MEETING DATE: 01/24/2011
AGENDA ITEM: Discussion of Proposed Changes to Culver City
Business Tax on Production Companies and Provide
Direction to the City Manager
ATTACHMENTS
1. Staff Report from October 11, 2010
1-7
City of Culver City, California
Agenda Item Report
Meeting Date: 10/11/10 Item Number: A-2
CITY COUNCIL AGENDA ITEM: Discussion of Proposed Changes to the Culver
City Municipal Code Related to Business Tax on Production Companies and
Creative Artists and Provide Direction to the City Manager Related Thereto.
Contact Person/Dept.:
Jeff S. Muir/Finance
Phone Number: 310/253-5865
Fiscal Impact: Yes [X] No [] General Fund: Yes [X] No []
Public Hearing: [] Action Item: [X] Attachments: [X]
Commission Action Required: Yes [] No [X] Date: _______________
Public Notification: (E-Mail) Meetings and Agendas – City Council (10/06/10), (E-Mail)
Culver City Chamber of Commerce, (E-Mail) Sony Corporation, (E-Mail) Culver Studios,
(E-Mail) GMT Studios, (E-Mail) Motion Picture Association of America (10/06/10)
Department Approval:
Jeff Muir (10/01/10)
City Attorney Approval:
Carol Schwab (by H. Baker) (10/06/10)
Chief Financial Officer Approval:
Jeff Muir (10/01/10)
City Manager Approval:
John M. Nachbar (10/06/10)
RECOMMENDATION:
Staff recommends the City Council discuss proposed changes to the Culver City
Municipal Code (CCMC) related to business tax on production companies and
creative artists, and provide direction to the City Manager related thereto.
BACKGROUND:
Since its inception, Culver City has been associated with the filming industry, as
evidenced by our motto “The Heart of Screenland.” Culver City is fortunate to be
home to several studios that provide needed infrastructure and services to
production companies in creating movies, television shows, and commercials.
These studios, and the production businesses they attract, contribute significantly to
our local economy in several ways, such as: providing well-paying local craft and
professional job opportunities, purchasing of goods and materials used in production
from local businesses, and supporting local restaurants and other businesses by
those employed by or using the studio facilities. There is also filming activity
throughout Culver City that does not take place at studios, such as on City streets
and at residential or commercial locations. Filming outside of the studios is normally
for short durations, while filming at the studios can range from short-term
(commercials, music videos, etc.), to medium-term (movies, television shows, etc.)
to long-term (recurring television series, etc.).
City of Culver City, California
Agenda Item Report
During the discussion of the City Manager?s Proposed Budget for Fiscal Year
2010/2011, staff was requested to look into the current business tax requirements
for filming/production companies and whether there might exist some inequities as
compared to how surrounding jurisdictions handle them. Currently, the CCMC
requires all businesses or individuals engaged in a business to apply for a business
tax certificate and pay a business tax. Specifically, the CCMC reads:
§ 11.01.010 REQUIREMENTS TO OPERATE BUSINESS.
A. No person as principal, agent, clerk, employee, corporate officer,
partner, trustee or otherwise, for himself/herself or for any other person, shall
commence or carry on any business specified in this Subchapter, without having
first:
1. Applied for and received a tax certificate specifying such business;
2. Paid the required application fee;
3. Paid the required business tax;
4. Obtained any permit required by the City;
5. Paid any permit fee required; and
6. Paid any investigation or inspection fee required, subject, however, to
the exemptions provided for in this Chapter.
Therefore, it is the City?s current practice to require all filming or production
companies to obtain a Business Tax Certificate as set forth above, as well as the
Film Permit requirements set forth in Chapter 11.14 of the CCMC. A summary of
how this is accomplished follows below:
• Some production companies come into Culver City on a short-term or intermittent
basis to film on the streets, on City or Agency property, or at some other
residential or commercial facility. Currently Film Permits are issued through the
Police Department. Current practice is that in addition to the Film Permit
Application Fee and any Daily Site Usage Permit or On-Street Parking fees, they
will also pay the Business Tax Certificate Application Fee and business tax of
$250 per day or a $1,500 maximum that would satisfy their business tax
obligation for the year.
• Other production companies come to a Culver City studio on a short-term basis.
