California Local Business Tax Trends: What Cities and Counties Need to Know to Improve Collections

Hundreds of cities and counties across California collect locally-administered taxes to provide a sustainable revenue channel for their communities.

These include business license tax, Utility Users Tax (UUT), Transient Occupancy Tax (TOT), and cannabis tax, as well as city-specific taxes like a parking facilities tax.

Now, facing persistent structural budget deficits at both the state and local levels, many are looking to modernize their tax codes, improve compliance, and extract more value from their existing tax base.

The pressure is acute. After years of multi-billion-dollar state deficits (California is projecting $18+ billion in 2026-27), cities and counties can no longer rely on stable flows from state and federal sources. Local revenue modernization is no longer optional; it is a fiscal survival strategy.

Business License Tax: Modernization Under Pressure

Hundreds of California cities and counties collect a business license tax as a core general fund revenue stream. Now, many are looking to modernize their codes in the face of budget deficits. Facing lower revenues from federal and state sources, cities and counties are updating tax structures in ways that will result in tax increases for many types of local businesses.

Local governments across the state are working to update their business license tax, balancing the need to provide relief to small businesses while closing budget deficits. Others are updating their tax rates to include annual consumer price index (CPI) adjustments to avoid the multi-year revenue erosion that comes from static rates in an inflationary environment.

At the same time, some cities like Irvine have pushed to move away from a gross-receipts-based tax in favor of a flat-rate fee for businesses, signaling that local leaders are increasingly questioning the value when weighed against the cost of doing business in their city or county.

The City and County of San Francisco restructured many aspects of the city’s business tax to simplify compliance and provide relief to small businesses while maintaining revenue. The measure required the tax collector to issue new market-based sourcing guidance—a reminder that tax code modernization generates administrative complexity even when it is designed to reduce it.

In 2025, California cities collected $15M+ in back penalties from unlicensed business operations, a figure that reflects both a compliance gap and an enforcement opportunity for cities and counties looking to close budget gaps.

The Hidden Costs of Updating Your Business License Tax

Administering a business license tax carries real costs for the city or county; even small cities must allocate staff to support business filers and reporting. Due to staffing costs, many cities and counties outsource this function entirely to solutions providers, but this approach is not a panacea.

Solutions providers often charge what amounts to an annual subscription fee for their software to make simple changes, and business license tax updates require significant customization. Additionally, when solutions providers are the only ones interfacing with local businesses, it can cause frustration for tax filers.

Cities and counties have an opportunity to improve their relations with local business owners when updates are going into effect, but many will find themselves disconnected if they are outsourcing this function.

Finally, updates carry a greater risk of non-compliance if local business owners do not understand the changes. Cities and counties that fully outsource compliance services may see much of this revenue lost to providers who charge high collection fees.

Best Practices for Updating Your Business License Tax

Cities and counties looking to update their business license tax should use this opportunity to seek a solution that is configurable to the jurisdiction’s unique tax needs. By comparison, some providers offer one-size-fits-all solutions with costly fees for updates and customizations.

Maintaining the ability to provide high-quality customer service at a time of change is critical. Local businesses are the backbone of their communities, and they should have the ability to interface directly with government staff who can ensure they understand updates and the value to them.

Compliance and reporting are two areas where local governments consistently struggle with their current solution and service providers. Cloud software solutions have advanced tremendously in their ability to surface data with AI. Cities and counties should use the timing of business license tax updates to test out solutions that incorporate these new technologies.

Utility Users Tax (UUT): Modernizing for the Digital Age

The Utility Users Tax (UUT) is a local excise tax imposed by approximately 150 California cities and counties on the consumption of utility services like electricity, gas, water, sewer, telephone, and cable television. For many jurisdictions, UUT revenues constitute as much as 25% of general fund revenue, making it one of the most significant locally-controlled tax streams available.

Yet many UUT ordinances were written decades ago and have not kept pace with how Californians consume utility services today. As telecommunications technology has shifted from landlines to wireless and VoIP, and as digital billing has replaced metered service models, outdated ordinances are leaving cities exposed to revenue leakage.

Since 2001, there have been 166 successful utility tax measures in California—including validations, extensions, expansions, and rate increases—as cities have worked to close these gaps.

