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Tax push catches freelancers by surprise

Bizarre as it may sound to many independent writers, editors and other media workers, self-employed Californians increasingly are finding that they owe back taxes to the city in which they live or work because they are considered a taxable "business."

If you live in Oakland and freelance, chances are that if you haven't already paid it, you owe the city at least $90, and possibly a lot more. If you've been honest on your federal tax return, the city will find you to collect.

Other California cities may soon follow suit. Most require anyone "doing business" within their boundaries to register and pay business taxes. Until recently, many overlooked the small-time self-employed. But in recent years the state has used its own tax databases to help 54 cities crack down on some people who never knew they had to pay.

Tax tips for freelancers

1. Most California cities and towns collect some kind of business tax, so call your local government tax office to see if you are required to get a business license. Some municipalities charge as much as $97 for doing any business at all, while others give the small-time self-employed a free pass.
2. Not everyone who declares business income has to pay business tax to the locality where they live. There are certain exceptions, such as café musicians and day-care providers. And if 100 percent of business is conducted out of town, you owe your hometown nothing.
3. If you receive a letter requesting back taxes, interest and penalties that you suspect has been sent falsely targeting you, exercise your option to appeal your case.
4. Tax law generally distinguishes independent contractors, who must pay a business tax, from employees, who don't. However, some companies that control the work product of people who are not technically on the payroll may be doing so in order to avoid additional business and payroll taxes. Contact your local tax office to see if the work you do qualifies you as a business-tax-exempt employee.
5. As Media Alliance discovered in the process of writing this article, you might owe taxes in another city if you are deemed to be "doing business" there. Cover all you municipal bases.
6. If the freelance work you do in any city pays less than the amount the city will tax you for working there, consider passing up the assignment. You are, after all, in business to make money, not lose it.

Oakland has provoked a torrent of protest by independent contractors over the last year, after the tax office sent out 11,838 letters to home-based businesses demanding up to three years of back-owed business taxes, plus late penalties and interest. The charges can run into the hundreds of dollars with or without the use of a home office.

For small, one-time projects, the taxes can even exceed the freelance income itself. And workers who aren't officially paid as employees at the companies they work for must prove that they're not "running a business" to avoid what essentially amounts to a local income tax.

The aggressive rooting-out of freelancers became possible after Assembly Bill 63 of 2001 allowed the state to share federal tax data with local governments. Cities have desperately sought to identify under-exploited revenue sources to plug holes caused by federal and state budget cutbacks and a souring economy. At a time when a growing number of Fortune 500 corporations are paying no corporate taxes at all, local governments have been forced to raise taxes on the smallest of small businesses -- arguably those least able to afford it.

Oakland officials say they are just enforcing the business laws that have always been on the books. Yet a group of residents who feel victimized by the city’s crackdown has been researching the law and meeting with city officials to work out a possible compromise.

"We don't think that all self-employed people are businesses," said Rephah Berg, who makes a few thousand dollars a year designing puzzles for magazines from her Oakland home, and last year had to forfeit $350 in taxes and penalties to the city. She and others have created an online discussion forum at http://groups.yahoo.com/group/biztaxprotest/ to discuss the issue and offer advice to the aggrieved. "We're the dolphins caught in the tuna net," Berg said. "This feels like an income tax, but a very selective one -- only for those who have self-employment income." By law, local governments in California cannot charge income tax, but can tap into a percentage of businesses' gross receipts.

While Oakland is not alone -- many cities have had similarly broad definitions of the term "business" -- most city business tax offices have not yet gone as far to enforce taxation on the self-employed. Oakland requires anyone who does business there, including the self-employed, independent contractors and people who have home businesses, to file for a business certificate. They are charged the same one-time $30 that commercial/industrial firms, residential rental property owners, retailers, wholesalers, manufacturers, service companies and nonprofit organizations pay. Then they are taxed an annual minimum $60 registration fee if the "business" earns as little as $1. For the professional and semi-professional category, which applies to most media workers, an added 0.36 percent tax applies to gross receipts above $16,666 -- even if the taxpayer operated the business at a net loss.

Some cities have used the state lists to educate the self-employed about their business tax obligations. Long Beach last year offered amnesty for anyone who didn't know about the requirements before the city informed them. Other cities overlook small-potatoes freelance work: Los Angeles exempts from the tax the first $5,000 of business income.