Because of the intermittent and short-term character of this business, the City
often is not aware of these companies, and unless they come to City Hall for
some other reason and are directed to the Business Tax desk, we would not
collect business tax from them. According to the CCMC, they are subject to the
$250 per day, $1,500 per year schedule.
• Finally, there are production companies that come to a Culver City studio on a
longer-term basis. The CCMC does not currently have a specific definition of
short-term or long-term. We currently apply a definition of more than 30 days City of Culver City, California
Agenda Item Report
being long-term. Again, because these companies deal directly with the studios,
the City does not generally have knowledge of them unless they come to City
Hall for another reason and end up at the Business Tax desk. In the case of
these companies, we apply the gross receipts tax (which is $1.00 per $1,000 of
gross receipts or the cost or production, whichever is greater). Like other
business categories, there is currently no maximum tax for these companies.
• It should be noted, there are certain exemptions from the filming regulations of
Chapter 11.14, including the requirement to obtain a Film Permit. One such
exemption, per CCMC Sec. 11.14.040.D, is for “[a]ll activities conducted at
places of business, zoned S-1, or otherwise, where the principal function is
producing, making, taking, developing, trading or dealing in motion pictures or
photoplays, television or commercial productions, sound film or animated
cartoons.” However, this exemption does not apply to the requirement to obtain
a Business Tax Certificate.
A situation arose several months ago when two production companies (under the
umbrella of the same larger company) were referred to the Business Tax desk.
These companies had been filming different television series episodes at a studio
and had a presence in Culver City for a number of months. Under dispute, they paid
business tax based on their total cost of operations (The CCMC requires that gross
receipts tax be based on the higher of gross receipts or the cost of operations).
Their letter of dispute, among other things, included information that the City of Los
Angeles has a $12,495 business tax cap for production companies working within
that city. Staff has been informed that these productions elected not to return to
Culver City based on the business tax structure. It has also been communicated to
staff that the word has spread throughout the production community, and this has
further hampered business for some of the studios. It is important to note that it
appears the business tax cap in the City of Los Angeles has existed since the mid-
1980?s, and is not something that was recently instituted.
There are a variety of studies that have been developed over the years addressing
the impact of the filming and production industries in California, as well as the United
States. Filming and production business is valued because of the high-paying jobs
and positive economic impact they can have on a region. A number of other states,
as well as other countries, have instituted tax and other incentives to lure more and
more of this market away from California, particularly the greater Los Angeles area.
In response, the State of California has developed incentives, and as already
mentioned, the City of Los Angeles has also instituted certain measures.
The City of Los Angeles also uses a separate non-profit agency called FilmLA to
handle the issuance of film permits. While they coordinate with city departments,
they handle most of the logistics. FilmLA also handles film permitting for other public
agencies such as the cities of Diamond Bar, Industry, Lancaster, Palmdale and
South Gate, the County of Los Angeles and several school districts. While this staff
report will not make any recommendations regarding the issuance of street or City of Culver City, California
Agenda Item Report
location film permits, this may be an option the City could further research in the
future.
The decision of whether to incentivize, what types of business to incentivize, and
how much incentive or tax relief to provide is a difficult policy question. There will
always be someone that is willing to provide more incentive than their neighbor.
Large incentive programs can be unsustainable over time. As the City works to
develop a comprehensive economic development policy, consideration of these
issues will be important. This staff report seeks only to have City Council discussion
and direction around making certain updates to the CCMC related to production
companies and the creative arts, and is not meant for the broader discussion of our
economic development policy and the role of business tax in that policy.
DISCUSSION:
During the summer, staff met with representatives from the three largest studios in
the City (Sony, Culver Studios, and GMT Studios). Discussions included their
viewpoint on whether Culver City?s existing business tax structure for production
companies created a competitive disadvantage, as well as any other thoughts they
wanted to share on the filming industry and its role in Culver City. It became clear
through the discussions that the size of each studio and its target customer base
were different and, therefore, created unique perspectives from each. There was
general agreement that with more production companies leaving California
altogether, the competition between studios has increased, and any competitive
advantage is helpful. The City?s current business tax requirements for production
companies appear to most impact those studios geared towards longer-term
productions. Staff also met with a representative of the Motion Picture Association
of America. One thing they particularly emphasized was recommending that, at a
minimum, the City consider a cap on business tax for production companies similar
to the City of Los Angeles.
