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City's Internet Business Tax has LegalZoom in a Bind

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Everyone's watching LegalZoom's next move | Photo by laverrue via Flickr
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LegalZoom and its 400 employees who work out of its Hollywood Boulevard offices are looking to move outside Los Angeles city limits in search of a better tax break. Last month, a new tax for internet-based businesses went into affect, effectively lowering their tax bracket, but some companies will only get the lower tax for a portion of their gross receipts if part of their business is not done online. Such is the case with LegalZoom. The Los Angeles Business Journal looks deeply into the issue and provides good background:

The company initially paid the lowest rate, which was designed to lure so-called multimedia companies. But two years ago, the city reclassified many such online companies, including LegalZoom, into the highest bracket, reserved for law firms and other professional service companies. The reclassification quintupled LegalZoom’s city tax bill. Under the multimedia category, businesses pay $1.01 for each $1,000 in gross receipts. But under the professional services category, they pay $5.07. That means a reclassified business with $100 million in revenue that would be exposed to the tax saw its annual bill soar from $101,000 to $507,000.

LegalZoom, half of whose employees take public transit to work and most all patronize Hollywood Boulevard eateries, is looking for space in West Hollywood, Burbank or Glendale where business taxes are better or non-existant. However, two other big companies, affected by the new tax, Shopzilla Inc. and MyLife.com Inc., are staying put for now.