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SR-10-13-2015-3E City Council Report City Council Regular Meeting: October 13, 2015 Agenda Item: 3.E 1 of 4 To: Mayor and City Council From: Gigi Decavalles-Hughes, Director, Finance Department, Treasury Division Subject: Sales, Use and Transactions Tax Audit and Information Services Recommended Action Staff recommends that the City Council: 1) Award RFP# 41 to Hinderliter, de Llamas & Associates, a California based company, to provide sales, use, and transactions tax audit and information services. 2) Authorize the City Manager to negotiate and execute a professional services agreement with Hinderliter, de Llamas & Associates for five years with an estimated total amount of $407,000. Executive Summary Hinderliter, de Llamas & Associates (HDL) has been providing sales and use tax auditing and information services to the City since 2001. HDL conducts these audits b y reviewing records from the California State Board of Equalization to determine if sales, use and transactions taxes collected by the State are being properly allocated to the City. The use of these services has recovered nearly $8 million in revenue for the City during the past 10 years (2005-2014). In addition, HDL provides valuable information and consulting services to the City. The current contract with HDL has been in place since October 12, 2010 and expires on October 12, 2015. Based on evaluation responses to the Request for Proposals (RFP), staff recommends HDL as the best qualified firm and that the City negotiate a new five-year contract. The annual amount for the information and consulting services for sales, use and transactions tax is $11,400. The annual amount for auditing services is approximately $70,000, based on a percentage of revenues reallocated to the City. Over the last three years, audit fees have averaged about $70,000 per year. Based on this, the estimated total value of the contract over the five-year period will be approximately $407,000. Background The City has contracted with Hinderliter, de Llamas & Associates (HDL) since 2001 to provide sales and use tax auditing and information services. The City’s current contract with HDL (9274 CCS) was authorized by Council on September 14, 2010 (Attachment A). The contract provided a term of five years. On September 27, 2011 (Attachment B), 2 of 4 Council approved a first modification which added transactions and use tax audit and information services to the scope of work; the modification added a 25% fee for recovered revenues. Transaction and use tax audit and information services were added due to the approval of Measure Y on November 2, 2010 which enacted a half cent transactions and use tax. Discussion The State Board of Equalization (BOE) processes a high volume of returns from sales/transactions and use taxes statewide – approximately 1.2 million in active accounts, some having 200 or more sub-outlets. The complexity in the State’s “point-of- sale” regulations compounded with the constant turnover, selling and consolidation of businesses, factual errors on tax forms, and evolving regulations impact the BOE’s ability to properly allocate the 1% local portion of these taxes. The amount of audit fieldwork and analysis needed to identify and correct these errors makes it inefficient for the BOE or the City to identify or correct these errors themselves. In the past 10 years, the City has recovered nearly $8 million in revenue from additio nal sales, use and transactions tax through HDL’s audit of state tax records from misallocation errors due to payments to other jurisdictions. In addition to providing auditing services, HDL would provide quarterly sales, use, and transactions data reports reflecting trends and projections; assist the City in identifying additional means to recover the local allocation from eligible purchases; assist the City in identifying strategies to preserve and enhance sales, use, and transactions tax. Statistical da ta provided will aid the City in revenue forecasting and reporting as well as economic development efforts. Consultant Selection On August 5, 2015, the City published a Request for Proposals (RFP #41) for sales and use tax audit and information services. The RFP was posted on the City’s online bidding website and notices were advertised in the Santa Monica Daily Press in accordance with the City Charter and Municipal Code provisions. A total of 392 vendors were notified and 16 vendors downloaded the RFP; the City received two proposals. An 3 of 4 evaluation panel composed of representatives from the Finance and Housing and Economic Development departments reviewed and ranked the proposals using the criteria set out in the RFP. Based on the selection criteria in SMMC 2.24.073, HDL was recommended as the best qualified firm to provide sales, use, and transactions tax audit and information services. HDL was selected based on the firm’s long standing and documented success in audit recoveries, commitment to customer service, experience and qualifications of staff, methodology in reporting including its web-based information portal, financial stability, available resources, and compliance with City scope of work. Staff thoroughly reviewed and analyzed each proposal looking for ways to improve efficiencies; maximize returns and minimize lost sales, use, and transactions tax revenues; and take advantage of new technologies. HDL’s cost to provide tax auditing services would be for an estimated annual amount of $11,400 plus a 15% fee for sales and use tax audit recoveries and a 25% fee for transactions and use tax audit recoveries. The 15% fee for the sales and use tax audit recovery applies to monies received in the first eight consecutive reporting quarters. The 25% fee for transactions and use tax audit recovery applies to retroactive adjustments only. Financial Impacts and Budget Actions The contract to be awarded to HDL is for estimated annual amounts of $11,400 for information services and $70,000 for audit recovery services resulting in an estimated five-year total of approximately $407,000, which will be more than offset by the additional revenue recoveries from audits. Funds are available in the FY 2015 -16 budget in the Finance Department, and the contract will be charged to account number 012241.555060 (Professional Services). Future year funding is contingent on Council budget approval. Prepared By: David Carr, Assistant City Treasurer Approved Forwarded to Council 4 of 4 Attachments: A. September 14, 2010 Staff Report B. September 27, 2011 Staff Report     Reference:    CONTRACT NO. 10196   (CCS)