Staff is making three recommendations for City Council consideration. Two of them
are directly related to actions the City of Los Angeles has taken, and another is a
„clean up? item that would help resolve a long-standing issue. As it relates to
business tax for production companies, staff proposes the following for the City
Council consideration or alternate direction:
• Production companies filming on City streets, at City facilities, or at other non-
studio facilities for up to thirty days in a calendar year will not be required to
acquire a business tax certificate or pay business tax. They shall continue to pay
all applicable Film Permit Fees charged by the Police Department.
• Production companies filming on City streets, at City facilities, or at other non-
studio facilities for more than thirty days in a calendar year will pay, in addition to City of Culver City, California
Agenda Item Report
all applicable Film Permit Fees, the appropriate (application or renewal) business
tax certificate fee and pay a flat $2,000 business tax for the year.
• Production companies filming at a studio for up to thirty days in a calendar year
are not required to acquire a business tax certificate or pay business tax.
• Production companies filming at a studio for more than thirty days in a calendar
year will pay the appropriate (application or renewal) business tax certificate fee
and pay a business tax of $1.00 per $1,000 of the cost of operations up to
$12,000,000 (with an annual tax ceiling of $12,000).
The City Council may wish to further consider the amount of the tax ceiling, the
number of days operating within the City before registration and taxes are required,
or whether a lesser flat tax amount might apply to some minimum portion of the cost
of operations before the $1.00 per $1,000 applies.
The City of Los Angeles also provides an exemption for creative artists engaging in
creative activities with gross receipts less than $300,000 annually. This provides
qualifying individuals that file and pay their renewal fees in a timely manner with a
waiver on the business taxes for gross receipts up to $300,000. The waiver is lost
for those that file their renewal late. They are still required to file annually and pay
the renewal fee. Los Angeles defines Creative Activities/Creative Artists as follows:
Creative Activities shall mean activities performed by Creative Artists primarily for
entertainment and/or aesthetic purposes, including assistants or professional
trainees performing those same Creative Activities, in the following professions:
1. The following professions to the extent they are directly involved with
motion picture, radio or television productions, commercials, multi-media
or recorded or live music or theater:
a. Actor or announcer; or
b. Art director, costume designer, production designer, scenery or set
designer; or
c. Choreographer; or
d. Cinematographer; or
e. Conductor of bands, chorales, orchestras, and other musical
groups; or
f. Director; or
g. Motion picture editor, sound dubbing, special effects, or titling artist;
or
h. Writer (where the writing is the writer's own creative work, but not
writing that is compilation, documentation or description of a non-
artistic nature, such as technical writing, the writing of technical or
scientific reports, etc.); or
i. Music or lyrics arranger, composer or writer; or
2. Author of books, essays, poems or short stories; or City of Culver City, California
Agenda Item Report
3. Cartoon artist, including animated media; or
4. Creator of visual fine arts, using artist's materials (i.e., lithographer,
painter, sculptor, or the equivalent); or
5. Drawing, graphic, illustration or sketch artist; or
6. Performing artist, including comedian, dancer, impersonator, juggler,
magician, mime, musician, or singer; or
7. Photographer, to the extent the photography is primarily artistic in nature
and not primarily journalistic or commercial.
The specific language from the City of Los Angeles Code related to Creative Artists
is included as an attachment to this report.
The final recommendation staff is presenting for the City Council?s consideration is
for cases where an individual works solely for one company throughout the year, but
is treated as a „contractor? and provided a 1099 instead of a W-2. While companies
have legitimate business and financial reasons to consider certain individuals as
independent contractors, when someone works and takes direction solely from one
employer they can by all other accounts be considered employees. Because these
individuals are paid as „contractors?, the CCMC requires they file and pay business
taxes on their 1099 reported income. This has been a matter of contention that staff
has had to deal with for many years. It is recommended that City Council consider
an exemption for „dependent? contractors, where all income is derived from one
employer and a single 1099 statement is received, versus an „independent?
contractor where services are provided to more than one employer and more than
one 1099 statement is received for the year.
Based on direction received from City Council on these or other ideas, staff will
return with the necessary items for codification/execution within a few weeks. It is
recommended this be completed before annual renewals begin in December.