Cities like Santa Barbara have turned to audits and digital tools to boost UUT revenue, with finance directors and advocacy professionals emphasizing the importance of modernizing UUT ordinances to reflect current technology and billing practices. Twenty-three California cities have proposed UUT changes to capture wireless telecommunications and internet usage, with 22 of those measures approved by voters.

The compliance gap for UUT is largely invisible to city finance departments until a targeted audit reveals it. Utility providers collecting on behalf of cities may be applying incorrect rates, exempting categories that should be taxable, or missing entirely new service classifications. For cities that haven’t audited their UUT collections in years, this is among the highest-ROI compliance investments available.

Key trends shaping the UUT landscape in California:

• Wireless and VoIP gap: Cities whose ordinances reference ‘telephone’ without explicitly covering wireless, prepaid, and VoIP services are losing significant revenue. Updating ordinance language requires voter approval under Proposition 218, but the return typically justifies the investment.
• Digital utility services: As streaming and internet-based services proliferate, some cities are exploring whether these constitute taxable utility consumption under existing ordinances—a question with significant revenue implications.
• Rate and audit programs: Cities are increasingly partnering with third-party compliance specialists to audit utility provider remittances, recovering underpaid collections without requiring legislative action.

Transient Occupancy Tax (TOT): Short-Term Rentals Drive New Complexity

The Transient Occupancy Tax (TOT), commonly known as a “hotel tax” or “bed tax,” is levied by local governments on guests who rent accommodations for 30 days or less. It is authorized under California Revenue and Taxation Code Section 7280.

In recent years, the explosive growth of short-term rental (STR) platforms like Airbnb and Vrbo, has transformed the TOT compliance landscape, creating both significant new revenue opportunities and significant enforcement challenges for California cities and counties.

The legislative response has been significant. Governor Newsom signed Senate Bill 346, the Short-Term Rental Facilitator Act of 2025, on October 13, 2025. The law authorizes local agencies to adopt ordinances requiring STR facilitators like Airbnb and Vrbo to transmit property-level information, including assessor parcel numbers, to enable effective TOT enforcement within their jurisdictions.

The legislation was sponsored by the California Association of County Treasurers and Tax Collectors and the League of California Cities, reflecting broad consensus around the compliance problem.

Cities across California have moved aggressively on TOT rates in response to growing tourism revenue and budget pressure:

• San Diego voters approved Measure C, creating three tax zones with TOT rates of 11.75%, 12.75%, and 13.75%.
• Santa Rosa increased its TOT rate to 11% in 2025, following a ballot measure.
• Los Angeles County’s STR ordinance, which took effect in the fall of 2024, requires registration and remittance of 12% TOT in unincorporated areas.
• San Francisco requires all short-term residential hosts to collect and remit 14% TOT, in addition to holding a current business registration certificate.
• Palm Springs transitioned to a new online TOT filing system in 2024, reflecting a broader trend toward digital administration.

For cities that haven’t updated their TOT ordinances in years—like Hanford, whose 8% rate had not changed since 1985—the gap between their rate and comparable jurisdictions represents an ongoing revenue loss. The city began exploring a rate increase to 12% in 2025, projecting $375,000 in additional annual revenue, a material sum for a smaller city.

Compliance remains the critical challenge. Many STR operators, particularly individual homeowners who rent occasionally, are unaware of their TOT obligation or fail to remit consistently. SB 346 gives cities a new enforcement tool, but only if they have the administrative capacity and technology to act on the data facilitators provide.

Cannabis Tax: Revenue Plateau and the Compliance Crisis

California has generated more than $7 billion in cannabis tax revenue since legal sales began in 2018, but the industry is facing a structural reckoning. Legal cannabis retail sales are estimated to have declined approximately 8% in 2025, with the state seeing more inactive cannabis licenses than active ones: 10,828 inactive or surrendered vs. 8,514 active.

According to the Department of Cannabis Control’s 2024 market analysis, only about 38% of cannabis consumed in California comes from licensed sources.

The tax burden has been a central contributor to this dynamic. In Los Angeles, the combined tax rate on cannabis (state excise, sales tax, and the city’s 10% local cannabis tax) exceeds 40%, far above what the illegal market charges. The city faces $400 million in unpaid cannabis taxes, with more than two-thirds of the city’s 738 licensed cannabis companies failing to meet their tax obligations.

