembly Bill 63. AB 63 gave deficit-riddled cities the right to pay for the names and private “business activity codes” of people who reported income to the California Franchise Tax Board.
L.A. used the private data from the FTB to launch its Tax Discovery Program, demanding to know how much income “unlicensed” businesses — anyone filing 1099 forms — had reported, then taxing them. That's a diverse group, from freelancers to those in the film industry hired on a gig-by-gig basis. More and more employers pay this way to avoid providing benefits.
Cedillo and L.A. city leaders promised that the “economic crisis” tax would “sunset” in 2008. But in 2008, with the recession hurting both freelancers and cities, Cedillo acted on behalf of Mayor Antonio Villaraigosa and others to push Senate Bill 1146, which quietly extended the freelance tax “sunset” date to 2014.
Then in 2013, with city coffers recovering, state Sen. Ed Hernandez of the San Gabriel Valley authored Senate Bill 211, which extended the freelance tax to 2019.
There was no media coverage of SB 211's impact on the vast number of people who work at home.
Last year, L.A. collected $15 million in business taxes and penalties this way, says Robert Lee, a chief tax compliance officer for L.A. The freelancer tax remains widely unknown in L.A., despite an occasional news story. “The ordinance is always evolving,” Lee says.
In 2009, the L.A. Office of Finance caused an uproar when it sent out 33,000 bizarrely worded letters to freelancers and other independent workers, demanding that they register with City Hall. As the Los Angeles Daily News reported, each letter read: “The following amounts are due and payable immediately: $4,363.81.”
Villaraigosa's administration insisted the letter made sense: Freelancers were merely being assessed for the previous three years, at an average estimated gross income of $200,000 per year — this in a city with household incomes of about $45,000.
It turned out that L.A. city employees had averaged the earnings for a category of companies known as “reporting businesses.” Doing so sent the average gross incomes of freelancers skyrocketing well above the levels they were actually earning.
San Diego and San Francisco are among about 100 cities that use L.A.'s tax brainchild, but they approach things much differently. San Diego charges a fraction of what L.A. does for its tax, and its penalties for failing to seek an exemption. In San Diego, freelance businesses pay just $34 yearly, says business tax manager Ricardo Ramos, and late penalties for failing to sign up rarely go much beyond $250. Freelancers end up paying, on average, about $60. “Having to pay $60 versus a couple hundred or a couple thousand [dollars] in L.A. — it's not that bad,” Ramos says.
San Francisco has created an extensive outreach and alert program that far surpasses the Office of Finance's passive website operated by L.A. The San Francisco Business Portal is a “single source of information for business owners to successfully start, manage and grow their business,” says Jane Gong, program director.
Amanda Kahn Fried, of San Francisco's Office of the Treasurer and Tax Collector, says, “We do our best to streamline the process and bring them into compliance.
“Cities are set up to deal with older, more traditional types of businesses — not to put down our neighbors in Los Angeles,” Fried adds. “It's definitely a struggle and it's something we're trying to wrap our brains around.”
Lynda Brendish, 35, another L.A. freelance writer, managed to get out ahead of the Feb. 28 deadline this year, hearing about it not from the city but from freelancers. “I don't even know how you'd find out about it, if it weren't for word-of-mouth, until you get penalized by the city,” she says. “Why would anyone even know to look? My CPA didn't bring it up to me — I brought it up to him.”