TO:
Honorable Mayor and Members of the City Council
THROUGH:
Talyn Mirzakhanian, City Manager
FROM:
Libby Bretthauer, Finance Director
Emy-Rose Hanna, Financial Services Manager
Toni Page, Revenue Services Supervisor
John Albi, Management Analyst
Josh Grady, Lead Account Specialist
SUBJECT:Title
Consideration of Business License Tax Study Results and Feedback from Business License Tax Forum (No Immediate Revenue Impact) (Finance Director Bretthauer).
(Estimated Time: 1.5 Hr.)
DISCUSS AND PROVIDE DIRECTION
Body
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RECOMMENDATION:
Staff recommends that the City Council discuss and provide direction regarding the Business License Tax Modernization Plan, including direction on which Tax Model option to proceed with, based on the results of the tax study and community input.
FISCAL IMPLICATIONS:
There are no immediate fiscal implications regarding this update on the Business License Tax Modernization Plan; however, General Fund revenue impacts will vary considerably based on the Tax Models presented, which range from $552,000/year on the low end to $2.9 million/year on the high end. These potential fiscal impacts would be realized only if City Council moves forward with a ballot measure and only if voters approve the measure during the upcoming November 2026 General Election.
BACKGROUND:
A Business License Tax is imposed on persons or entities for the privilege of conducting business within a city. For most cities, business license taxes are generally a major source of revenue and the licensing process allows cities to regulate the types of businesses that can legally operate and conduct activities.
The purpose of the tax is to ensure that businesses comply with local regulations and contribute to public services, of which they benefit. The City’s business license tax supports the General Fund, which helps keep the City’s clean and well-maintained streets and sidewalks, as well as our safe and secure community, all of which uphold the City’s desirability and attract visitors and business to Manhattan Beach.
The City’s current Business License Tax makes up about 5% of General Fund revenues (approximately $6 million). Based on available data in the California Municipal Revenue Sources Handbook (Fifth Edition) by the League of California Cities, more than 95 percent of cities and counties in California impose a business operations tax. On average, the business license tax provides around 3 percent of city revenues (standard deviation 4.2 percent). However, in some cities, the business operation tax provides as much as 30 percent of General Fund revenues. Business License Tax collections vary across cities based on the size of their commercial and residential areas and business mix.
The City of Manhattan Beach has imposed a Business License Tax since 1971. The way business is conducted today looks fundamentally different from the world of 1971 - e-commerce, remote work, and entirely new business models simply did not exist when the City’s Business License Code was written. Currently, the City has about nine different ways the tax is assessed based on the business type, which has created confusion for new and existing businesses due to the complexity of the City’s tax structure. Considering the tax code was established over 50 years ago, a comprehensive review of the code and tax structure is warranted due to significant shifts with State and case law, changes to how businesses operate and new industry types that have emerged.
At the March 3, 2026, City Council meeting, City staff presented the Business License Tax Modernization Plan. The primary goals of the Plan are to Simplify, Clarify and Modernize the Code, with a Fair and Equitable tax structure that maintains long-term Fiscal Sustainability. The attachment titled Business License Tax Modernization Plan Priorities includes 22 priorities that aim to streamline administration, increase transparency, align with modern code language and best practices, address emerging business models, and support small businesses, while also protecting current tax revenues that fund essential City services. These priorities were outlined into two phases:
• Phase 1 (Completed) - Administrative Clean Up of the Code: City Council adopted Ordinance 26-0005 on March 17, 2026, which was drafted by Special Counsel, amending sections of the Manhattan Beach Municipal Code Chapter 6.01 Licensing Regulations. This Ordinance modified several sections of MBMC Chapter 6.01 to address outdated language and current best practices.
• Phase 2 (In Progress) - Perform Tax Study, Identify Alternative Tax Structures, Obtain Community Input & Explore Ballot Measure: City Council directed staff to proceed with a Financial Analysis/Tax Study to provide options for modern tax structures along with fiscal impacts to the City and to businesses. Phase 2 addresses the Code amendments and substantive policy updates that require voter approval.
