Los Gatos ponders changes to business licensing tax

Los Gatos Town Council is considering a change in its business licensing tax to help boost town revenue.

The tax has not been updated in 30 years and has not taken into account new business models like e-commerce and delivery services. Staff held a virtual meeting to explain the process and proposed changes Monday evening.

“It's extremely important to our council that the business community engages in this process,” assistant town manager Arn Andrews said. “At this time, our council has not decided whether or not to place a business license modernization initiative on the ballot. They are currently just seeking input and are trying to get an idea of what the business community thinks of some of the different models.”

The tax will be up for a vote at the Aug. 2 council meeting and, if approved, will be placed on the November ballot for voter approval.

One of the major catalysts of modernizing the business license tax was creating a more equitable model. The current tax structure is “regressive” in nature, Andrews said, with small businesses whose annual revenues are about $50,000 paying a tax rate of 0.15%, while a larger business bringing in around $1 million pay taxes at a rate of 0.06%.

Staff proposed three potential tax models to boost revenue and modernize the tax structure.

One would increase all tax rates across the board by 20%, which would generate about $255,000 annually. It would not solve the regressive structure problem, but would be easy to implement from an administrative perspective.

The second model would eliminate the current structure and pivot to different single rates for different business types. The “gross receipts reporting model” would increase revenue by an estimated $2.8 million, with most of that amount coming from the service industry.

Model 3 would keep the current structure but increase payments for higher-earning companies. The current tax asks businesses that make more than $12 million for an additional $75 for each increment of $550,000. The proposed model would bump up that amount to $300, generating about $1.1 million each year. This change would only impact five businesses in town.

Los Gatos' budget forecast projected a $10 million deficit over the next five years, and town council has been searching for a solution to the problem amid rising costs and inflation.

Council considered allowing cannabis dispensaries to set up shop in town, which could have brought in anywhere from $410,000 to $570,000 annually, but ultimately decided to maintain its local ban.

Businesses are still reeling from the blows caused by the pandemic, which forced many restaurants and retailers to close their doors. Andrews said this will have some bearing on the town's business licensing tax discussions.

“Most businesses aren't necessarily interested in their expense structure changing drastically, given the current environment,” Andrews said. “So they have kind of suggested, `We're willing to do something; we just don't know if what we're willing to do is going to go as far as some of your models.'”