You have no legal liability for the business tax. They cannot tax you for customers who live in city but buy from you in LA county. However, if the cost of defending the suit is greater than the settlement amount, it makes economic sense to settle.
The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change.
Another problem is that the City will put a tax lien on your business and wreck your credit. Extortion? Maybe, but it's a cost of doing business you can pass on to your customers.
If you do settle, be sure to change your business address from your residence to outside of the county and advise LA City in writing that you have no business presence in LA City. There might be sense in settling, but there is no sense in allowing such a settlement to make you pay this tax indefinitely.
The above material does not constitute legal advice and should not be relied on. It does not create an attorney-client relationship. Each locality has differing laws. Each matter has differing facts. A legal matter cannot be satisfactorily resolved without a comprehensive review and analysis of all the unique facts and laws at issue by an able attorney. Your matter may result in a loss of rights if you do not timely retain such an attorney.