The state excise tax increased from 15% to 19% in July 2025 under legislation passed to offset the 2022 elimination of the cultivation tax. However, Governor Newsom subsequently signed legislation rolling the rate back to 15% through 2028, acknowledging that California’s legal industry needs relief to compete against the untaxed and unregulated illegal market. The LAO projects cannabis tax revenues of $773 million in 2025-26, reflecting the impact of the rate rollback.

For local governments, the cannabis tax compliance challenge operates at two levels:

• Rate calibration: Local cannabis tax rates that are too high push consumers to the illegal market, reducing the tax base. Only 15% of jurisdictions that allow delivery-only sales from outside jurisdictions impose a local tax, and just 43% require outside deliverers to obtain a local license, representing a material compliance gap for cities trying to capture this revenue.
• Collection enforcement: As the $400 million unpaid tax figure in Los Angeles illustrates, many licensed operators who cannot compete with the illegal market stop paying taxes. Cities need real-time visibility into operator compliance status, not annual self-reported filings.

The CDTFA issued a new rule in October 2025 clarifying the definition of gross receipts for cannabis excise tax purposes, including industrial hemp under certain THC concentration thresholds—expanding the taxable base and adding new compliance obligations for retailers.

Cities and counties with cannabis tax ordinances should be evaluating whether their current compliance infrastructure can surface non-filers, track operator activity against reported receipts, and integrate with state licensing data. The legal cannabis market’s continued pressure from the illegal market means every dollar of uncollected local cannabis tax is a dollar that will likely never be recovered.

Parking Facility Tax: An Underestimated Compliance Gap

The parking facility tax, also known as the Parking Occupancy Tax in Los Angeles, is one of California’s most under-administered local taxes. Levied on the privilege of occupying space in a parking facility, the tax is collected by operators and remitted to the city, creating a compliance chain that is difficult to monitor without active enforcement.

Los Angeles imposes a 10% parking occupancy tax on parking fees and requires all auto park operators to post a bond to ensure payment of delinquent taxes. The city’s compliance guide for operators makes clear that audits may cover 36+ months of prior transactions, a significant lookback for operators who have been under-remitting.

Santa Monica’s City Council voted unanimously to place a parking facility tax increase of 8% on the November 2024 ballot, projecting approximately $6.7 million in additional annual revenue.

The measure exempted city-owned lots and structures and included an advisory measure directing at least half of the additional revenue toward public safety and homelessness—a model for how parking tax increases can be structured to build voter support.

Common compliance gaps in parking facility tax administration include:

• Operators failing to collect the tax on validation transactions, monthly passes, or valet services
• Inconsistent treatment of app-based and cashless payment systems, which may not be captured by older reporting methodologies
• Incomplete remittance from third-party parking management companies operating on behalf of property owners
• Under-reporting of total ticket issuance, particularly where paper ticket counts are the basis for tax calculations

For cities with parking facilities generating significant revenue (urban cores, airports, event venues, beach communities, etc.), the ROI on a parking facility tax audit program is consistently high. The audit lookback period of 36 months means that even modest under-remittance rates across a large operator population translate into material recovery.

The Common Thread: Compliance Technology and Local Control

Across all five of these tax types, the story is the same: California cities and counties are sitting on more revenue than they are currently collecting, and the gap between what they are owed and what they receive is a compliance and technology problem as much as a policy one.

With state budget deficits projected to persist through the end of the decade and federal funding uncertainty compounding local fiscal pressure, the urgency to close these gaps has never been higher.

The cities and counties that will come out ahead are those that treat the current moment of tax code modernization as an opportunity not just to update rates but also to build better compliance infrastructure, bring aspects of administration back in-house where it has been fully outsourced, and adopt cloud-based platforms that surface real-time data and automate enforcement workflows.

The key principles for local government finance leaders navigating this environment:

• Configurability over customization: Tax administration software should be configurable by city staff and not require paid vendor intervention every time a rate or rule changes.
• Compliance visibility: Finance teams need real-time dashboards showing who has filed, who is delinquent, and what the estimated gap between registered and operating businesses looks like.
• Direct taxpayer relationships: When cities outsource tax administration entirely, they lose the direct relationship with local businesses that makes compliance education and outreach possible.
• AI-powered data surfaces: Cloud software platforms now incorporate AI to identify anomalies in filing data, flag non-filers against business registry data, and prioritize audit candidates—capabilities that were out of reach for most local governments just a few years ago.

Learn more about managing tax collection and compliance in one system with Neumo Tax & Licensing.