Oakland, though, has used its business-tax program primarily to raise money in the short term. The city claims such tax enforcement action generated $2.5 million in fiscal year 2003-04.

"It's been helpful for us," said Bill Noland, director of finance and management for the city. "There are businesses in all shapes and sizes in Oakland, some of which come forth and pay their taxes and others that don't. It has been controversial for those who work at home, so that hasn't been a lot of fun.

"I'm definitely sympathetic for those who did not know," he said. "The flip side is that there are a lot of businesses that did not register and did know. How do you tell the difference between an innocent victim and a tax cheat?"

Kathleen Salem-Boyd of the Oakland City Attorney's Office said that while there have been discussions and proposals to soften the financial blow to the self-employed, none has come to fruition. One proposal before the City Council is to apply the tax only to those who make more than $2,500 a year in business income.

In late March representatives from the city met with the tax protesters, media workers' unions and Media Alliance to discuss several proposals to:

Jack Rasmus, San Francisco Bay Area chair of the National Writers Union, said his organization was most interested in reducing the future "tax on creative workers." Oakland Vice Mayor Jane Brunner was particularly supportive in offering to find solutions, Rasmus said, though city staffers warned that any significant refunds would cost the city hundreds of thousands of needed revenue dollars, or as much as $5.9 million for the most generous refund. The city is now studying the business-tax policies of eight similarly sized California cities.

The most sweeping critique of Oakland's system is that the $30 registration fee and minimum $60 annual charge makes it a regressive tax; those with low income pay a higher rate than those with high income. To take it to an absurd but quite possible conclusion, a retired Oakland referee who agreed to work a charity baseball game for $1 could pay a 9,000-percent effective tax rate on those earnings, while a car dealership on Broadway's Auto Row, by contrast, is taxed at a little more than a tenth of one percent of revenues.

Some cities have backed off their enforcement pushes. The San Jose Mercury News reported last April that the city of San Jose faced a backlash from residents who thought they never should have had to pay the business tax. One case involved a woman who earned $110 a day from a family trust to care for her 92-year-old mother.

"This is, to me, the end of the game of crack-the-whip that the right wing is playing in this country, by -- as they put it -- starving the beast," said Michael Slaughter, who sits on the board of the San Francisco local chapter of the American Federation of Musicians. "What they're doing is reducing the money available for public services and social services, and putting the burden increasingly on lower levels of government, each of which passes it on to yet lower levels of government." Cities, he said, have no one left to lean on. "So the pocket of last resort is becoming artists."

Business-tax protesters have many remarkable stories. One involves the author of a German textbook that is revised every four years. She is charged the Oakland business tax every year because she deducts the cost of a German newspaper subscription and trips to Germany as business expenses in off years. She is taxed as an operating business, even though most years she is not working on the book.

Another is Oakland resident Laura Boytz, a schoolteacher with a passion for the cello. In 2001 she played a $100 gig in San Jose only to learn last year that she had to pay $90 in taxes and fees, plus $66.68 in penalties and interest.

"Kafkaesque is a good term for how it all looks to me," Boytz writes. "I can't believe that there's nobody in the Oakland city administration who's willing to say it's absurd to tax someone at a rate of 90 percent of their gross receipts and then add penalties and interest on top of that because they didn't know they owed the tax (and no one in Oakland notified them for four years). If it was just the minimum tax, I probably wouldn't be fighting it, even though it"s regressive, but the fact that they have the nerve to charge penalties and interest on that and are completely unwilling to apply any form of common sense is what drives me crazy and has made me fight the whole thing."

Postscript:

Actually, it's not necessary to interview any freelancers to brush up against these obscure and regressive taxes. When this writer called the Oakland tax help line, (510) 238-3704, he was told that if he traveled to Oakland from San Francisco to write the article, he would be charged $90 in fees and taxes by the Oakland tax collector for the privilege of writing this story ("doing business in Oakland"). Suffice it to say, he did all his interviews by telephone and e-mail. But the writer was still not off the hook. He still needed to apply for a $25 business license in San Francisco for retroactive permission to write this story. And he discovered that since he wrote a $300 freelance story in 2003, he owes $320 for several years of accumulated business registration fees and penalties.

-- Michael Stoll is a freelance writer who pays his taxes in San Francisco. He is also associate director of Grade the News (www.gradethenews.org), a Bay Area media watchdog group.

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