FISCAL ANALYSIS:
For Fiscal Year 2009/2010, the City received approximately $9 million in business
tax. Of this amount, approximately $2.5 million was collected from companies under
the broad category of „entertainment,? which includes production companies, studios,
and others. It is estimated that at least 95% of the business taxes paid by
entertainment-type businesses is generated from the studios and other related
businesses located in Culver City.
Thus, it is likely that current business tax collections from production companies that
only come to Culver City for filming purposes is well under $125,000 per year.
Potential changes in policy regarding non-permanent production companies will not
have a significant effect on total business tax collection. With increased cooperation
and compliance with the studios, as well as greater studio occupancy, there could City of Culver City, California
Agenda Item Report
possibly be an increase. Also as mentioned previously, an increase in the filming
activity in Culver City will cause some increases to sales tax as well.
The total business tax paid by creative artists with $300,000 or less in gross receipts
for Fiscal Year 2009/2010 was less than $10,000. Many of these companies and
individuals still appear to be „for profit? enterprises that would not qualify for the
exemption. It is estimated the maximum fiscal impact for an exemption to creative
artists would be less than $5,000 per year.
It is estimated the exemption for „dependent? contractors could result in a maximum
of a few thousand dollars in decreased business tax revenues per year.
ATTACHMENTS:
1. City of Los Angeles Municipal Code Section 21.29(b)
MOTION:
That the City Council:
Discuss this matter and direct the City Manager as deemed appropriate.
City of Culver City, California
Agenda Item Report
Meeting Date: 01/24/11 Item Number: A-3
CITY COUNCIL AGENDA ITEM: Discussion of Proposed Changes to the Culver
City Municipal Code Related to Business Tax on Production Companies and
Provide Direction to the City Manager Related Thereto.
Contact Person/Dept.:
Jeff S. Muir/Finance
Phone Number: 310/253-5865
Fiscal Impact: Yes [X] No [] General Fund: Yes [X] No []
Public Hearing: [] Action Item: [] Attachments: [X]
Commission Action Required: Yes [] No [X] Date: _______________
Public Notification: (E-Mail) Meetings and Agendas – City Council (01/19/11), (E-Mail)
Culver City Chamber of Commerce, (E-Mail) Sony Corporation, (E-Mail) Culver Studios,
(E-Mail) GMT Studios, (E-Mail) Motion Picture Association of America (01/19/11)
Department Approval:
Jeff Muir (01/13/11)
City Attorney Approval:
Carol Schwab (by H. Baker) (01/18/11)
Chief Financial Officer Approval:
Jeff Muir (01/13/11)
City Manager Approval:
John M. Nachbar (01/19/11)
RECOMMENDATION:
Staff recommends that the City Council discuss potential changes to the Culver City
business tax on production companies and provide direction to the City Manager
related thereto.
BACKGROUND:
On October 18, 2010, the City Council considered an agenda item discussing the
City’s current business tax policy as it relates to production companies. The
purpose of this item was to establish the importance of the film and production
industry in Culver City’s local economy and to allow the City Council to discuss
possibilities for a business tax structure that would be more favorable to production
companies and would also spur more activity at our local studios, thereby stimulating
our local economy. The staff report from the October 18, 2010 agenda item has
been included as an attachment. The City Council gave general direction that they
were in favor of becoming as competitive as possible as it relates to the taxation of
production companies. The City Council also acknowledged the need to be wary of
any Proposition 218 issues that might arise in the future if the tax rate were lowered
or capped. There was also support for consideration of the Redevelopment Agency
playing a role in the form of an economic development incentive to mitigate any
General Fund effects.
With the direction received, staff met to determine if there was a single course of
action that could come back for City Council adoption. After further consideration by City of Culver City, California
Agenda Item Report
staff and discussion with some of our local studio contacts, it was determined it
would be most prudent to return to City Council one more time with some specific
options to get final direction. The goal for considering this item is to receive the
specific direction required to bring back any subsequent Culver City Municipal Code
amendments or other items needing City Council approval to effectuate the decision.
Specific options are presented in this report for consideration and discussion.
DISCUSSION:
As was mentioned during the discussion of the last staff report, it is extremely
difficult to compare how one city charges business taxes to another. It can become
even more complicated when examining the film industry specifically. This report
does not include an in-depth, city-by-city analysis of all of the various charges, fees
and taxes associated with the film industry. Such a report would take significant
staff time and would impact the approved work plan for the Finance Department. If
the City Council desires such a study, such direction can be provided. However, if
the City Council desires this study to be completed this fiscal year, this would impact
the ability of the Finance Department to complete other work plan items over the
same time frame.
