Business License Modernization

Town of Los Gatos Business License Program Modernization

Welcome to the Town of Los Gatos Business License Modernization information webpage.  The Town Council is currently considering whether to amend the Town’s 1991 Business Tax Ordinance.  Any potential amendments to the 1991 Ordinance could affect future annual tax rates paid by individual businesses.  This webpage is designed to provide businesses and the public with information regarding the current business license program, Town Council and Finance Commission discussions to date, results of an independent analysis of the current program, the process for amending the 1991 Ordinance, and other information.  

Thank you for taking the time to review the information.   We look forward to hearing from you and answering any questions you may have.  Please send inquiries to the email below or contact Arn Andrews, Assistant Town Manager at (408) 354-6836.

BLModernization@losgatosca.gov

August 2, 2022 Town Council Meeting

At the August 2, 2022 Town Council meeting, the Council unanimously asked staff to return at a special meeting prior to August 12 with a draft resolution revising Model 3 to encompass a 120% tax increase in E-Commerce, Manufacturing, Wholesaling, and Jobbing gross receipts, a 40% increase in Retailing gross receipts, a 30% increase for flat fees, and implement an ongoing Bay Area Consumer Price Index adjustment to account for future inflation on flat fees.  The staff report with attachments, desk item, and full video recording of the meeting are available on the Town website

The Special Town Council Meeting will take place on August 11, 2022 at 3:00 p.m. via teleconference.  The agenda and report will be published no later than 24 hours prior to the meeting at www.LosGatosCA.gov/AgendasAndVideos

July 25, 2022 Business License Modernization Informational Webinar

On July 25, 2022 at 7:00 p.m., the Town hosted a business license modernization informational webinar via teleconference.  The meeting provided an opportunity for Town residents and businesses to learn more about the background and potential business license modernization, discuss each of the proposed options under consideration, ask questions, and provide feedback.  The materials from the meeting are available below:

Audio Recording
Slideshow Presentation
Zoom Poll Question Results 

Current Business License Tax Program

The Town's Business Tax Ordinance was last adopted on June 3, 1991.  The current ordinance did not contemplate inflation adjustments or other predetermined structural rate changes, therefore leaving the rates unchanged for 30 years.   In addition, having not been updated in over 30 years, the current rate structure did not take into account shifts in business models and delivery methods over the decades.

The Town Business License Tax program is governed by Chapter 14 of the Los Gatos Town Code.   Articles I through III of the business license chapter are enacted solely to raise revenue for municipal purposes and are not intended for regulation.

The Town issues different types of business licenses based on the type of activity. The amount of business license tax paid by each business is also based on its business activity because the purpose of the tax is to cover municipal services and infrastructure utilized by the business, its employees, and customers. Fees for activities such as wholesales and manufacturing are charged on a sliding scale based on gross receipts, as is retail, with retail being capped at $975. These gross receipt activities account for approximately 25% of annual business licenses, while the remaining 75% are flat fee businesses. While the Town Code list different license types, the most common ones are listed below with the appropriate business license tax and fees.

Typical Business License taxes and Fees

Business License Tax Modernization Discussions to Date

On September 13, 2021, the Town Finance Commission reviewed the Town’s Business License Tax Program and recommended that the Town Council authorize the Town Manager to issue a Request for Proposal (RFP) for consultant services to evaluate and recommend modernization options for the Town’s Business License Tax Program. The staff report is available on the Town website

On October 19, 2021, the Town Council received the Finance Commission recommendation and directed staff to engage a consultant to review the Town's 1991 Business Tax Ordinance and recommend options for modernizing the Ordinance.  The staff report is available on the Town website

On December 17, 2021, the Town issued an RFP for Business License Tax consulting services. Hinderliter, deLlamas & Associates (HdL) Companies was selected given their significant experience in business license review and analysis, including having performed dozens of tax study and modernization programs in California. 

HdL submitted their Business License Analysis and Ordinance Review (Report) to the Town on June 8, 2022. 

On June 13, 2022, the Finance Commission discussed the HdL Report and voted unanimously to move forward to continue research and public outreach on business license tax modernization.  The staff report is available on the Town website

On June 21, 2022, the Town Council unanimously directed staff to continue conducting research and public outreach and prepare two options for proposed ballot measure language for Council consideration on August 2, 2022. The staff report is available on the Town website

Why Modernize the Business License Tax?

As previously mentioned, the Town has not updated the existing Business License Tax Program since 1991.

