SR-01-14-2014-3CCity of City Council Report
Santa Monica
City Council Meeting: January 14, 2014
Agenda Item: 3C
To: Mayor and City Council
From: Gigi Decavalles- Hughes, Director or Finance
Subject: Business License Tax Modernization Review Services
Recommended Action
Staff recommends that the City Council direct staff to research options for modernizing
the business license tax program with a focus on improving customer service while
maintaining revenue neutrality.
Executive Summary
In recent years, businesses have informally provided feedback to staff during routine
interactions on areas that would assist with making the business license tax program
more business friendly. However, some of the changes could have a negative impact
on revenues; staff is seeking to conduct a thorough review to determine how best to
draft potential changes to ensure that there are no financial impacts to tax revenues.
Additionally, some changes could require voter approval to achieve this goal. Staff is
requesting that Council direct staff to review potential changes with a focus on
improving customer service while maintaining revenue neutrality.
Background
The City of Santa Monica adopted the existing business license tax code on May 8,
1990. Since this time, new business types have emerged that would not have been
considered at the time the law was adopted, particularly eCommerce and other Internet
based business models. These types of business are now common in Santa Monica,
and are thriving. In fact the area has been dubbed "Silicon Beach" for this growing
sector.
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On November 5, 1996, California voters passed Proposition 218 which added articles
XIIC and XIIID to the California Constitution. Among other things, Proposition 218
established the requirement that "general taxes," defined as taxes that are used for
general government purposes, obtain approval from a majority of the electorate. An
example of a general tax is the City's business license tax. As a result, any material
changes to the business license tax structure since this time would likely require
approval by registered Santa Monica voters.
Except to account for other changes to the code, the business license tax code has not
been amended in any material way since the passage of Proposition 218. For example,
in 1996 the Santa Monica Municipal Code (SMMC) was modified to add regulation of
community or special events; in 2003 the SMMC was amended to add a business
license application processing fee; in 2004, taxicab owner and driver permits were
addressed; and in 2005, Council approved a modification to create a small business tax
exemption. In 2009 and 2010, minor changes were made to account for the
implementation of the taxicab franchise program. Since 1990, the changes to the
business license tax code have not impacted the broader business license tax
classifications, rates, and structure.
Discussion
In recent years, businesses have provided informal feedback to staff during routine
interactions on areas that would assist with making the administration of the program
more business friendly and in some cases more equitable. Staff has addressed some
issues through policy. For example, on July 5, 2013, the Finance Director issued an
administrative policy on "place of business" for the purpose of requiring a second
business license. The policy provides staff with guidance on what constitutes a single
"place of business" that would then require a business to obtain only one business
license instead of two. Currently only auto dealers are explicitly provided an exemption
from obtaining a business license for each location.
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Examples of areas for review include:
1) the threshold for the small business exemption;
2) licensing requirements for real estate agents and brokers;
3) taxing of pass- through entities;
4) business classification categories;
5) apportionment;
6) related entities and combined returns; and
7) di minimis business activity requiring a business license, such as conducting a 2
day meeting in the City or providing services at a special event of 5 days or less.
The list provided above is only an example of the types of issues that a review would
address. The objective of the review would be to determine what potential changes
could be considered, as well as research on how other California cities with gross
receipts tax address these issues. To assist with this review, HdL Companies' (HdL)
would provide information services to include analysis and comparative services. Using
the data compiled from the registration analysis in the HdL business license tax
software, as well as data compiled from other sources such as neighboring cities, HdL
would prepare a report comparing the City of Santa Monica's proposed changes and
the best practices to those of neighboring cities. The report would provide a series of
possible business tax re- structuring options for City consideration. These options would
include proposed structures and policy changes designed to increase efficiencies, and
other best practices that the City may choose to explore, and to ensure net revenue
neutrality.
Staff would also seek more formal input from key stakeholders, including members of
the business community, that would be included in the review and modeling services
that HdL would provide.
HdL Companies includes Hinderliter, de Llamas & Associates, HdL Coren & Cone, and HdL Software.
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Time is of the essence in performing this review, due to the fact that changes could
likely require voter approval. The time frame to present recommendations to Council
would require enough time to also meet the November 4, 2014 ballot deadline.
Vendor Selection
HdL was founded in 1983 and provides revenue management and economic data
analysis to over 360 agencies in six states. Services provided by the company include
business license, sales tax, and property tax audits, analytical services, and software
products.
The City currently has three contracts with HdL, including property tax information,
audit, and consulting services; sales and use tax audit and information services; and
centralized business tax management software. These services assist the City in
identifying strategies to preserve and enhance tax collections; preparing tax forecasts
and collection reports; and managing business license tax accounts and records.
The Sales and Use Tax Audit & Information services agreement is for an amount not to
exceed $9,000, plus 15% of recovered sales and use tax for a five year term and a
request for proposals was issued on May 10, 2010;the Property Tax Audit & Information
services agreement is for an amount not to exceed $225,500 for a five year term and a
request for qualifications was issued on September 28, 2012; and the Business Tax
Software services agreement is for an amount not to exceed $209,275 for a term of 5
years and a request for proposal was issued on November 5, 2012.
HdL is the only company that is positioned to effectively provide the modeling of
financial impacts from potential changes within the timeframe required to prepare for a
November 4, 2014, ballot initiative, due to its extensive experience with the City's
business license program, its experience performing sales tax information and analysis
for the City, and its business license experience with other California cities. The
contract is being awarding in accordance with the provisions of Section 2.24.073(d) of
the SMMC; the selection process was completed prior to 12/26%2013, when
amendments to Chapter 2.24 of the SMMC, adopted by the Council at its November 26,
2013 meeting, were in effect.
Financial Impacts & Budget Actions
The contract to be awarded to HdL Companies is for an amount not to exceed $15,000.
Funds are available in the FY 2013 -14 budget in division 224; the contract will be
charged to account 01224.555060.
Prepared by: Salvador M. Valles, Business & Revenue Operations Manager
Approved:
Gigi Decavalles- Hughes
Director of Finance
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Forwarded to Council:
Rod Gould
City Manager