To Tax or Not to Tax?

Posted by Dave Fratello on Tuesday, September 21st, 2010 at 5:45pm.

Tuesday night, the MB City Council takes up a discussion of taxing real estate agents.

Is it a new idea? Yes and no.

Is there a lot of money at stake? Almost surely, no.

Do other cities impose the tax? By and large, yes.

But ever since MB began down this road, it's been controversial. Who wants to pay a tax if they don't have to? (See the Daily Breeze's recent coverage here, and the Beach Reporter's here.)

The city began down this road inartfully, determining on its own that it was time to apply the business tax that applies to other independent contractors equally to real estate agents. The city then began sending nastygrams to real estate agents in April suggesting that they were not complying with the law, and adding that failing to reply to the letter within 10 days could be another violation of city codes. Yikes.

After that unwelcome surprise, the city backed off and began discussing the issue in greater depth. The zig-zaggy line leads to Tuesday's hearing.

A key to the controversy is an arcane aspect of real estate law. Real estate agents can't do business on their own – they must attach themselves to a broker. However, they're not employees by almost any definition, they are independent contractors. In that sense, each agent can be seen as a business that would normally be subject to city business license taxes. For reasons perhaps lost to history, MB has never treated individual real estate agents as such, and has only charged brokers the tax.

Now we see that the city's hands-off approach is an anomaly. A survey by MB city staff found (click graphic to enlarge this table) that "most" nearby and comparable cities do impose a business license tax on both brokerages and individual agents. Not every city does it the same way.

The following cities charge real estate agents business license taxes separately from their brokers:
  • Los Angeles;
  • Long Beach;
  • Beverly Hills;
  • Torrance;
  • Huntington Beach;
  • Newport Beach; and
  • Santa Barbara.
Meanwhile, some South Bay cities besides Torrance take a different approach. As the table above states, they "charge each real estate office per head count not gross receipts. Each agent in the office is calculated in the business license tax."

In other words, the brokerages pay a business license tax based on how many agents work for them, in the cities of:
  • Hermosa Beach;
  • Redondo Beach; and
  • El Segundo.
Most of the 10 cities noted by MB city staff did not impose a tax on gross receipts. Only 4 of 10 did that – the 2 biggest cities (Los Angeles, Long Beach) and the 2 priciest (Beverly Hills, Newport Beach).

Despite the hue and cry, there does not appear to be promise of much revenue for the city, nor a threat of an overwhelming burden on agents. The base tax would be $ 204.68 per year, covering the first $59,800 in gross receipts. So part-timers and those having an off year would generally pay about $200.

If the gross receipts tax were to apply ($1.88 per $1,000 in gross receipts above $59,800), here's an idea of how much agents might pay in total:
  • $100k/yr. commissions/gross receipts: $  280.26
  • $250k/yr. commissions/gross receipts: $  562.26
  • $500k/yr. commissions/gross receipts: $1,032.26
(We welcome corrections on the estimates, drawn from the data in the city staff report.)

Meantime, the city offers an extremely rough estimate that, with 100 agents in town, all paying the minimum, the city would raise $20,468/yr. The reality may differ. But this won't plug any major budget holes or open the door to any new programs.

One of the big issues you hear in the debate is that the agent tax would be "double taxation." The idea is that brokerages already pay a gross receipts tax on commissions they take in before distributing the funds to agents. Would individual agents pay a second tax on the same commission income?

Such "double taxation" would be legal, though the city is talking about changing the rules to make sure that only agents pay gross receipts tax on the commissions they receive. That change would eliminate the concern. Not incidentally, it could save brokers money.

The discussion is on the agenda for Tuesday's council meeting under "general business." One has the sense that this debate won't end soon.

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Disclosure: Your blog author here technically has a stake in the outcome of this debate. As a recent real estate licensee, I could be forced to pay $204.68 per year, or possibly more. But I don't really have a position on the question, and won't oppose it if the city decides to start collecting it.
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