On April 23, 2026, the City and Manhattan Beach Chamber of Commerce held the first ever Business License Tax Forum to engage the community on the Business License Tax Modernization Plan and receive feedback from businesses. The outcome of this Forum is described further in the discussion below.
DISCUSSION:
The City partnered with HdL Companies, a leading expert that specializes in local government taxes, to conduct a comprehensive Financial Analysis/Tax Study. HdL analyzed the City’s current business license tax structure and compared it with seven other cities including 1) Redondo Beach, 2) Hermosa Beach, 3) El Segundo, 4) Torrance, 5) Beverly Hills, 6) Culver City, and 7) Santa Monica.
The Tax Study analyzed available data through the 2025-2026 licensing year, which indicates the City has about 5,200 businesses that generate $5.8 million in Revenue. The top 100 businesses account for roughly 35% of the tax revenue despite reporting about 85% of the total reported gross receipts, which is a result of Manhattan Beach’s Business License Tax Cap (maximum amount of tax). The current Cap on business licenses is $12,156, which means a business that generates $4.5 million or greater in gross receipts pays only up to this Cap. For example, a business generating $4.5 million pays the same amount in business license taxes as a business generating $20 million.
The Tax Study also demonstrates that the City currently generates comparatively low to moderate revenue per business and per capita ranking 4th lowest out of all eight (8) cities. Among the cities observed, it was discovered that Manhattan Beach is the only city that currently has a Cap in place while all other cities did not have a Cap to the tax.
Based on the preliminary results of the Study, four (4) conceptual Tax Models were developed for community input and City Council consideration. These models vary in structure, complexity, and anticipated revenue impact, which aim to address all five primary goals of the BLT Modernization Project:
Model 1
• How it Works:
o Maintains the current tax structure and keeps existing categories
o Removes the Cap
• Business Impact: No change to tax structure other than removing the Cap, which only affects businesses with gross receipts greater than $4.5 million as they would begin paying the same proportion of taxes as all other businesses
• Revenue Impact: Increases BLT by about $2.9 million per year
Model 2
• How it Works:
o Uniform tax rate for all businesses based on gross receipts basis
o Small flat rate tax of $100, which covers the first $100,000 in gross receipts in support of micro-enterprises
o Removes the Cap
• Business Impact: Due to reduced flat tax rate of $100, most businesses would see a decrease in their taxes, while businesses with gross receipts greater than $4.5 million would begin paying the same proportion of taxes as all other businesses
• Revenue Impact: Increases BLT by about $2.3 million per year
Model 3
• How it Works:
o Uniform gross receipts tax rate for all businesses
o Small flat rate tax of $100, which covers the first $100,000 in gross receipts in support of micro-enterprises
o Increases the Cap to $100,000
• Business Impact: Due to reduced flat tax rate of $100, most businesses would see a decrease in their taxes, while businesses with gross receipts greater than $4.5 million would begin paying the same proportion of taxes as all other businesses, but only up to a Cap of $100,000
• Revenue Impact: Increases BLT by about $1.1 million per year
Model 4
• How it Works:
o Variable gross receipts tax rate based on business type (General Retail category would be assessed a lower tax rate)
o Small flat rate tax of $100, which covers the first $100,000 in gross receipts in support of micro-enterprises
o Increases the Cap to $100,000
o Model simplifies businesses into five base categories
• Business Impact (Varies based on Category):
o Contractor/Professional/Property Rental/Services categories: Due to reduced flat tax rate of $100, most businesses would see a decrease in their taxes, while businesses with gross receipts greater than $4.5 million would begin paying the same proportion of taxes as all other businesses, but only up to a Cap of $100,000
o General Retail category: Due to reduced flat tax rate of $100, and reduced gross receipts increment tax of $2.00, most businesses would see a significant decrease in their taxes, while businesses with gross receipts greater than $6.1 million would start to see an increase and begin paying the same proportion of taxes as all other businesses within the General Retail category, but only up to a Cap of $100,000
• Revenue Impact: Increases BLT by about $552,000 per year
To effectively communicate the potential impacts of the four Tax Models to the business community, on April 23, 2026, the City and Manhattan Beach Chamber of Commerce held the first ever Business License Tax Forum in the City Council Chambers and via Zoom. Approximately 68 community members attended the Forum with 53 attending on Zoom and 15 attending in-person.
