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SR-11-B (18) , e 21/'&"-0/0 e 11-1/ 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. -1- II-iS MAY 2 7 It" ~ 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 -2- 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. -3- 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: -4- 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 -5- 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 -6- 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 -7- 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 -8-