There are variations from city to city in how business taxes are calculated and
applied. Like Culver City, many cities have a business tax system based on gross
receipts. Some cities have a higher ‘fixed rate’ annual charge and a lower receipts-
based tax. Others may charge the tax based on the number of employees. Still
others may charge virtually no business tax. This all very much depends on the
history of the particular city, the demand for service levels in that community, and the
mix of other general revenues to fund services. In many communities, property
taxes are the number one revenue source. To further demonstrate how the mix of
local general revenues can influence the structure of the business tax, the table
below provides summary information for several other local cities that have film
studio locations, as well as other West-side cities:
City
2010/11 GF
Revenue
($ Millions)
Property
Tax
Sales
Tax UUT TOT
Business
Tax
Culver City $80.5 5% 19% 18% 4% 12%
Burbank $145.2 18% 13% 14% 4% 1%
Manhattan
Beach
$49.2 40% 15% 0% 6% 5%
Santa Clarita $74.1 33% 34% 0% 2% 0%
Downey $59.9 35% 19% 12% 2% 2%
El Segundo $52.4 12% 15% 15% 7% 0%
Los Angeles $4,375.0 32% 7% 15% 3% 9%
Santa Monica $251.5 14% 11% 13% 12% 10%
Beverly Hills $157.4 25% 13% 0% 15% 20%
City of Culver City, California
Agenda Item Report
It is immediately apparent that Culver City gets much less of its general revenues
through property tax than any of the cities listed, which is why sales tax, utility users
taxes and business tax are so important. Some cities, because they receive much
more from other taxes, have very low or virtually no business taxes. This
information is presented to provide context and reiterate the point that while Culver
City may have higher business taxes than some other cities, this is our third largest
source of revenue in supporting our high level of services. One cannot simply
compare business tax only from city to city.
It is also the case that the film and creative industries are very important to Culver
City. Creating an atmosphere that continues to foster this industry in the long-term
is important as well. It is within this context that the discussion of our current
business tax structure as it relates to out-of-city production companies started. The
purpose of this staff report is to provide options to making our business tax structure
more competitive and attractive to film production companies. The City Council may
discuss these options and approve them, or provide further direction to staff.
Studio Filming
One of the concepts discussed at the October City Council meeting was the
Redevelopment Agency playing a role in any reduction or elimination of business tax
on production companies in the form of an economic development program, thereby
mitigating any potential negative impacts to the General Fund. Staff discussed this
internally and came up with some different options that, in exchange for Agency
support, included working with the studios to encourage more production spending
to occur locally, as well as identifying supply or service businesses that support
production that do not currently exist within the City. Unfortunately, through
discussions with Agency counsel, there does not appear to be a way to legally
establish such a program that falls within the statutes comprising Redevelopment
law. Therefore this staff report does not include a recommendation that includes
Agency support or subsidy.
From the perspective of staff, the removal of the Redevelopment Agency assistance
as an option focuses the policy question on whether the City should keep the same,
lower or eliminate the business tax on out-of-city production companies that do
business on studio properties. This goes to the fundamental question of whether we
believe the economic impacts of more filming at the local studios outweighs any
potentially lost business tax from these companies. As was discussed at the last
meeting, current compliance with the existing requirement is low and there is limited
enforcement activity. From a practical perspective, lowering or eliminating the
business tax on production companies working on our local studios has a negligible
impact.
Staff has also had discussion internally and with the City Attorney’s Office regarding
how a program to reduce or eliminate the business tax for production companies
would best be structured to provide the City the most flexibility in the long-run. The City of Culver City, California
Agenda Item Report
ideas analyzed were lowering the existing tax for such companies, creating a
maximum or ‘cap’ on the tax (similar to the City of Los Angeles), or a temporary
suspension of collection of business tax for these companies.
It is clear from Proposition 218 that if City Council were to decrease the tax by
lowering the tax formula, an effort in the future to increase it back to its current level
would be viewed as a tax increase and would require voter approval. Therefore, this
option is not recommended.
