SR-11-B (18)
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MAY 2 7 t9Ii
FI:MD:TM:g:amnesty
council Meeting: May 27, 1986
Santa Monica, California
TO:
MAYOR AND CITY COUNTIL
SUBJECT:
city Staff
BUSINESS LICENSE TAX AMNESTY/AUDIT PROGRAM
FROM:
Introduction
This is to recommend that Council approve the implementation of a
Business License Tax Amnesty/Audit program for FY 1986-87/ and to
direct the City Attorney to prepare necessary implementing and other
associated changes to the Santa Monica Municipal Code.
Background
Amnesty programs have been an effective way to increase revenues.
Successful programs have been conducted recently by the City of
Chicago (business license tax) the state of California (Income tax),
the Department of Motor Vehicles (vehicle registration) and the City
of Los Angeles (business license taxes) .
The City of Los Angeles program was initiated because there was a
very substantial number of businesses which had not paid overdue
taxes. It was also believed that there was a number of unlicensed
businesses operating in the city. To address these problems, the Los
Angeles City Council directed the City Attorney to begin criminal
prosecutions of these businesses. However, the council also directed
that an anmesty period be allowed to enable these businesses to pay
prior to the new enforcement effort by the City Attorney.
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II-iS
MAY 2 7 It"
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The City of LOs Angetlb amnesty excused all penJllies owed provided
the following requirements were met: 1) the business filed with the
Business Tax Bureau during the amnesty period; 2) the business filed
a gross receipts statement; and 3) the business paid the amount of
tax due plus interest.
The City of Los Angeles expected to realize $2.5 million from this
program. The amnesty period was October 1, 1985 through December 31,
1985. As of March, 1986 actual collections totaled $13.5 million.
Surprisingly, this unexpected windfall was primarily due to
unregistered businesses rather than those businesses which were in
arrears in their tax payments.
Santa Monica Business License Collections
The status of business license collections in the City of Santa
Monica appears to be quite different than the situation which existed
in the City of Los Angeles prior to implementing its amnesty program.
Santa Monica staff have been actively enforcing the City's business
license ordinance. This has been done through field business license
inspections, close coordination with the city Attorney's office which
prosecutes delinquent businesses, and the initiation of a pilot
business license audit program during FY 1985-86. Currently, there
are only about 350 delinquencies which are being processed by the
City Attorney's office, or about 2% of total City business licenses
and 90 to 100 inspector-issued administrative citations are written
per month to businesses. However, the results of our pilot audit
program indicated there may be a problem with underreporting of gross
receipts to the city. It is for this reason that City staff believes
an amnesty period followed by a temporarily augmented audit effort
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will increase businJlt license collections to m~ closely
approximate the amounts lawfully due to the city.
FY 1986-87 Amnesty/Audit Program
The primary purpose of the City of Santa Monica's Amnesty/Audit
program is to allow those businesses which have not reported or
underreported gross receipts to the city the opportunity to report
accurately and pay any taxes and interest due without being subject
to penalties. Those businesses which underreported and do not come
forward during the amnesty period and which are identified by
subsequent audits during FY 1986-87 will be assessed the additional
tax due plus interest and a penalty of 100%.
City staff recommends that the amnesty/audit program be structured in
the following manner:
The amnesty period will be from July 1, 1986 - August 31,
1986.
The temporarily augmented audit period will be from September
1, 1986 - June 30, 1987.
During June, 1986, staff will disseminate information
concerning the amnesty/audit program by:
a) Preparing a special information sheet which will be
mailed to all currently licensed businesses along with
their FY 1986-87 business license renewal forms;
b) Publishing a special notice in the Evening Outlook:
c) Posting a notice on the cable television community
bulletin board channel (Channel 30): and
d) Meeting with the Santa Monica Chamber of Commerce to
explain the program.
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During July, ~6 staff will hold at lea~one community
meeting to explain the program and answer questions.
During July, staff will install a business license "hot line"
at City Hall to facilitate answering questions.
Following the amnesty period, up to 50% of all licensed
business (selected at random) would be audited. The audit
process would consist of comparing gross receipts reported to
the city with gross receipts reported by the business on its
state or Federal income tax forms which the business would be
asked to provide to the city.
