Background
The City Council adopted a revision to the business tax ordinance to allow “Single Category Filing” (SCF), which added Section 21.06.1 to the LAMC. This ordinance change became effective January 1, 2004, and states that 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 gross receipts, the taxpayer may, at its discretion, report and pay all its gross receipts under that single category. Single Category Filing is optional.
Frequently Asked Questions
Who is eligible for SCF?
Under the SCF option, a taxpayer with multiple classifications whose rates are based on their annual gross receipts may elect to pay 100% of the gross receipts business taxes based on a single classification, provided that classification accounts for 80% or more of the entire gross receipts after any apportionments.
How does this apply to a taxpayer with classifications that are not measured by gross receipts?
Classifications that are not based on gross receipts, such as amusement machines, money lenders, etc., do not qualify for SCF. A taxpayer must continue to report and pay for these classifications under the current method.
Is there a full year requirement of gross receipts before a taxpayer can declare under the SCF?
No. A taxpayer will be allowed to elect SCF even if there is less than one full year of gross receipts.
Example: A taxpayer, such as a gasoline service station, has a retail sales (L044(LGR2)) activity for the entire year of 2016. The taxpayer adds an auto repair (L049) activity in December 2016 which amounts to less than 20% of that year's total gross receipts. Although the taxpayer has not been providing auto repairs for a full year and does not have a full year of gross receipts to report under L049, the taxpayer will be eligible to elect SCF under Retail Sales (L044(LGR2)) in 2017.
May a taxpayer elect SCF only when they are filing an annual renewal and therefore must register and pay the required taxes for all activities that they are engaged in at the time of registration?
No. A taxpayer may elect SCF at the time of registration (establishing a new location or new classification). A taxpayer that decides to file SCF should understand that if it elects to file under a single category and it is later determined that it is not eligible, it will be subject to all applicable taxes, interest and late fees.
May a taxpayer change an election during any given year once it is made? For example a taxpayer elects SCF in February, based on the previous year's gross receipts, however, later in the year the taxpayer realizes that SCF is not in its best interest. Can the taxpayer change its election?
Yes. The taxpayer may elect to change back and forth during any given year. Also, if a taxpayer is audited and found to not qualify, then the City may remove the taxpayer from SCF. Likewise, a taxpayer may realize it didn't really qualify for SCF and provided an amended return and go back to reporting under multiple classifications.
Example: The taxpayer has three (3) classifications with associated gross receipts, namely, Wholesale Sales (L042 (LGR1)) - $50,000, Retail Sales (L044(LGR2)) - $70,000 and repairs (L049) - $650,000. For the purpose of simplifying its reporting, the taxpayer elects SCF in 2017 and paid under the repair (L049) rate. However in June 2017 the taxpayer realized that it paid too much in February 2017. The taxpayer may cancel SCF and file for a refund.
Will the ordinances applicable to underpayments (Section 21.05) and overpayments (Section 21.07) apply to SCF?
Yes. The rules for underpayments and overpayments as a result of choosing SCF or filing under multiple classifications will not change.
Does a taxpayer have the right to elect to file under SCF or not? In other words, even if there appears to be a tax reduction, do taxpayers have to sign up for SCF? May a taxpayer choose to file under SCF if it results in paying all taxes in a higher tax rate classification?
Yes. A taxpayer has the option to elect to file under SCF or not, whether it pays in a lower or higher tax rate classification. It is the taxpayer's choice to file or not to file under SCF even if doing so will increase the business taxes. SCF is offered to provide tax simplification for the taxpayer even if it increases the taxes.
Is the election of SCF an all or nothing proposition?
Yes. For example, if a taxpayer has three (3) classifications of gross receipts and has elected SCF, the taxpayer must designate two (2) of the classifications as dormant and one as the primary or the taxpayer will not be allowed to elect SCF. The taxpayer does not have the option of choosing which classifications to report under SCF. Remember, it is the 80% or higher gross receipts classification that must become the primary classification if the taxpayer elects SCF, and all other gross receipts classifications become dormant classifications. Again, only gross receipts classifications qualify for SCF.
