Pocket Change: A fee for paying your taxes

In 2004, the city of San Diego imposed a business tax-processing fee of $25, in order to cover tax collection costs and alleviate some of the pain from the budget deficit. That’s right– a processing fee to pay a tax. Last week, a state appeals court found that practice to be in violation of the California constitution.

The fee structure was an attempt to work around Prop. 218, which ensures any new taxes or tax increases must be approved by the voters. The fee was charged to all businesses, from large corporations to farmer’s market booths to rental properties.

Shortly after the creation of this fee, two landlords, Sidney Weisblat and Kenneth Ledgerwood sued the city, claiming it was illegal. Initially, this caused the city to reevaluate the fee and drop it to $15. This did not appease the two landlords, who kept up the suit.

Last year the city collected $2.7 million in business tax fees, and they have collected similar amounts each year since 2005. That amounts to more than $10 million in revenue for San Diego.

This ruling has far reaching implications throughout cash-strapped California, as this case sets a precedent that other cities will likely have to abide by. It will also have implications for San Diego, which is facing deficits in the range of $100 million in the next few years. Whether or not a refund of previous year’s fees occurs, the city will lose money that it can’t afford to lose.

The city may appeal to the California Supreme Court, who could overrule the case. If refunds are given, it will be after this appeal process.

This issue raises a vital question. What is the legal difference between a fee and a tax? Many suits over the years have cornered this question, but this one might finally pin it down.

Read what San Diego’s expert policy analysts think about this situation and get an exclusive video commentary by District 5 Councilmember Carl DeMaio:

Erik Bruvold, founding president of the National University System Institute for Policy Research:

The decision by the Court of Appeals knocks another multi-million dollar hole in the city of San Diego’s budget. Not only will the city “lose” out on millions in foregone revenue but, in all likelihood, will also need to refund the illegal gains – the total which could exceed $10 million.

Councilmember DeMaio correctly notes that these liabilities are starting to pile up and that, as a matter of prudent financial planning, the city needs to show where we stand. The public is likely to be shocked when the preliminary budget for fiscal year 2010-2011 is released. Early information and dialogue about the challenges faced will help prepare the community for what is going to be the most difficult budget it has ever faced.

The court’s decision also underscores the need to rethink San Diego’s business tax regime in its entirety. Collecting a myriad of tiny little fees with no connection to the delivery of city services is both costly to carry out and difficult to enforce. Tax relief would be welcomed during this time of recession. Such a moratorium could allow the breathing room to rethink the current system, ensuring that businesses and landlord pay their fair share for city services but to avoid levies that are inefficient, ineffective, and, as the court ruled, illegal.

Murtaza Baxamusa, Ph.D., AICP, director of Research and Policy, Center on Policy Initiatives:

The bottom line is that businesses in San Diego pay the least for license fees among any of the cities for any type of business, at an average of a fifth of the average paid by businesses in the 10 largest cities in California. Growth of business generates a demand for city services such as police, fire fighting, libraries, parks and road maintenance, for which the city cannot raise revenues except through a ballot measure. The post Proposition-13 dilemma that the city faces is to either stop business expansion, or undergo an expensive and politically charged election.

Whereas, other cities charge businesses taxes based on the revenue they generate, and audit them to ensure that they pay their fair share, San Diego charges a flat rate of $34 for most businesses, and $125 for large corporations (with $5 per additional employee). For example, a large hotel with $50 million in revenue and 600 employees would pay over $74,000 in Los Angeles, over $80,000 in San Francisco, and over $10,000 in San Jose. A similar hotel would pay only $3,065 in San Diego. To supplement its low tax, the city charges $15 in processing fees, which the Appeals Court concluded was a tax, since it was mixed with the city’s General Fund.

This decision is a tap on the wrist for San Diego politicians and business establishments that want more services, without having to pay for them.

District 5 Councilmember Carl DeMaio:

Steven Bartholow is SDNN’s multimedia editor and political reporter.

Tags: Business, DeMaio, fee, processing, prop 218, SDNN, sue, tax

This entry was posted on Monday, August 24th, 2009 at 4:55 pm and is filed under Pocket Change . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.