City Scraps a Business Tax in Wake of GM Suit

The Los Angeles City Council voted Friday to scrap a manufacturing tax that will cost the city about $10 million in revenue annually and could have further financial ramifications.

That decision stems from a lawsuit the city lost last year in which an appeals court ruled that the city discriminated against General Motors, which long operated an assembly plant in Panorama City, by forcing GM to pay both a seller’s tax and a manufacturer’s tax.

As a result, the council has dropped the manufacturer’s tax, and will impose only a seller’s tax on companies that sell products or manufacture goods here, effective retroactively to Jan. 1.

Los Angeles also owes General Motors about $4.5 million in back taxes and interest, and possibly as much as $9 million, pending final court rulings.

More significant, however, is that the city faces potential tax-refund claims of up to $180 million by other companies that paid seller’s and manufacturer’s taxes from 1993 through 1995, said Charles Ajalat, the Los Angeles attorney who handled GM’s case.

Those companies that want a tax refund must hurry, Ajalat said, because there is a three-year statute of limitations on filing tax-refund claims.

“It’s a shame that a lot of little guys won’t know about this and won’t be able to get any money back,” he said.

The court decision “may enable other companies to obtain a refund,” conceded Assistant City Atty. Ronald Tuller. But Tuller’s interpretation of the GM decision is that only manufacturers may be entitled to city tax refunds--and those claims might not stand up in future court cases--while firms that paid a seller’s tax are not entitled to refunds.

How much the city ends up paying will have to wait for another day in court. The potential tax refunds range “from zero to $180 million,” Tuller said.

What’s more, Ajalat said the court ruling is likely to open up similar tax-refund claims by businesses against city governments across the country.

Although Los Angeles now faces a $10-million annual drop in tax revenues, this year’s city budget already provides an overlapping $8.9-million business tax cut, so this amounts to only a $1-million drop in tax revenue, said Rex Olliff, a city finance specialist.

The city’s total revenue, mostly from taxes and fees, is $2.5 billion annually, Olliff said.

Richard Alatorre, chairman of the City Council’s Budget and Finance Committee, said that while it appears that the city will lose some money, it is unclear how much. How the loss would be made up, Alatorre said, “remains to be seen.”

The council decision is the result of a complex case GM filed in 1990.

The company manufactured cars in Panorama City for more than 40 years until the plant was closed in 1991. For years it had paid a manufacturer’s tax on cars that it made in Los Angeles.

GM argued, and the court agreed, that it was unfairly taxed because it could also be hit with a manufacturer’s tax in other cities where it built cars. By contrast, manufacturing firms that operated only in Los Angeles would have to pay only one such tax.

GM argued that it was also discriminated against by having to also pay a seller’s tax on cars that it sold here, which again left the auto maker facing more seller’s taxes in other cities, while, GM argued, firms that operated only in Los Angeles only paid one seller’s tax.

Last June, a state appeals court ruled in GM’s favor. In September, the state Supreme Court refused to hear the case.

The city now owes GM a refund for taxes it paid since 1987, though GM claims the city owes it for taxes back to 1981. The city contends it doesn’t owe any taxes the company paid from 1981 through 1986. That final issue is still before the courts.

Because of the City Council’s decision, from now on the city will impose only a uniform seller’s tax.

“If you are a manufacturer, you will pay a seller’s tax. If you are a seller, you will pay a seller’s tax. It’s the same seller’s tax on everybody,” Olliff said.

Correspondent Kay Hwangbo contributed to this story.