The purpose of the forum was to share information and engage the business community regarding the City’s Business License Modernization Plan and potential changes to the City’s Business Licensing program. Throughout the forum, community members were able to participate in real-time polling regarding the type of tax structure and gross receipts category their business falls under. All attendees had an opportunity for Public Comment/Q&A with attendees voting on which Tax Model they prefer at the end of the meeting. The City also posted the presentation and QR code on the City’s website for businesses to further view the presentation and continue to vote until May 1, 2026. The results from the voting are detailed in the PowerPoint Presentation attachment and summarized as follows:
Question 1 Asked: What tax structure do you currently fall under?
• The majority of participants (84%) are taxed on Gross Receipts (34 out of 42 respondents) while the remaining 8 participants are taxed based on a Flat Tax, Per Vehicle Tax, Per Employee Tax, Commercial Property basis of square footage or gross receipts, or did not know how they are taxed.
Question 2 Asked: Which Gross Receipts threshold does your business currently fall under?
• The majority of participants (79%) generate $1 million or less in gross receipts (34 of 43 respondents) while the remaining 9 participants generate anywhere from $3 million - $50 million.
Question 3 Asked: Which Tax Model do you Prefer?
• The voting results were split as follows:
o 46% of participants (22 of 48) preferred Tax Model 4
o 38% of participants (18 of 48) preferred Tax Model 2
o 10% of participants (5 of 48) preferred Tax Model 3
o 6% of participants (3 of 48) preferred Tax Model 1
Next Step for Business License Modernization Plan:
1. May 12, 2026 - City Council to discuss and provide direction on which the preferred Tax Model and confirm direction to proceed with Community Polling
2. May/June 2026 - Conduct community polling regarding the potential business license tax ballot measure, which supports the five primary goals of the Modernization Plan (done through statistically valid polling process lead by TrueNorth Research)
3. July-August 2026 - City Council approval/final steps
a. Present Community Polling results
b. Present Ordinance/ballot language
c. Present Resolution to call the Election
d. Present Resolutions for Ballot Measure submission, calling of the Election as well as arguments for and against
4. November 3, 2026 - Ballot Measure would be presented before voters during General Election
In summary, staff recommends the City Council discuss and provide direction regarding which Business License Tax Model to proceed with for the purpose of polling potential voters.
PUBLIC OUTREACH:
On October 23, 2025, staff held a meeting with representatives from the Chamber of Commerce and Downtown Business and Professional Association (DBPA). The meeting was informative, collaborative and staff received positive feedback on commencing this initiative. Overall, the representatives agreed with the need to prioritize the business license code update and were pleased with the tentative timeline.
On November 6, 2025, City staff presented the Business License Tax Modernization Plan to the Finance Subcommittee to receive feedback on the overall plan.
On March 3, 2026, City staff presented the Business License Tax Modernization Plan to City Council to receive feedback on Phase 1 and 2 of the Plan and next steps.
On April 23, 2026, the City, in partnership with the Manhattan Beach Chamber of Commerce, held the Business License Tax Forum in the City Council Chambers and via Zoom. This Forum was advertised in The Beach Reporter on April 16, 2026, and email invitations were sent on two occasions to about 5,000 email accounts associated with active businesses licenses.
On April 27, 2026, the City sent another email to 5,000 licensed accounts with a recap of the Business License Tax Forum along with an opportunity to still cast a vote through May 1, 2026 to allow results to be presented at this City Council Meeting.
ENVIRONMENTAL REVIEW:
The City has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that there is no possibility that the activity may have a significant effect on the environment; therefore, pursuant to Section 15061(b)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is necessary.
LEGAL REVIEW:
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
ATTACHMENTS:
1. Business License Tax Modernization Plan Priorities
2. PowerPoint Presentation