There is also a question as to whether it could be argued that a cap on the tax is a
tax reduction, and therefore removing the cap in the future could be considered a tax
increase and trigger Proposition 218 requirements. While Finance staff believes a
strong argument could be made that a ‘tax cap’ is not a tax reduction, we agree with
the City Attorney’s Office that there is greater potential that the cap removal will look
more like a rate increase than a temporary suspension of collection. Consequently,
the City Attorney’s Office is more comfortable with a suspension of tax collection
than setting a cap, and Finance staff is in agreement.
The options presented do not include any requirements for the studios to provide
information on where they spend money locally, however it is hoped that through
outreach and discussion they will still work with us to better understand the industry
and the types of supporting businesses the City might target in the future.
Studio Filming Option
In light of the importance of the film industry in Culver City and the positive economic
impact, job retention and job creation that occurs through increased filming at our
studios, the City Council would adopt a two year suspension on the collection of
business tax for out-of-city production companies filming at a Culver City studio
location. These companies would still be required to obtain a business tax
certificate, but no taxes would be due. While the City Council could consider a one-
year tax suspension, staff feels that would not be enough time to really see what the
impacts would be. At the end of the two year period, staff would bring back a report
of any of the noticeable economic impacts (e.g. increased business tax from the
studios, any information the studios are able and willing to provide about local
spend, additional Culver City-based entertainment industry support businesses,
etc.). At that time, the City Council could consider extending the period or letting it
end. Based on the approximate $50,000 the City currently receives from such
companies, there is a limited loss of revenue. Over this period, the City can
determine if the moratorium has had a positive impact on stimulating the local
economy.
Non-studio filming
The current Culver City Municipal Code includes a provision where companies that
perform filming in Culver City outside of a studio (i.e. City streets, facilities, City of Culver City, California
Agenda Item Report
commercial locations, etc.) are to pay business tax at $250 per day, or $1,500 per
year, at the producer’s option. The business tax is in addition to film permit fees,
and other fees and charges. The City currently requires other out-of-City businesses
that come into the City on a temporary basis (e.g. plumbers, contractors,
electricians, etc.) to obtain a business tax certificate and pay business tax on the
amount they earn within the City. The fixed dollar amounts currently charged were
likely established to simplify things for production companies, so they would not
have to file year-end returns, etc. In reviewing how other cities handle short-term
production, there is a wide variety. Some don’t charge any business tax and some
charge less than Culver City does. Staff does not receive many complaints as it
relates to the current business tax requirements for short-term filming. The easiest
option in this regard is to leave the current process and amounts intact. If the City
Council desires an option to reduce the cost for short-term filming, one is offered
below.
Non-studio Filming Option
Out-of-city production companies that do filming in Culver City outside of a studio
(i.e. City streets, facilities, commercial locations, etc.) working within the City for a
period of less than sixty days during a calendar year shall be required to obtain a
business tax certificate, but not to pay any business tax. Any other filming permit
fees or charges from other departments would still need to be paid. Such
companies doing business in the City more than sixty days in a calendar year will be
required to acquire a business tax certificate and pay business tax based on the
greater of their gross receipts or cost of operations. It is estimated the City currently
receives approximately $75,000 annually in business tax from short-term, non-studio
filming.
FISCAL ANALYSIS:
For Fiscal Year 2009/2010, the City received approximately $9 million in business
tax. Of this amount, approximately $2.5 million was collected from companies under
the broad category of ‘entertainment’, which includes production companies, studios,
and others. It is estimated that at least 95% of the business taxes paid by
entertainment-type businesses is generated from the studios and other related
businesses located in Culver City. Thus, it is likely that current business tax
collections from production companies that only come to Culver City for filming
purposes is under $125,000 per year. Within this $125,000, it is estimated that
$75,000 is generated from short-term, non-studio filming and $50,000 is generated
from studio filming. Potential changes in policy regarding non-permanent production
companies will not have a significant effect on total business tax collection. With
increased cooperation and compliance with the studios, as well as greater studio
occupancy and a commitment for more local spending, there could be a stimulus to
our local economy. Information from the studios on the kinds of supporting City of Culver City, California
Agenda Item Report
businesses that do not currently exist in the City can also aid our economic
development activities.
ATTACHMENTS:
1. Staff Report from October 18, 2010
MOTION:
That the City Council:
Discuss this matter and direct the City Manager as deemed appropriate.