Los Angeles Business Journal

State Drops Tax Deposit Requirement

By Howard Fine Tuesday, December 17, 2013

Local startups have just been handed a bit of holiday cheer: the state will no longer require security deposits for new businesses in most cases and will refund about $300 million in deposits it’s now holding.

The state Board of Equalization on Tuesday voted 5-0 to eliminate the security deposit requirement for new businesses, effective Jan. 1. Most businesses that have already paid the security deposit will get refunds early next year. The state currently holds deposits belonging to more than 15,000 businesses.

“It’s challenging enough starting a new business in California,” said Board of Equalization member George Runner. “Forcing new business owners to turn over up to $50,000 of their money does nothing to help them succeed, nor has it proven cost-effective for the state.”

The security deposit requirement has been on the books for decades and is aimed at ensuring that businesses pay sales taxes to the state. The deposit is required in order to obtain a seller’s permit; the amount is typically set at half the expected annual sales taxes with a minimum of $2,000 and a maximum of $50,000. Businesses either pay in cash, surety bonds or some other form of personal guarantee. If a business fails to pay sales taxes, the agency can take the money out of the security deposit.

The security deposit was refunded after three years, less any money the state took out to cover missed tax payments.

Under the measure the board passed Tuesday, most new businesses will no longer need to make security deposits. Only businesses with a history of missing sales tax payments or in certain industries with a higher risk of payment lapses will still be required to maintain a security deposit.

The board vote was welcomed by one statewide business leader.

“This money is capital that is desperately needed to help new businesses stay solvent and grow, but California was choosing to penalize businesses before taxes were even owed,” said John Kabateck, executive director of the California chapter of the National Federation of Independent Business.