San Jose adopted a business tax in the 1960s as a revenue stream for the city’s general fund, which pays for everything from police and fire service to roads, parks and libraries.
And for the fifth time since the law was modernized in the 1980s, the city is offering an amnesty program for business owners who never registered to pay the tax or have fallen behind in their annual payments, allowing them to apply for an exemption, or pay their back taxes without penalties or interest.
The past two business tax amnesty programs offered by the city in 2006 and 2012, which together covered six fiscal years, generated approximately $3.4 million in revenue. But that was also before San Jose voters approved Measure G in 2016, which substantially increased the tax for the first time in 30 years without opposition from the area’s largest business interest group, the Silicon Valley Organization.
The current amnesty program began in Oct. 2019 and has already delivered $700,000 to the city coffers from 1,250 businesses that were delinquent. The program ends in March.
It’s unclear how many businesses in San Jose are currently behind on their taxes.
Although the SVO didn’t oppose the business tax increase four years ago, it doesn’t take an official position on the city’s amnesty program, agency spokesman Mason Fong said.
But as far as revenue generation goes “that’s a drop in the bucket” for San Jose — which has a $4.3 billion budget — said Fong, the SVO director of public policy communications.
However, Fong praised the program for educating small-business owners about their tax responsibilities and allowing them to come forward and get right with the city without fear of punishment.
“From a small-business perspective, this is really a service the city provides for companies that don’t have an accounting department or an executive who understands tax compliance — those who may be blissfully unaware that they are even supposed to be paying this tax,” Fong said.
The business tax is not a city tax on businesses’ receipts. Rather, it’s an excise tax in lieu of an annual license fee. So, it is possible that many new companies, including smaller businesses and especially those that don’t maintain an address in the city, don’t know they were supposed to register and pay the tax.
Indeed, city officials say education is an important part of the amnesty program. But San Jose Deputy Finance Director Rick Bruneau said that once businesses are registered, 90 percent continue to pay their annual tax bill, which is another reason to offer incentives to businesses that may have started in the past three years who never registered to come forward.
“The amnesty program is performing as expected in terms of revenue generation, and better than expected in terms of operational impact because of enhanced technology improvements,” Bruneau said.
The biggest improvement is an updated online portal that allows previously unregistered businesses to apply for amnesty, get a tax certificate and apply for exemptions. The portal also allows businesses that already registered to update their tax information. After their registrations are current, the online tool also lets businesses pay their tax bills for the past three years in full immediately, waiving all fees owed to the city.
“The ability for business owners to register remotely has drastically reduced the foot traffic and wait times in City Hall as compared with prior amnesty programs,” Bruneau said. “We also enhanced our phone payment technology prior to rolling out the amnesty program, which allows existing business owners to make a payment over the phone using an interactive voice response technology, without speaking with a customer service representative.”
The service is available in English and Spanish by calling the Finance Department at 408-535-7055.
Standard businesses — those that sell goods or provide services in San Jose — pay a tax according to the number of employees the company has. Residential and commercial landlords are subject to the tax by the number of units, or square feet leased. The base tax for the city’s current fiscal year is $200.85 and is capped at $159,135, regardless of how it is calculated. Penalties and interest are added as time passes without payment.
Bruneau said nine out of 10 businesses whose penalties and interest have been waived so far are either standard businesses or residential landlords. Among the total, approximately three out of four are new to the city’s tax rolls, he said.
That’s more than 900 new businesses, with the remaining few hundred divided between previously registered businesses that have grown over the years and a smaller portion that fell behind in payments altogether.
During the current amnesty period, the city has also granted approximately 175 exemptions, mostly for financial hardship, but also for senior citizens and charitable organizations.
“In addition to resolving tax avoidance and delinquency, the advantages of running an amnesty program are to educate individuals and entities about the city’s business tax requirements, the availability of exemptions, and the benefits of registering with the city,” Bruneau said. “It also facilitates voluntary compliance, reduces the administrative costs of collections, and provides needed ongoing revenue for funding essential city services.”
The city ran similar amnesty programs in 1987 and 1998. A 2006 business tax amnesty that ran for 60 days brought in $1.3 million in revenue from more than 5,000 businesses — many of those new to the city’s tax rolls. And most recently in 2012, the city ran a nine-month amnesty and 7,000 business owners paid more than $2 million in taxes.
The city expects to generate more than a million dollars from the current five-month amnesty program, which closes March 27 and covers the last three fiscal years.
Contact Adam F. Hutton at [email protected] or follow @adamfhutton on Twitter.