Customers from all over the world go to surgeons in Beverly Hills to get cosmetic enhancements. Now, the city of Beverly Hills wants to get enhancements of a different kind from the surgeons – financial ones.

The city is trying to get more taxes – sometimes dramatically more – from cosmetic surgeons and surgery centers when they rent out space they’re not using. The city sees this as real estate activity, and wants to charge the corresponding higher tax rate.

City Hall has already targeted two surgical centers, attempting to make them pay up to four times more in business taxes.

The two Specialty Surgical Center facilities have been paying the same, relatively lower business tax rate as doctors, lawyers and other professional companies. The tax is a flat fee of about $1,300 for the first 2,080 hours of billable hours and 62 cents for each additional billable hour.

But City Hall contends that because the surgery center owners lease out their space to other surgeons, a portion of their revenues should be taxed at the rate that real estate leasing companies pay, which is about $23 for every $1,000 of gross receipts.

As a result, the city figures the owners of these two surgery centers should be paying about $150,000 a year in business taxes, about four times what they currently pay. The centers are both jointly owned by a group of physicians and Symbion Inc., a Nashville, Tenn.-based surgery center company.

The dispute centers on the longstanding business practice of surgical centers that capitalize on unused facilities. Surgeon groups that own or lease medical facilities often rent out space to other doctors when they’re not using the rooms.

The city is also reviewing the books of several of the 75 other surgery centers, trying to figure out what portion of their revenues comes from surgical procedures that should be assessed at the lower professional rate and what portion comes from leasing out space to doctors. If the city prevails, it stands to gain millions of dollars in additional business tax revenue.

But not without a fight.

The surgery centers say their function is to provide medical services and thus should only be charged the rate the city charges doctors and other professionals.

“We’re not in the business of renting commercial property, so the city is trying to twist the municipal code for its own ends, to get more revenue,” said Phil Starr, an attorney with the Beverly Hills law firm Ervin Cohen & Jessup LLP, which is representing the two centers.

While many Beverly Hills surgery centers specialize in cosmetic procedures, most of the operations at Specialty Surgical centers are for outpatient procedures such as colonoscopies.

Danny Bundren, the executive at Symbion who has been Specialty Surgical’s lead negotiator in its dispute with the city, couldn’t be reached for comment.

Tax disadvantage

But Starr said that several Specialty Surgical physicians told him that the higher tax would place the surgery centers at a competitive disadvantage with centers in Los Angeles and that they might consider moving out of the city.

A tax increase would hit surgical centers particularly hard because they already face higher rental costs than conventional doctors’ offices, according to Evan Kovac, a broker in the health care real estate group in the San Diego office of real estate brokerage Marcus & Millichap LLP.

“It is already very difficult to operate a successful and profitable surgical center, especially in today’s economic environment coupled with the fact that many physicians are being hurt by reduced reimbursement revenues and declining patient volumes,” Kovac said.

Starr said the city’s effort to impose the higher tax rate appears to be part of a broader campaign to limit the amount of medical space in the city. About 21 percent of all office space in the city is designated for medical use, a much higher percentage than in other local cities.

In 2009, the city considered imposing a hard cap on the amount of medical office space within its borders, but last year the city abandoned the cap idea and opted for a project-by-project approach.

However, the tax dispute predates the push to limit medical office space. City officials first targeted the Specialty Surgical Center facilities five years ago, after an outside consultant raised issues in a report to the city about how surgery centers are taxed. In the 2005 report, MBIA Muni Services Co. said that physician groups that own surgery centers often rent rooms in those centers to other doctors. The report recommended that the physician groups be taxed at the real estate rate, not the professional services rate.

City officials say that the principal business of surgery center owners is offering their space for rent.

“What we discovered is that, for the most part, true surgery centers are not doctors’ offices,” said Noel Marquis, assistant director of administrative services for the city. “Their principal purpose for existence is offering space for a fee, in this case, surgical space.”

Marquis went on to say the city is reviewing the books of several larger surgery centers to “ensure that revenue from each business is properly apportioned to the appropriate business tax category.”

Marquis would not say how much tax revenue the city hopes to gain through this process. But if Specialty Surgical’s estimation of a $120,000 tax hike is correct and comparable hikes hit dozens of other surgical centers, the additional tax could run into the millions of dollars.

The dispute in Beverly Hills is similar to a recent battle in the city of Los Angeles over how much Internet companies should pay in gross receipts taxes.

Several years ago, Los Angeles city began reclassifying Internet companies as professional service companies, charging them much higher rates. After some of them threatened to relocate outside the city, L.A. officials approved a new lower tax category for many Internet companies.

Larry Kosmont, an L.A. economic development consultant who tracks municipal business taxes, said that surgery centers in Beverly Hills lack the bargaining position that the Internet companies had in Los Angeles.

“Most surgery centers need the cachet of the Beverly Hills address, so they are not as free to go to neighboring cities,” he said.

Although Beverly Hills voters rejected a ballot measure to reform its business tax, Kosmont suggested that it might be the best way to reach a compromise. He said the city should set up a new tax category for surgery centers.

“The city does have a point that some leasing activity probably takes place, but the level of tax that they are proposing does appear to be somewhat punitive,” Kosmont said.

The city rejects that suggestion, however.

“Many of our businesses operate in multiple tax-rate categories for the different activities they perform,” Marquis said. “We do not view creating a new business tax category for surgery centers as an alternative to properly reporting in the city’s current categories.”