Newport Beach Business License Tax (“BLT”) Newport Beach Association of Realtors February 25 th, 2014

NBAOR Position The Business License Tax as it is applied to Realtors in Newport Beach should be eliminated altogether or reduced to the same level as that which employers pay for their W2 employees (currently $16).

NBAOR Position (cont’d) Real estate agents are not as independent as they may seem (reasons to follow). Background: The real estate industry and the IRS determined that real estate agents report income as though they were independent contractors (Schedule C) due to the unpredictability and irregularity of receipt of income and the irregularity of business expenses (has to do with withholdings). Agents are not as independent as traditional IC’s. Most IC’s are their own “boss” but they are not in the case of RE agents.

NBAOR Position (cont’d) There is a precedent where many other cities in Orange County have eliminated or reduced the BLT (e.g., Huntington Beach). Difference between Broker’s License and Salesperson’s license. Many of the attributes that are present in the relationship with IC’s are not present in the relationship between the agent and the broker. As a result, Schedule C’s may not be the best way to classify real estate agents as IC’s.

Business License Taxes – Why do they exist? Newport Beach is for taxation purpose only. Some cities have stated that the BLT’s purpose is to insure businesses are in the appropriate location and within guidelines associated with their specific activity. BLT’s fund critical City Services that are utilized (e.g., Police, Fire protection, street rehabilitation, sidewalk maintenance, etc.) Note: Should real estate agents be required to pay so much more than W-2 employees given the points above.

NBAOR’s “Top Ten” Reasons for Eliminating or Reducing the BLT 1.Bureau of Real Estate (“BRE”) requires that licensees affiliated with a particular broker must be fully supervised in all activities. 2.Listings belong to the Broker of Record (“BOR”). 3.Many acts of the agent must be approved and authorized by the BOR (e.g., advertising, marketing). As with any employer, BOR is responsible for all acts and omissions of the agent. 4.BOR’s are required to carry Worker’s Compensation insurance for agents.

NBAOR’s Top Ten Reasons for Eliminating or Reducing the BLT (cont’d) 5. Commissions payable on transactions are paid to BOR. 6. Agents are not able to function as an independent business (must always “hang” license with a BOR). 7. Errors & Omissions Insurance (“E and O”) is carried through the BOR (carriers will not write for individual agents) 8. In general, agents cannot work for two BOR’s at the same time. 9. The CA courts have held that the BOR is responsible for all of the acts and omissions of the license.

NBAOR’s Top Ten Reasons for Eliminating or Reducing the BLT (cont’d) 10. Courts have held that real estate agents are agents of the BOR, and may not be an independent contractor and is an agent as a matter of law. Source: Tom Jacobson, Attorney for Orange County Association of Realtors, letter dated 7/7/2008 to Huntington Beach City Council.