Must a taxpayer report gross receipts and calculate taxes on all gross receipts classifications in order to sign up for SCF?
No. A taxpayer need not report gross receipts and calculate taxes on all gross receipts classifications in order to sign up for SCF. Since this is a self-reporting tax, there is no initial proof required that the taxpayer does in fact qualify for SCF. The taxpayer merely elects SCF at any renewal and designates and reports all gross receipts under the primary category.
Does the taxpayer have to validate its eligibility to elect SCF every year?
The taxpayer is required to state its election to SCF on each annual renewal form. If the active and dormant classifications have changed from the prior year, the taxpayer must designate the new active and dormant classifications.
How will the apportionments be applied to a taxpayer that elects SCF?
A taxpayer that elects SCF must apply the apportionment rulings to each classification before it elects SCF in order to determine if it meets the 80% threshold for gross receipts taxable by the City.
Example: A taxpayer located in Los Angeles with Retail Sales (L044(LGR2)) and Professions & Occupations (L049) classifications that additionally conducts business activities outside Los Angeles must apply Ruling 14 to the retail sales and Ruling 15 to the sales and services performed outside the city in order to determine the total taxable gross receipts for each classification. After determining the total taxable gross receipts for each classification, the taxpayer may then determine whether the 80% threshold has been reached in order to qualify for SCF.
May a taxpayer with a new business which may be subject to a "back tax" elect SCF at the time of renewal or must that taxpayer report gross receipts under the dormant classification?
A new business taxpayer (LAMC Section 21.30) will be subject to back tax if it files late or if taxable gross receipts exceed $500,000. The taxpayer may still elect SCF. If the taxpayer elects SCF, all gross receipts and taxes, which includes the back tax, will be reported under the primary gross receipts category. The taxpayer does not have to report the gross receipts and taxes that would have been owed under the dormant classification and is not subject to back tax under the dormant classification.
The rules for the New Business Exemption (Section 21.30) should be applied prior to the rules for SCF.
Example 1: In 2016, a new business taxpayer applies for both the Retail Sales (L044(LGR2)) and Professions & Occupations (L049) classifications. In 2016, the taxpayer had $120,000 in Retail Sales gross receipts and $30,000 in Professions & Occupations gross receipts. The taxpayer files a late renewal in April of 2017 and therefore does not qualify for the New Business Exemption in the second year but does qualify for and elects SCF under Retail Sales (L044(LGR2)). The taxpayer may combine and report all gross receipts under the Retail Sales (L044(LGR2)) and pay back taxes under this classification.
Example 2: In 2016, a taxpayer providing services under Professions & Occupations (L049) begins selling tangible personal property in June 2016. The taxpayer registers the Retail Sales (L044(LGR2)) classification in June 2016. The taxpayer's Retail Sales (L044(LGR2)) in 2016 are $100,000. In 2017, the taxpayer elects SCF under Professions & Occupations (L049), which accounts for 90% of its 2016 total annual gross receipts of both services and retail sales. The taxpayer without SCF would have had a back tax liability under Retail Sales (L044(LGR2)) because the retail sales exceeded the minimum gross receipts of $75,000 for that classification. But now the Retail Sales (L044(LGR2)) classification becomes dormant and the taxpayer reports the Retail Sales (L044(LGR2)) gross receipts, without a back tax, under the Professions & Occupations (L049) classification because there is no back tax due under Professions & Occupations (L049).
If a taxpayer has multiple accounts (multiple locations), may the taxpayer elect SCF for all locations?
Each location needs to be evaluated separately for SCF purposes. It is possible one location will qualify for SCF while another does not. Therefore, if a taxpayer normally combines all gross receipts under one location while reporting minimum gross receipts for all other locations, that taxpayer must now evaluate each account and analyze the gross receipts for each location to determine if the location qualifies for SCF.
The exception to this would be a taxpayer having several locations outside Los Angeles that operate within the City from those locations while maintaining only one account for those locations, as provided for under LAMC Section 21.06 (a). This taxpayer may combine all gross receipts after apportionment from all the locations outside the City and determine if it qualifies for SCF.