Business License Compliance

Reviews and Notifications

The Finance Department conducts compliance reviews to identify unregistered, under reporting and delinquent businesses operating in the City. The purpose of these reviews is to ensure the City is applying local law equitably and accurately for all individuals and entities conducting business in the City of Santa Monica.

If you have received a compliance notification from the Finance Department, click one of the options below for more information:

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FAQ

Audits

What is an audit?

A business license audit is an examination of the financial records of a business by the Finance Department or its contracted 3rd party agent to determine whether the business has remitted the proper amount of business license taxes and is operating in compliance with provisions of the Santa Monica Municipal Code.

Why does the City of Santa Monica conduct audits?

Audits are very important to the public interest and the efficient administration of the self-assessed business license taxes. Audits help ensure that taxes and fees are administered in a fair and uniform manner throughout the business community. Audits provide businesses with enhanced understanding of the business license laws so they can more accurately self-assess taxes and fees and better comply with the business license regulations. Audits often result in the early detection of matters requiring attention or correction by a business before they become a more significant problem.

What should I expect during an onsite audit?

It is always our desire to conduct audits in a professional and courteous fashion with minimum disruption to the business and its accounting activities. We also strive to keep businesses well informed during an audit. The Finance Department will provide prompt and thorough responses to questions and provide reasonable up-front estimates of how long audits will take. The Finance Department will explain tax and compliance findings as well as audit appeal rights. All audit working papers and audit results are reviewed by supervisory personnel before they are finalized.

At the conclusion of every audit, businesses have an opportunity to provide written feedback to the Department regarding the conduct of the audit and any issues or concerns that may have arisen as a result of the audit.

How should I prepare for an onsite audit?

The auditor will contact you to schedule a mutually convenient date and time for the audit. You will receive written correspondence confirming the details of the appointment. Audits are usually performed at the business location; however, if circumstances make it impractical for the audit to be conducted at the business location, an alternate off-site location, such as a bookkeeper's office may be acceptable. Regardless of where the audit work is conducted, the auditor will make an appointment to tour the business in order to become familiar with your operations, products and/or services, and facilities.

What records will I need to have available during an onsite audit?

The type of records required for an audit will vary depending on the type of audit.

The auditor will discuss the records requirement with you when the audit is scheduled. This discussion will allow the auditor to create a list of required documents that is tailored to your business and accounting system. As a general rule, however, the following types of documents may be required:

Copies of license renewal forms with supporting worksheets, calculations, and documentation of amounts reported for the audit period
Audited financial statements for the most current fiscal/calendar year
Monthly income statements for periods covered under the audit
Month end general ledger reports or subsidiary ledgers listing gross revenues
Monthly sales journals listing detailed transactions
Revenue worksheet summarizing revenues by reporting period (the auditor will send this form to you to be completed prior to the commencement of the audit)
Daily register summaries, sales invoices, z-tapes, and/or other supporting data for selected sample dates
Chart of accounts
Three most recent Federal income tax returns
Copies of bank statement for periods covered under the audit
Internal control questionnaire (the auditor will send this form to you to be completed prior to the commencement of the audit)

How many years will I be audited?

A typical audit will include three years of reporting history.

What should I do if I disagree with the auditor's findings?

Simply discuss any unresolved issues with the Finance Department. Due to the numerous different types of accounting systems and methods of recording revenues, it is possible that there may be factors that may have affected the outcome of the audit. The City is always willing to consider any relevant and material information in an attempt to resolve any disputed issues.

Compliance Notice

Why did I receive a Notice to Comply?

Through the sharing of data, predominately the Franchise Tax Board Reciprocal Agreement (other sources include, but are not limited to, sales tax records, business publications, fictitious business name filings, and commercial property tenant lists) the City has identified business entities and sole proprietors that may be operating without a business license.

Information provided to the City indicates that you or the named entity has reported some type of business activity using a Santa Monica address. This indicates that you may be operating a business in the City without a business license.

What is the Franchise Tax Board Reciprocal Agreement?

As a result of State legislation, the California Franchise Tax Board (FTB) is authorized to disclose certain information related to business activities of residents, corporations, and other business entities within the City. By matching the data provided by the FTB to our own records, we are able to identify unlicensed business activity within the City.

What does the City of Santa Monica consider to be a business and why do they think I am operating one?

Section 6.04.010 of the Santa Monica Municipal Code (SMMC) defines business as any business, commercial enterprise, trade, calling, vocation, profession, occupation, or means of livelihood, whether or not carried on for gain or profit.

This requirement applies to self-employed independent contractors and home-based businesses as well as business activity operated from a commercial location.

State law (Business and Professions Section 16300) requires cities to use the manner a taxpayer reported income to the Internal Revenue Service and FTB to determine whether the taxpayer performed services as an employee or as a separate business entity. A person who is an employee and whose compensation is reported on a Federal W-2 is not in business and is not required to obtain a business license.

What happens if I do not respond?

It is a misdemeanor to do business in the City of Santa Monica without a license. Any person convicted of a misdemeanor under the provisions of this Code shall be punishable by fine decided by the Court (SMMC Section 1.08.010). The City may take other actions to gain compliance including California Tax Return audits to establish tax liabilities and administrative citations and fines.

What if I received this notification and I no longer have a business?

If you previously conducted business in the City of Santa Monica and never obtained a business license, please complete the business license application and provide a statement of gross receipts for each year during which the business operated, and a statement of the date on which the business closed.

I am or have been in business in the City of Santa Monica, but have never been profitable. Am I required to have a business license?

Yes, all businesses in the City of Santa Monica, whether or not they realize a profit or are carried out for profitable purposes, are required to obtain a business license. Business license taxes are not income-based taxes.

I receive a 1099 Form instead of a W-2 from my work. Am I required to have a business license?

Yes, individuals that work as independent contractors within the City of Santa Monica and report from an Internal Revenue Service 1099 Form instead of a W-2 are required to obtain and maintain a business license.

Do I need a business license if I do part-time work from home?

Yes, businesses both large and small are required to obtain and maintain a business license to be in compliance with the City's Municipal Code. If part-time work is conducted from a location within City limits, such as your residence, you are required to obtain and maintain a business license.

Do I need a business license if I rent out residential space, like an apartment or house?

Yes, any person or business renting, leasing or sub-leasing residential space is required to obtain a business license regardless of the number of units. Even if you rent out a house or condo that you own, you are required to obtain and maintain a separate business license for each property.

I live in Santa Monica, but my business is located outside of the city limits. Do I need to get a business license?

As long as your business location and all business activity are conducted outside the City, there is no need to obtain a business license. If you are conducting business from your residence, or your residence is your business location, you will need to obtain and maintain a business license.

I live outside of Santa Monica but enter into Santa Monica to conduct business. Do I need to get a business license?

Yes. Even though you may not have a physical location in Santa Monica, if you conduct business within the Santa Monica city limits, you are required to obtain and maintain a business license. Examples of such work are contractors, consultants, out-of-town doctors, gardeners, pool cleaners, domestic help, and any other type of business that takes place within the City of Santa Monica.