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SR-11-B (14) ~ ,r ;Z08-()I{} J 1-6 HAR 2 7 J99Q FIN:CMD:TJF:br:iirecllc Cauncll Meeting: March 27, 1990 Santa Monica, California STAFF REPORT TO: Mayor and City Council FROM: City staff SUBJECT: RECOMMENDATION TO DIRECT CITY ATTORNEY TO DRAFT A REVISED BUSINESS LICENSE TAX ORDINANCE Introduction This is to recommend that the Ci ty Council direct the City Attorney to revise the City's Business License Tax Ordinance to reflect the findings and recommendations set forth in the attached report and the technical/conforming changes outlined in Attachment I; and to return the revised ordinance for first reading at the April 10, 1990 Council meeting. The revised Business License Tax Ordinance is to be effective July 1, 1990. This staff report also answers various questions raised by the city Council at a March 13, 1990 study session concerning the attached report. Backqround In August 1989, staff retained Ralph Anderson and Associates (RAA) to assist in performing a comprehensive review of the equity, ease of administration and tax rates of the current Business License Tax Ordinance. The City's Business License Tax Ordinance has not been comprehensively reviewed since 1962. During FY 1983/84 selective revisions were made to tax rates for major business categories. - 1 - 1\-8 MAR 2 7 1990 w During the last six months, RAA has undertaken three basic work efforts: Conducted an overview assessment of the City's Business License Tax Ordinance to identify its strengths and weaknesses, and to recommend opportunities to improve the current Ordinance. Reviewed the adequacy of the City's Business License Tax apportionment guidelines in relation to various issues raised by businesses in the City. Prepared a detailed framework from which the City Attorney can draft a revised Business License Tax Ordinance which will result in a tax which is equitable, easily understood and administered, and which reflects tax rates which are consistent with similar tax rates in neighboring jurisdictions. Attached is RAA's final detailed framework report. In addition, staff has prepared Attachment I of technical/ conforming changes which should be incorporated into the revised Business License Tax Ordinance. These changes will ensure consistency throughout the revised ordinance, increase administrative efficiency, and bring the Ordinance up to date to recogn~ze current procedures and practices. study Session and Response to City Council Questions On March 13, 1990, the attached report from RAA was presented to the city Council during a study session. The following questions were raised by the Council at that time. staff has researched answers to these questions. - 2 - Question: What kinds of deductions are allowed for professional or service businesses? Answer: Mandated fees to government agencies are an allowable deduction from gross receipts reported by service or professional business. All other expenses, including payments to subcontractors, are categorized as a cost of doing business and are not excludable. This is a continuation of the City's current practice and is consistent with business license tax practices in the comparison cities of Los Angeles, Beverly Hills and Culver city. Question: How can we protect the small business? Answer: It is difficult to characterize what constitutes a "small business." A "small" business may operate on a large profit margin, whereas a "large" business, conversely, may operate on a small profit margin. As this is a "gross receipts" tax, this issue is addressed by the establishment of a minimum tax. The per $1,000 tax rate does not become effective until a business has achieved $60,000 in gross receipts, an increase of $10,000 from the current minimum level of $50,000 for application of the tax rate. Question: How do the proposed tax rates compare with the tax rates prior to FY 1983/84? Answer: Attachment II shows tax rates in effect prior to FY 1983/84, current tax rates and proposed tax rates by major business category. Attach- ment III shows sample tax bills for all major business categories and the percentage change between the various sample tax bills. Question: How many automobile dealers pay the maximum ($5,000)? How many automobile dealers pay less than the maximum? Answer: In FY 1988/89, there were forty-nine (49) licensed automobile dealers in the City of Santa Monica. Of those, twenty (20) paid the maximum tax, ($5,000); sixteen (16) paid the minimum tax ($50.00); thirteen (13) paid a tax amount more than the minimum but less than the the maximum. - 3 - Question: What percentage of our sales tax revenue is a result of automobile sales? Answer: Based on the latest available information, for the twelve months ending March 31, 1989, auto sales accounted for $2.7 million or approxi- mately 17.3% of all Sales Tax collected in the city of Santa Monica. Budqet and Financial Impact Implementation of the proposed tax rate changes for FY 1990/91 is projected to increase Business License Tax revenues approximately $3.2 million. Implementat10n It lS critical that the City Attorney return a draft ordinance for first reading by April 10, 1990. Staff will be required to make extensive changes to the business license data processing system. Time is also necessary to develop and implement a new business license renewal form which will make the renewal process more efficient for both the business community as well as city staff. Additionally, it should be noted that following adoption of revised tax rates, staff will recommend to the city Council a revision of the Downtown Business Assessment District fee which is currently set at three times the business license tax. The current multiple will be reduced to maintain existing fee revenues in light of increased Business License Tax rates. - 4 - Recommendation It is recommended that the city council direct the City Attorney to prepare a revised Business License Tax Ordinance in accordance with the provisions of the attached report and Attachment I and return to city council on April 10, 1990 for first reading of the revised ordinance. Prepared by: Mike Dennis, Director of Finance Toby J. 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