Proposed Business License Tax Measure

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.

The tax would apply only to businesses that conduct business in Palo Alto. It would not apply to Section 501(c)(3) non-profit organizations, owners of less than 4 rental housing units, or to residents not engaging in a business in the City. Due to State law restrictions the tax would not apply to Stanford University or to P.A.M.F.

The annual rates for the tax are:

• Personal Services, Retail/Hotel, and Wholesale/Manufacturing businesses: $75 for the first employee plus $34 for each additional employee.

• Professional/Business Services, Real Estate Brokerage and non-classified businesses: $75 for the first employee and $95 for each additional employee.

• Multi-family (4 or more rental units) Landlords: $75 for the first residential unit above three units and $25 for each subsequent residential unit.

• Commercial Rental businesses: 3 cents per square foot of leasable space.

Where a tax amount is calculated based on number of employees, a business can calculate the amount due based on their choice of actual employee headcount; average monthly employee headcount; or full time equivalent. Under the full time equivalent 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 would represent one full time employee for the purpose of calculating the tax due.

The proposed measure contains a minimum tax of $75 per business, a maximum tax of $20,000 for each Retail/Hotel and Personal Services business and a maximum tax of $30,000 for other businesses. Taxes for a year are calculated based upon business activities during the prior calendar year. Taxes are due on January 1 of each year and delinquent on January 31. The ordinance has a delayed implementation schedule with the first payment due in January, 2011. In addition, the tax for 2011 would be charged at 50% of the usual rate and based only on employee hours during the second half of 2010. The City estimates that the annual approximate cost to administer the program would be $250,000 and that the tax would initially net approximately $3,000,000 annually in local tax revenue when fully implemented. The tax amount will be increased annually by the C.P.I.

Nearly all cities in California have some form of business tax, with the exception of Palo Alto.

This tax measure imposes a general tax and will take effect if passed by a simple majority (50% + 1) of voters casting a vote on the measure.

PREPARED BY: Gary M. Baum, City Attorney