A months-long process to develop a new, "flatter" and simpler business license and tax system for Manhattan Beach unexpectedly hit the rocks Tuesday night.

City council declined to move the plan forward, although the night's agenda had anticipated a referral to voters for a ballot initiative vote this November.

Instead, council members portrayed the effort as incomplete and needing greater vetting with stakeholders, while continuing to discuss and debate potential changes to the new structure of the Business License Tax – up until the moment they let it drop.

City staff came prepared with all of the legal steps needed to place a measure on the ballot, including ordinance text, official ballot language and a process for filing of pro and con arguments. But council took no vote at all, once it was clear that the effort would not have the 4 out of 5 council member votes that it would need to advance. Tuesday night was effectively the deadline for council to act if members wanted to put the matter to a public vote this Fall.

The outcome was a reversal of fortune after the prior council meeting on July 21 saw members vote 5-0 in support a specific tax "model."

After one hour of staff presentations and 45 minutes of often-contentious public comment – almost all opposed to the new Business License Tax (BLT) as drafted – Mayor Joe Franklin led off council comments by signaling that the concept was dead. 

"I'll state it up front, I am a 'no' vote for this proposal," Franklin said. "It's too rushed, it increases taxes too much and unfairly, and there's not enough detail."

Franklin suggested instead that a task force or commission be formed that is inclusive of various aspects of the business community. The goal would be to look ahead to a possible ballot measure in two years with greater consensus behind it.

The city had commissioned professional polling indicating that Manhattan Beach voters were likely to support a BLT reform this November that, generally speaking, lowers taxes on a large share of businesses while asking larger firms to pay more than the $12,000 and change that they pay now as a maximum Gross Receipts Tax.

Under the model approved in late July, a few firms with the highest revenues in town could go from $12,000 to $100,000 in annual business taxes. Even with a reduction in the basic license registration fee from $313 to $100, the city projected mostly flat revenues overall, with many more businesses subject to an initial license fee.

Ballot language prepared for the meeting suggested that the measure would "lower taxes for approximately 73% of businesses operating in Manhattan Beach," while ensuring that "large businesses [would] pay their fair share." Polling that used similar language showed local voter support ranging from 59% to 64%.

Council member David Lesser, who announced earlier in the evening that he would not be seeking re-election, said, "I would observe that there's a difference between polling and actually finding supporters."

Lesser challenged supporters of the BLT reform: "Has anyone spoken in favor of this tonight?"

Public Comments Run Mostly Negative

Finance Director Libby Bretthauer framed the proposed reforms as originating from local businesses. 

"I've said multiple times that this has never been about generating revenue for the city," Bretthauer said. "[W]hat really started this was input from the business community and smaller businesses that ... felt like the current tax code was unfair."

Council member and Mayor Pro Tem Nina Tarnay echoed Bretthauer in saying, "I really want us to focus on the fact that our businesses have asked for parity, for some equity, in the way that they're being treated. And that's the impetus for this endeavor."

Maureen McBride of Tabula Rasa Essentials said, "We've been talking about this for 20 years or more ... the whole effort in this all along has been to just create some level of parity between your smaller businesses and the big guns in town."

McBride emphasized that small businesses have "disproportionately been paying a higher rate" and that they "have been looking for parity in this forever."

But as council member Lesser observed, voices like McBride's in favor were scarce on Tuesday night, while opponents were out in force.

Mike Zislis, owner of Shade Hotel, The Strand House and other local restaurants, offered a brief, but blistering, multi-front critique of the BLT proposal. He disagreed with the idea of lowering the initial license fee from $313 to $100 – because mostly non-local businesses pay that fee.

 

Zislis called the raising of the Gross Receipts Tax cap from $12,000 per business to $100,000 "absolutely crazy," and said enactment of the proposal would make Manhattan Beach the "highest-taxed, non-business-friendly city" in the area, potentially driving businesses to neighboring cities.

Brad Sperber, general manager of Manhattan Beach Toyota, said, "I was first introduced to this whole entire business tax increase last week, Thursday evening. In fact, I had never heard of it and I was completely shocked and surprised at the same time."

"I love this city," Sperber said. "I live here. I work here. I've been here for decades now. And I said, 'Hey, I don't have a problem throwing in another couple thousand dollars.' Little did I know it was going to go to $100,000."

Tim James, representing the California Grocers Association, expressed concerns about how the proposed Gross Receipts Tax would uniquely damage the grocery industry. That kind of tax "is the most damaging form of taxation for grocery stores," James said, explaining that "grocery is a high-volume, low-profit business model."

James, who complained of a "lack of direct outreach to grocers, who learned of this tax recently," offered an example of the tax impact: a store generating $25 million in sales would need an extra $3 million in sales just to cover the cost of the increased tax they would owe. He urged the council to consider a tax credit for full-service grocers, in line with a proposal that he said San Francisco had recently enacted.

Several local real estate brokers and agents spoke against the measure, which aimed to require individual agents to each register as businesses and pay a Gross Receipts Tax on their commission income. 

David Kissinger, representing the South Bay Association of Realtors, argued that the measure might run afoul of the law, as enacted by AB 5 (2019), which Kissinger said "specifically excludes real estate agents from consideration as independent contractors for a number of purposes, including, in our view, for the purpose of business license taxation."

Finance Director Bretthauer, appearing to anticipate opposition from the real estate community, had said in her own remarks that any references to individual real estate agents in the proposal were not a change in policy. Although internal legal opinions have repeatedly held that real estate agents could be taxed as businesses in Manhattan Beach, city council voted in 2010 to direct staff not to enforce business license requirements on individual agents. That remains policy unless the council reverses that stance, Bretthauer noted.

Gary Richardson, a founding partner at Strand Hill Properties, pleaded for the council not to proceed with requiring realtors to be licensed, arguing for the benefits real estate agents bring to Manhattan Beach.

"When we market a home, we also market our city. Our advertising reaches buyers throughout California and across the United States and around the world," Richardson said. "We help maintain strong property values, which supports the city's property tax, and services residents depend on."

The president of the California Association of Realtors, Tamara Suminski, herself a South Bay area broker, acknowledged staff's position that the 2010 direction from council exempts individual realtors.

 

Still, Suminski testified Tuesday, "The resolution specifically includes licensed real estate salespersons as taxable businesses. And I think these two positions are very inconsistent and create confusion."

"Our request is simple," Suminski said. "Preserve the exemption, remove it from the language. The California Association of Realtors has consistently opposed unfair taxes that disproportionately impact realtors, real estate and homeownership. We hope to resolve this collaboratively. If not, if the language is not corrected, we would be prepared to oppose this measure."

No Specific Next Steps Yet

As the session wound down, there was a general consensus among Council members to create some kind of commission or task force to research the issue for the next two years.

Mayor Franklin said, "We can just give it a definite start date, definite end date, go to our business associations ... [to] real estate associations ... all the different stakeholders and get some people working on this." 

"Let's make good use of this time, these two years, and see if we can get it done," Franklin said.

It will be up to city council to give formal direction to city staff at a future date.