Loading...
HomeMy WebLinkAboutCC AG PKT 2005-08-08 #C City of Seal Beach Agenda Report Date: August 8, 2005 To: Honorable Mayor and City Council From: John B. Bahorskt � City Manager Subject: Council Policy — B siness License Administration SUMMARY OF REQUEST: At the request of Council Member Levitt and with the concurrence of City Council, staff was directed to prepare a Council Policy to address the concerns of the business community regarding the business license tax. BACKGROUND: This item has been before City Council on several occasions and two Staff Reports have been prepared regarding administration of business licenses within the City. On May 9, 2005 City Council received a report on the business license issue that addressed history of business license tax, independent contractors, real estate agents, and the process used to collect delinquent business license taxes. A follow up report was provided to City Council on June 13, 2005 that further elaborated on business license tax issues and addressed the concerns of amending the business license code. The June 13 staff report also discussed in detail the concept of creating a tiered system. Following these two staff reports, Council Member Levitt requested that Council consider a two tier system and that this system be in place for a one year trial period so that the City could evaluate the fiscal impacts. Under this proposal a business with gross revenues in Seal Beach above $25,000 would pay the full amount of the business license tax. Businesses with gross revenues less than $25,000 would pay no business license tax. As proposed, this would apply to all classifications within the business license ordinance. The attached City Council Policy on business license administration would implement Council Member Levitt's idea. This proposed City Council Policy has the following advantages: > The one year trial period allows the City to try the tier system without permanently committing to the change should the fiscal impacts be greater than Council anticipated. Agenda Item C > This policy would eliminate the need for a fiscal study and the costs associated with completing such a study. > If the fiscal impact is not significant, the Council could then consider making the change permanent. > Staff would gain experience with the impacts of this type of tiered system and would be better able to provide City Council with a report after the trial period that is factually accurate regarding the fiscal and administrative implications to the City. Staff is requesting that City Council consider as an alternative to the proposed Council Policy that rather than an across the board application of a tier system, Council consider applying the tier system to those businesses most impacted by the cost of the business license tax. Those classifications are: real estate agents, health instructors, hair stylists and manicurists. This alternative would address the concerns of those individuals who indicate they are the least able to pay the business license tax. The attached City Council Policy outlines the details regarding the business license experiment and implementation of the change in business license applications. FISCAL IMPACT: The City will see a reduction in revenue however at this time staff cannot quantify the exact fiscal impact. RECOMMENDATION: Take public input, discuss, and if appropriate approve the attached City Council Policy. ATTACHMENTS: A) Proposed City Council Policy regarding business licenses B) May 9, 2005 Staff Report - Business License Update ;,�!',Gn -► & C) June 13, 2005 Staff Report — Business License Update :0 ..00" CITY OF SEAL BEACH COUNCIL POLICY SUBJECT BUSINESS LICENSE ADMINISG ON SECTION INDEX NQ. ISSUE DATE REVISION DATE COUNCIL CITY MANAGER [ APPROVAL APPROVAL 100 /% 8/8/05 1. SCOPE This Council Policy applies to the business license administration for the City of Seal Beach. 2. PURPOSE AND INTENT The purpose and intent of this policy is to establish a temporary alternative for the administration of the City's business license system. Based on public input the existing system may place a burden on the business community that can be mitigated by experimenting with an alternative business tax system. Policy 100 -7 shall sunset one year after adoption of this policy. During this one year period staff will monitor the new policy and determine its fiscal and administrative impacts on the City. A report will be prepared for City Council prior to the sunset date so that Council can determine whether to permanently enact the changes, modify the tiered system, or return to the current system. 3. POLICY Effective with the approval of the Seal Beach City Council the business license system will be modified to a tiered system. The first tier will exempt a business operating in Seal Beach from the current business license fee if their annual gross revenue is Tess than $25,000. The second tier will require a business operating in Seal Beach with an annual gross revenue of /or over $25,000.01 to pay the full amount of the appropriate business license tax. The tiered system shall sunset one year from the approval of the adoption of this policy. Should this policy conflict with the business license tax code the existing code shall prevail until the conflict is resolved by either the Director of Administrative Services or the City Council. This policy still requires an exempt business (a business with gross revenue equal to /or less than $25,000 in annual gross revenues) to complete the necessary paperwork to verify the license fee exemption and be issued a business license (SBMC 5.10.015 & 5.10.545). 4. PROCEDURE The Director of Administrative Service shall develop procedures to implement the Purpose and Intent and Policy sections of this report. During the development of the procedures the goal shall be to make the tiered system as streamlined as possible. The income verification process shall ensure that any tax information is correct and that verification can promptly be determined. The development of the new procedures does not eliminate the need to comply with SBMC 5.10.045 (issuance of license). 