If a business is identified during the audit period as owing
taxes to the City, the business would be subject to a penalty
equal to the amount of the taxes owed. This would be a
one-time change from the current penalty schedule whereby a
business incurs penalties of 15% on September 1, if it does
not pay its annual renewal tax by August 31 and an additional
5% per month up to a maximum of 50% until the amount due is
paid. Interest due would be calculated based on the city's
actual rate of return for the period involved. staff believes
this one-time change will encourage participation by eligible
businesses during the amnesty period.
Changes to the Santa Monica Municipal Code
In order to implement the Amnesty/Audit program during FY 1986-87 and
to facilitate participation by eligible businesses, the City Attorney
should be directed to prepare an appropriate ordinance amending
applicable sections of the Santa Monica Municipal Code.
Specifically:
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Recognizing ~ amnesty period of July l4ll986 - August 31,
1986.
Permitting the waiving of penalties, if delinquent and/or
unreported taxes are paid during the amnesty period.
Increasing the penalty to 100% and specifying the amount of
interest due for current and prior year's unreported and/or
underreported taxes identified during the audit period of
September 1, 1986 - June 30, 1987.
Changing the gross receipts reporting period from a fiscal
year to a calendar year basis. Currently the vast majority of
businesses pay the city's business license tax based on gross
receipts earned during the preceding July 1 - June 30 period.
When a business is audited, it is asked to provide the city
with a copy of its last two calendar year state and/or Federal
income tax reports and a month-by-month break out of gross
receipts. This information is necessary in order to convert
gross receipt information from a calendar year to a fiscal
year basis. staff believes this imposes a hardship on many
businesses. To alleviate this problem, staff recommends that
effective with the FY 1986-87 renewal periOd beginning July II
1986, all businesses pay their business license tax based on
gross receipts earned during the prior calendar yearl or in
this case 1985. However, businesses paying for underreported
and/or unreported gross receipts for FY 1984-85 or earlier
fiscal years would still have to pay on the basis of fiscal
year gross receipts.
In addition to the above ordinance changes specifically connected
with implementation of the Amnesty/Audit program, the City Attorney
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and City staff recoJltnd two additional ordinan~changes which will
increase the overall efficiency and effectiveness of the collection
of City business license taxes:
Currently, City license inspectors are authorized to issue
administrative citations when they identify an unlicensed
business operating in the city. When cited in this manner, a
business has seven days to obtain a business license. If the
seven day deadline is not met, City staff follow-up with two
administrative letters (one signed by the License and Permit
Supervisor, and one signed by the Collections Manager) issued
15 days apart.
If the business still fails to respond, the matter is referred
to the city Attorney whereby the business may be required to
appear in Court. If the business still fails to comply, a
warrant may be issued for the arrest of the owner, if
sufficient and correct identifying information is available
from city records.
Alternatively, when dealing with unusually difficult
situations the City may dispatch a police officer to a
business operating unlawfully whereupon the officer would
issue a Q-citation which orders the person operating the
business to appear in court within 30 days to resolve the
matter.
Both of these procedures are not cost-effective as they are
extremely time consuming and/or costly to implement. To
correct this problem, it is recommended that the Santa Monica
Municipal Code be amended to empower the City's Business
License Inspectors to issue Q-citations under specific
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conditions a~ithin written administra~e guidelines which
would be approved by the city Attorney.
Currently, operating an unlicensed business in the city
constitutes a misdemeanor. As such, violators are permitted
jury trials if they so request. City and court staff agree
this is not cost-effective based on the amount of tax usually
in question. It is therefore recommended that the Santa
Monica Municipal Code be amended to add an alternative
provision making the failure to obtain a business license an
infraction.
Budgetary/Financial Impact
It is anticipated that the Amnesty/Audit program will produce
approximately $112,500 in additional revenue during FY 1986-87 at an
associated additional cost of approximately $7,500, primarily to hire
temporary staff who would augment permanent staff in conducting the
audits. The additional revenue and administrative cost are included
in the proposed FY 1986/87 budget.
Recommendations
Based on the above report, it is recommended that the Council:
Authorize implementation of a business license tax
Amnesty/Audit program during FY 1986-87 as described in this
report.
Direct the City Attorney to prepare an appropriate ordinance
amending the Santa Monica Municipal code as described in this
report to permit implementation of the business license
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AnmestY/AUdi~ogram and to increase th~verall efficiency
and effectiveness of City business license collections.
Prepared by:
Mike Dennis, Director of Finance
Toby Menin, Collections Manager
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