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Los Angeles Daily News
Monday, May 22, 2000

Corporations suing L.A. over taxes
By Alexa Haussler. Staff Writer

Already facing massive Rampart settlements and struggling to salvage damaged relations with the business community, Los Angeles faces a new attack by several major corporations that claim the city's tax system is unfair and are demanding millions of dollars in refunds.

Nine corporations -- including Eastman Kodak and Pacific Bell -- have filed lawsuits seeking roughly $2 million and which, if successful, could cost the city as much as $10 million for all similarly affected businesses, according to the City Controller's Office.

An attorney representing Eastman Kodak said those costs could rise if the city fails to fix its business tax problems.

"They'll pile up liability," said Los Angeles attorney Charles Ajalat, who also successfully fought the city's tax code for General Motors in 1995. "Our people must be refunded their money, and the city must correct the structure for the future."

Los Angeles officials forecast the city will collect nearly $314 million in city business tax this year from its more than 230,000 registered businesses.

The city's business tax code, with its complex and ambiguous provisions, has caused countless headaches for people doing business in Los Angeles as well as local government administrators -- and is the subject of a massive reform movement launched by Mayor Richard Riordan.

Five major department stores filed a lawsuit Tuesday against the city's tax policy, becoming just the latest to do so after Eastman Kodak, Pacific Bell, Vons grocery stores and Atlantic Richfield.

Dozens of companies have filed similar lawsuits against San Francisco, which has nearly the same tax system as Los Angeles, and Ajalat said a state court judge Tuesday called that city's system unconstitutional.

City legal officials defend the system, saying Los Angeles retooled it after losing a $50 million judgment to General Motors Corp. A federal appeals court ruled in 1995 that the city's tax unfairly exempted manufacturers within the city from paying taxes on the sale of products, but imposed that tax on manufacturers based outside of Los Angeles.

"We really don't think that the claims have any merit, that the problems were taken care of in 1996," said Deputy City Attorney Miguel Dager.

Still, Ajalat and other attorneys say the changes were not enough. They claim the new system still unfairly exempts locally based manufacturers from paying certain taxes that those based out of town must pay.

"They've been losing all of their cases. They really shouldn't be prolonging it, they should be changing it," Ajalat said.

Specifically at issue in the lawsuits are two taxes levied to businesses operating in the city.

Los Angeles imposes a payroll tax and a business tax based on receipts and most locally based companies doing business in the city must pay only one -- the greater of the two -- and are exempt from the other.

That system, the lawsuit alleges, is unconstitutional and amounts to discrimination because businesses based outside the city are required to pay the city's business tax, plus local taxes in the city in which they are based.

"The real issue is two taxes vs. one," Ajalat said. "You only pay one tax if you're solely within the city, but you are subject to two separate taxes if you do business within and without the city."

Greg Turner, general counsel for the California Taxpayers' Association,  said the group has closely monitored the cases.

"You can't discriminate in favor of local business and that was what, in essence, those local tax structures were doing," Turner said. "Your tax structure shouldn't be trying to create winners and losers among competitors."

Turner said the city should have remedied the situation years ago.

"What surprises me is that we keep having to revisit these issues," he said. "What's it going to take for these guys to get the message?"

Deputy Mayor Rocky Delgadillo said the Mayor's Office couldn't comment on pending lawsuits. But he said Riordan is confident ongoing reforms will help simplify the process.

"We continue to press hard on making this city the most business-friendly in the Southland, and the reform of our tax code is an important element to accomplishing that," Delgadillo said.

Los Angeles imposes two business taxes: a payroll tax based on employees and a business license tax based on receipts. Locally based businesses are only required to pay one of the two -- whichever is greater -- while corporations that do business in Los Angeles but are based elsewhere must still pay two local taxes: one in Los Angeles and another in their headquarters' city. Attorneys for the corporations call the arrangement unconstitutional because it imposes different tax requirements on similar businesses. They also say it amounts to double taxation, another violation of the Constitution. Attorneys say the city has failed to remedy the problem, even after losing previous similar cases filed by General Motors Corp. and Union Oil.