5. ISSUANCE , AGENDA REPORT DATE: May 9, 2005 TO: Honorable Mayor and City Council THRU: John B. Bahorski, City Manager FROM: Pamela Arends -King, Director of Administrative Services /Treasurer SUBJECT: Business License Update SUMMARY OF REQUEST: Staff requests Council receive and file the business license update report and not implement the CPI increase to the business license tax for fiscal year 2005 -06. BACKGROUND: At the April 25, 2005 Council Member Antos requested staff to give Council an update on the status of the City's business licenses primarily in the area of independent contractors. Over the past three years the Finance Department has worked diligently at the request of City Council and concerned residents of Seal Beach to "clean -up" business licenses and ensure all businesses doing "business" in the City had a business license and paid the business license tax as required according to the Municipal Code. Due to staff "cleaning up" business licenses the following questions have been raised: Why is the Municipal Code being enforced and why wasn't I charged a business license before? As the current staff was not employed by the City or in the capacity to make decisions about the enforcement of the Municipal Code regarding business licenses it is unclear as to why businesses were not actively pursued to ensure the business license tax was paid prior to May 2001. Before May 2001 the City's business license software was basically non - functioning therefore with the installation of the Springbrook finance software all business license records had to be reviewed and manually entered into the software. This was a time consuming process and with only a part-time employee available to complete this review and implementation into the new software. Many discrepancies were discovered and resolved. It was not until 2003 before everything was complete. With prior records cleaned up, staff is now concentrating ensuring all businesses doing businesses within Seal Beach pay the business license tax. Agenda Item G May 9.2005 Business License Update How is staff identifying who needs a business license and why is an independent contractor required to have a business license? Staff identifies who needs a business license based on the Municipal Code. Code Section 5.10.015.A provides that every person carrying on any business in the City must obtain a license. The City's interpretation of "person ", in turn, has consistently included "individuals transacting and carrying on any business in the City, other than as an employee. Has the requirement for independent contractors to have a business license new or has it always been in the Municipal Code? The requirement for independent contractors to have a business license has always been in the Municipal Code. Why are real estate agents required to have a business license when the State of California real estate license classifies the agents as salespersons and must belong to a brokerage? The fact that real estate agents must belong to a brokerage does not alter their status as self - employed individuals, because the statutes requiring real estate agents to belong to a brokerage expressly recognize that they can be either independent contractors or employees, depending on the nature of the arrangement between the agent and the broker. According to the City's Municipal Code independent contractors must obtain a business license but employees of a broker would be covered by the broker's business license. (Muni. Code Sec. 5.10.060.B) Therefore, real estate agents and or realtors that classify themselves as independent contractors for income tax purposes must pay the City business license tax required of independent contractors Are real estate agents being singled out in the Old Town area of Seal Beach? Real estate agents are not being singled out in the Old Town area of Seal Beach. Through information gathered from the State's licensing agency all realtors listed with brokers located within Seal Beach were sent business license notifications. How many business licenses are outstanding at this time? As of May 2001 the number of active businesses staff was aware of. and billed for the business license tax was 975. As of May 3, 2005, the number of active businesses that staff is aware of and billed for business license tax is 1,688. Currently of the 1,688 active businesses that staff has billed there are 291 businesses that have not paid the business license tax totaling $75,460. Of this amount, $36,305 May 9, 2005 Business License Update represents licenses billed in the last 30 days. Businesses that do not pay the business license tax are now sent to collections if payment is not received and or there is no response from the business within 120 days. This additional business license revenue is used for the many capital improvements being constructed in Seal Beach. Who else pays the business license tax? As stated earlier, Muni. Code Section 5.10.015.A provides that every person carrying on any business in the City must obtain a license. Different types of businesses paying the business license tax are dog walkers, caregivers, commercial rentals and residential rentals, fitness trainers, home occupations, attorneys, real estate agents, wholesale brokers, tax preparers and palm readers. Staff works with other licensing agencies, the Franchise Tax Board, State Board of Equalization, advertisements, canvassing commercial areas, word of mouth, and the Internet to identify and locate businesses. How are contractors identified and do they pay a business license? All contractors who pull a building permit are required to pay for a contractor's business license regardless of the size of the job and the amount of time the contractor will be spending time in Seal Beach to complete the job. The current contractors business license fee is $178. What happens when a business does not pay the business license tax? Annual business license tax are delinquent if not paid by July 30 except annual business license taxes paid on gross receipts which are due by August 30 For new businesses the business license tax is due on the 30 day after commencement of business. A 25% penalty is added to the business license tax remaining unpaid 30 days after it becomes due. A penalty of 50% of the tax amount is added to each tax remaining unpaid 60 days after it becomes due. A penalty of 100% of the tax amount shall be added to each tax remaining unpaid 90 days after it becomes due. According to the Municipal Code all penalties shall be cumulative. Staff