Please Note: The ordinance for Sections 21.41(c) and 21.41 (d) expired on December 31, 2018, and will not be extended for the 2019 tax year.
Background
The City Council adopted an ordinance to amend Los Angeles Municipal Code (LAMC) Section 21.41 Gross Receipts Fund Class 1 to add the following business classifications: Internet-based Application Service Providers and Internet-based Data Manipulation. The amended ordinance is effective May 3, 2010 for Tax Years 2010 through 2014. In adopting the amended ordinance, the City Council included a five-year sunset clause to allow the review of the ordinances impact upon the City of Los Angeles.
Who is eligible for the new business classification(s)?
Businesses that meet the definition and criteria of either an Internet-based Application Service Provider or an Internet-based Data Manipulation business are eligible for the newly created business classification(s). Please see the link to the complete amended ordinance.
What is the definition of an internet-based application service provider?
An Internet-based Application Service Provider (ASP) is a business that provides its customers access, exclusively through the Internet, to electronic applications that are available exclusively on computer devices operated by or on behalf of the ASP. An "electronic application" is a computer program that provides the user with the ability to accomplish a specific task.
A business does not qualify as an ASP unless its Internet-based electronic application provides information to the user directly without any substantial intermediation by any person except for technical support related to the use of the electronic application.
Are there any limitations to being classified as an internet-based application service provider?
Yes. An ASP shall not include a business that provides electronic applications, including but not limited to computer software, for customers to download through the Internet. In addition, an ASP does not include a business that sells electronic applications through the Internet, or any business that obtains its income from the use of electronic applications by itself, on its behalf, or by any related entity as defined in LAMC Section 21.00(a).
Does the amended ordinance contain any other exclusions to the internet-based application service provider definition?
Yes, Sec. 21.41(c)(2) of the amended ordinance identifies specific exclusions to the Internet-based Application Service Provider classification. An ASP business shall not include the following:
- A business that utilizes an application to sell goods or further its business;
- A Motion Picture, Television, or Radio Producer
- A Telephone Company
- A Radio or Television Broadcaster
- An Adult Business as defined in LAMC Section 12.70B
What is an example of an internet-based application service provider?
A general example of an Internet-based ASP is a business that offers its customers user access to an Internet electronic application that enables the user to accomplish a specific task. For example, a business that provides user access to an Internet-based spreadsheet application that allows the user to generate a spreadsheet or series of calculations would qualify for the Internet-based Application Service Provider classification assuming the above-mentioned limitations or exclusions do not apply.
My business operates an internet-based tax preparation application in addition to providing users with tax review, consultation and audit defense services. Does this qualify for the internet-based application service provider definition?
No. The amended ordinance specifically excludes businesses that provide substantial intermediation by any person except for technical support related to the use of the electronic application.
What is the definition of an internet-based data manipulation business?
An Internet-based Data Manipulation Business is a business that exclusively provides access to Internet-based applications that allow a user to search, compile, and otherwise manipulate data, including but not limited to a business that operates or provides access to one or several search engines. A search engine is an Internet-based application that retrieves documents or files or data from the Internet, a computer network, a database, or other data sources. Data includes visual, numerical, and written information.
A business does not qualify as an Internet-based Data Manipulation Business unless its Internet-based application provides information to the user directly without any substantial intermediation by any person except for technical support related solely to the use of the Internet-based application.
Does the amended ordinance contain any exclusions to the internet-based data manipulation business definition?
Yes, Sec. 21.41(d)(2) of the amended ordinance identifies specific exclusions to the Internet-based Data Manipulation Business classification. An Internet-based Data Manipulation business shall not include the following:
- A business that utilizes Internet-based data manipulation to sell goods or further its business;
- A Motion Picture, Television, or Radio Producer
- A Telephone Company
- A Radio or Television Broadcaster
- An Adult Business as defined in LAMC Section 12.70B
What is an example of an internet-based data manipulation business?
A general example of an Internet-based Data Manipulation Business is a business that offers its customers user access to an Internet-based search engine that allows the user to search, compile, and otherwise manipulate data. For example, a business that provides user access to an Internet-based search engine that allows the user to compile shopping data about various electronic products in order for the user to compare prices and product reviews would qualify for the Internet-based Data Manipulation Business classification assuming the above-mentioned limitations or exclusions do not apply.
My business operates an internet-based data manipulation business and, in addition, sales staff contact users to provide shopping suggestions, direct marketing services and product warranty services. Does this qualify for the internet-based data manipulation business definition?
No. The amended ordinance specifically precludes businesses that provide substantial intermediation by any person except for technical support related solely to the use of the internet-based application.
How do I determine if my business qualifies as an internet-based business as defined by the amended ordinance?
Please see the attached link for the Internet-based Business Eligibility Questionnaire. The questionnaire contains a series of questions that will assist in determining whether your business activities qualify for either of the two newly created classifications.
After completing the eligibility questionnaire, I have determined that my business meets the inter-based business criteria. What happens now?
Please follow the directions on the Eligibility Questionnaire and either mail the completed questionnaire to the specified address or e-mail the completed questionnaire to the specified Finance Customer Service e-mail address. A final determination will be made once Finance staff reviews your completed questionnaire. Please remember to include a contact person and contact number to ensure that you can be contacted if there is a need for additional information.
If our review indicates that your business does not meet the Internet-based Business qualifications, you will be advised of that determination.
If our review confirms that your business does meet the Internet-based Business qualifications, your account will be updated and the new Fund Class will be added to your account. You will receive notification of this change and an updated Business Tax Registration Certificate.
My business tax renewal and payment has already been remitted under a higher business tax classification. Will I receive if my classification is changed to either of the two internet-based business classifications?
Yes. If it is determined that your business activity qualifies for reclassification to either Internet-based Business Classification and the reclassification results in a Business Tax overpayment for Tax Year 2010, you will be eligible for a refund of the overpaid tax.
After your Eligibility Questionnaire has been processed and a determination has been made that your business activity qualifies for reclassification, Finance will determine the revised tax liability. If your Tax Year 2010 renewal and payment has not been received, you will receive a notification of the revised tax liability that remains outstanding. If it is determined that the reclassification results in an overpayment of tax for the 2010 tax period, a notification will be sent to you advising of this overpayment and how to claim it.
My business activity includes other classifications in addition to the internet-based business classification. Will my gross receipts from all activities be taxed at the internet-based business classification rate?
No. The Internet-based Business Classification(s) tax rate is only applicable to your gross receipts that are derived specifically from activity defined in the amended ordinance. If you are engaged in multiple business activities, you must segregate your taxable gross receipts attributable to each classification and use the appropriate tax rate for each of the classifications to determine your tax liability.
The one exception to the above paragraph is if your business qualifies for the Single Category Filing Election. In general, if a taxpayer has two or more fund classes measured by gross receipts, and if one of those fund classes represents 80% or more of the total of all your taxable gross receipts, the taxpayer may, at its discretion, report and pay all its gross receipts under that single category. Single Category Filing is optional. Please see the Single Category Filing FAQ for more information.
Are my gross receipts attributable to the internet-based business classification(s) subject to apportionment?
In general, gross receipts are subject to apportionment only when the taxpayer can document that the gross receipts are attributable to the performance of the taxpayer's employees or equipment outside the City of Los Angeles. City Clerk's Ruling No. 15 is used to apportion the gross receipts attributable to service activities.