Inflation

Having not been updated in over 30 years and currently utilizing a blend of flat fees and decreasing gross-receipts tax rates, the HdL analysis determined that the Town’s existing structure is regressive in nature.  A regressive tax takes a larger percentage of income from low-income earners than from high-income earners.  For example, a general retail business grossing $50,000 a year (the small business in the chart below) would pay $75.00, which is an effective tax rate of 0.15%.  But a large business, grossing $1 million in a year, will pay $600 or 0.06%--less than half the effective tax rate of the small business.  This is illustrated in Chart 4 of the HdL report.

Examples of Current Tax Rate as Percent of Estimated Gross Receipts

The Town is not alone in having not revised its Business License program in decades. Many cities in the Bay Area and throughout California have either updated their tax structure through local ballot measures or enacted a tax if they previously didn’t have one. Recent examples of general business tax ballot measures include:

• Daly City – Measure BB 2018 (approved 80.64%)

• Mountain View – Measure P 2018 (approved 71.05%)

• Sausalito – Measure M 2018 (approved 65.42%)

• Berkley – Measure U1 2016 (approved 74.93%)

• Monterey – Measure H 2016 (approved 73.86%)

• San Jose – Measure G 2016 (approved 65.59%)

• Foster City – Measure U 2013 (approved 73.2%)

• Campbell – Measure M 2010 (approved 69.59%)

In addition, staff is aware of business license modernization ballot discussions happening in the City of Palo Alto, City of Burlingame, and City of Oakland. 

What Modernization Options Are Being Considered?

At this time the Town Council has not decided whether to place a business license modernization initiative on the ballot.  The Town Council is seeking input on the types of Ordinance changes that could be considered when they meet on August 2, 2022.   The HdL analysis provided three different Models which reflect differing ways to consider modernizing the current program.

Model 1 – would retain the existing structure while modifying the tax amounts for each category by 20%.  The drawback of model 1 is that the tax remains regressive. In fact, because it would increase the flat fees, it becomes more regressive. This Model increases revenues approximately $255,000 annually primarily from the Services category ($101,000).

Comparing Estimated Revenue by Model and Business Type

Model 2 – introduces the concept of  converting the Town tax to a gross-receipts model for all businesses. Meaning every business would pay based on the gross-receipts utilizing different single rates for five different business classifications.  Model 2 also lowered the annual base rate to a uniform $25, to provide some additional tax relief for smaller businesses. This model affords the most flexibility for increasing revenues while accommodating certain business categories with differing rates.  This Model increases revenues approximately $2,861,000 annually primarily from the Services category ($2,321,000).

Comparing Estimated Revenue by Model and Business Type Model 5

For additional information regarding the HdL analysis please refer to the full report.

In addition to the HdL Models, another consideration could be to leave most of the existing ordinance as is and change fewer elements while still seeking greater fairness in the existing model.  Staff developed Model 3 to illustrate an example of this option.

Model 3 - Maintains the existing gross-receipts structure for Manufacturing, Wholesaling, and Jobbing except for updating the $75.00 for each $550,000 more than $12,000,000 to $300 for each $550,000 more than $12,000,000.  This model would have the least changes of the existing structure only impacting 5 businesses, while helping to offset some of the inequities associated with the lower effective tax rates of larger businesses presented earlier.  This Model increases revenues approximately $1,100,000 annually.

Tax Rates as a Percentage of Gross Receipts

Ballot Measure Timeline

A ballot measure to modernize the Business License Tax requires a 4/5 vote of the Town Council to place it on the ballot.  In California, all taxes imposed by local governments are classified as either general or special taxes and must be put before voters as a local ballot measure for approval.  A General Tax can be expended on any program, service, or capital need at the discretion of the local government's governing body.  A simple majority vote (50 percent of voters plus one additional voter) is required for approval of a general tax.

With the November 2022 election scheduled, the last regular Council meeting to add an item on this ballot is at its August 2nd meeting.  Should the Town Council choose to pursue a ballot measure, final approval including the ballot measure language will need to be submitted to the Santa Clara County Registrar of Voters by August 12, 2022.  Provided below are ballot measure milestone dates:

  • August 2, 2022: Last regular Council meeting to add an item on this year’s ballot
  • August 12, 2022: Last day for Resolutions calling a measure 
  • August 16, 2022: Deadline for submitting primary arguments in favor of or against a measure
  • August 17, 2022: Last day to amend or withdraw a measure
  • August 23, 2022: Deadline for submitting rebuttal arguments to primary arguments in favor of and against a measure and impartial analyses

Comments?

Please send all comments to the dedicated email address BLModernization@LosGatosCA.gov