TBID TAX TROUBLE
Around Thanksgiving, John Lambeth of Civitas, a firm that consults lical municipalities on the formation of Business Improvement Districts (BIDs) wrote a letter to John Urdi – Executive Director of Mammoth Lakes Tourism (MLT).
The first paragraph: “It has recently come to our attention that the California Department of Tax and Fee Administration (CDTFA) has issued a written opinion that sales tax applies to the revenue generated from Tourism Business Improvement (TBID) assessments on items where state sales tax is levied. The purpose of this letter is to notify TBID businesses of CDTFA’s written opinion and to provide recommendations moving forward.”
In other words, the CDTFA interpreted a long-standing sales tax code differently than it had been interpreted in the past. Now, the department believes sales tax should be levied on restaurant and retail TBID assessments, which generated $3 million in TBID revenue for MLT last year.
Quick explanation of how the sales tax on the TBID assessment works. You go to Awesome Shirt Extravaganza Store and buy a shirt that shows an orangutan wearing sunglasses. It’s $10. What a deal. Tack on a TBID assessment of 1.5%. Now, the shirt costs you $10.15. That 15 cents goes into MLT’s pocket. Which you’re alright with because you love Mammoth Lakes, and you want as many people as possible to come here and contribute to the economy so that business can thrive.
The new CDTFA opinion says that the 7.75% Mammoth sales tax now must be paid on revenue generated by the TBID assessment on your shirt. That 15 cents will be taxed at a rate of 7.75%, generating 1.1625 cents of tax revenue for the state of California.
Which someone has to pay, be it MLT (since it is their revenue that is getting taxed at the point of sale), or the business itself, which would inevitably pass the additional cost off to the consumer.
This additional tax isn’t what worried Urdi. He sent the Civitas letter out to 175+ business owners in Mammoth. An extra cent to every 15 cents of TBID generated is an added cost – and several businesses are not yet sure how to factor it into their point of sale systems – but the tax itself is not catastrophic. Right now, restaurants and retail charge 7.75% sales tax on every item, plus the 1.5% TBID assessment. A total of 9.25% in additional taxes and assessments. If they upped that to 9.37%, that would be enough to cover their new tax liability.
However, last week, one local business was audited by the state and subsequently presented a $27,000 tax bill. $14,000 of that was three years worth of unpaid taxes – the retroactive enforcement of this new CDTFA opinion – and $13,000 of that was in late fees and penalties. The CDTFA has the authority to go back and enforce up to ten years of unpaid sales tax on TBID assessments.
It’s this retroactive enforcement and additional penalties and fines that concerns Urdi. A restaurant or retail store can’t pass on a tax to a customer that shopped with them three years ago. That money has to come out of the business’s pockets. Some businesses in town could end up owing seven figures (i.e. mammoth Mountain) if they get audited. Some businesses would be unable to recover from the burden and close their doors.
If only a few businesses end up getting audited, MLT might be able to cover the cost. But, there are 175 to 200 affected businesses in town. If every single one gets audited and has to pay these penalties and taxes, MLT wouldn’t be able to help. Business would die. The town would struggle.
There are currently 114 TBIDs in California. 110 of those are lodging only and remain unaffected. Mammoth Lakes is one of four affected TBIDs in the state that includes restaurants and retail. North Lake Tahoe’s has only been in existence for one year. The two others are wine districts in Temecula and Livermore.
Urdi is meeting with legal counsel to see what can be done about this new opinion. He says the key here is to not sour on the TBID and subsequent marketing that it funds. The Board believes that not renewing the TBID (it’s due for renewal this June) would not help this situation. Urdi believes that the Town can grow out of this predicament just like it did following the airport litigation more than a decade ago. “We’re gonna fight this hard,” he said.
Business owners belonging to the TBID have suggested that MLT should create an escrow account to pay any fines or penalties that local businesses might accrue as a result of this change in tax enforcement.
Tom Cage of Kittredge Sports said that his business has begun adding a fee on its sales to pay for the tax on TBID, which started January 1. Michael Raimondo of Old New York Deli said that this is yet one more blow to the consumer, whom he believes is close to tapping out.
“We’re taxing ourselves out of business,” he said, pointing out that Mammoth Lakes is starting to resemble Las Vegas, where they literally have to kill a tree to print every receipt (because the receipts have so many line items). “Much improved communication. transparency and overall evaluation of TBID is needed and deserved by the business community at this point.”
Urdi believes that California’s move to retroactively tax businesses is hardly a coincidence given the state’s current $24B deficit. “They must have hired someone to start searching in the couch cushions” to raise money, said Urdi.
Town Manager Dan Holler called the new opinion “a brand new interpretation by the state,” saying that he’s never seen anything like this in his career in any other Business Improvement District. MLT Board Chair Jeremy Goico put the situation nicely at last week’s MLT meeting: “There is so much that is bizarre and mind-blowing about this that just doesn’t make any sense.”
Just how exactly MLT will fight this – and whether or not they will bail out local businesses – remains to be seen.