sends a business a notice after each 30 day delinquency occurs. After a business receives the third and final notice it is given 30 days to pay. Staff is now sending businesses who do not pay the business license tax plus accumulative penalties after the payment period for the third notice to collections. Code Section 5.10.150 C states the amount of any business license tax and penalty imposed shall be deemed a debt to the City and the City may pursue any legal remedy available for the collection of any delinquent business license tax, penalties and administrative costs incurred in connection with collecting the tax. May 9, 2005 Business License Updatc How much is the current business license tax? The Municipal Code identifies the amount of the business license tax based on the type of business. There is a base tax that is used to determine the amount of business license tax depending on the type of business. The current flat base tax is $178. The Code gives the Council the option to raise the base tax by the Consumer Price Index on an annual basis. Manufacturers pay their business license tax based on gross sales. FISCAL IMPACT: As just mentioned, the Municipal Code gives the Council the option to raise the base tax by the Consumer Price Index on an annual basis. The current flat base tax is $178 and the increase in the Consumer Price Index is 3.8 %. With the CPI increase the current flat base tax will go from $178 to $185 for fiscal year 2005 -06. With staff's dedication to ensuring the Municipal Code regarding business licenses is being enforced and the number of business licenses has increased significantly and continues to increase and concerns from businesses because the Municipal Code is being enforced, staff believes that to compromise on this issue Council should not implement the CPI increase and keep the flat base tax at $178 for fiscal year 2005 -06. RECOMMENDATION: Council receive and file the business license update report and not implement the CPI increase to the business license tax for fiscal year 2005 -06. Pamela Arends -King Director of Administrative Services /Treasurer NOTED AND APPROVED: John B. Bahorski City Manager c AGENDA REPORT DATE: June 13, 2005 TO: Honorable Mayor and Council Members THRU: John B. Bahorski, City Manager FROM: Pamela Arends -King, Director of Administrative Services /Treasurer SUBJECT: Business Licenses SUMMARY OF REQUEST: Staff requests Council receive and file the business license report. Staff also requests that if Council determines a tiered system of business license tax based on gross receipts /revenues or by another method is appropriate a financial consulting firm be hired to determine the financial impact to the General Fund before the ordinance is adopted. Following a financial analysis if Council determines a tiered system for business license tax based on gross receipts /revenues is appropriate staff will return with an ordinance amending the existing code, a budget amendment for additional funds to hire staff and a recommendation for the necessary budget cuts that may be necessary to match the actual loss of revenue. Staff also requests Council give direction to have staff increase the business license tax by the CPI for fiscal year 2005 -06. BACKGROUND: At the May 23, 2005 meeting, staff presented an update on the status of business license tax primarily in the area of independent contractors. Based on the comments of the members of the audience, Council requested staff research the feasibility of having a tiered approach to the business license tax based on gross receipts /revenues. The following questions address the issue of implementing a tiered business license tax based on gross receipts /revenues and address recurring questions that have been asked since the prior meeting. Why is the City charging businesses a new business license tax without getting the vote of the people as Prop. 218 requires? The City is not charging businesses a new business license tax. The business license tax was established many years before Prop. 218 was voted in by the public. Agenda Item 0 0 June 13,2005 Business Licenses If the City amends its business license ordinance to tie the business license taxes to gross receipts /revenues, would the amendment be subject to Prop. 218? Yes. An amendment to the business license ordinance that tied business license taxes to gross receipts /revenues would be subject to Prop. 218. Could the City lower the existing business license tax and or implement a tiered system without triggering Prop. 218? Yes. The City could implement a tiered system and or lower the existing business license tax without triggering Prop. 218 if the maximum amount for the tiered system does not exceed the existing tax. What type of tiered system could the City implement in regards to the business license tax? If Council desires a tiered system staff suggests the following tiered system: If a business has no annual gross receipts /revenues the business would not have to pay any business license tax. If a business' annual gross receipts /revenues are greater than zero and less than $10,000 the business license tax would be 33% of the applicable business license tax for that business. If a business' annual gross receipts /revenues are greater than $10,000 but less than $20,000 the business license tax would be 66% of the applicable business license tax for that business. If a business' annual gross receipts /revenues are greater than $20,000 the business license tax would be 100% of the applicable business license tax for that business. Please note the receipts /revenues are "gross" not "net ". Will it take more staff time to implement this tiered business license tax system? Yes. Currently the City allocates a portion of one full -time staff person's time to do business licensing. This person has other critical accounting functions that need to be completed besides the function of monitoring and issuing business licenses. Through out the fiscal year the staff person's work schedule is to work 20 hours a week on business licenses and 20 hours a week completing critical accounting functions. During the business license renewal period the staff person spends up to 30 hours a week for at least 2 months therefore less time is spent on critical accounting functions. The staff person will also be responsible for sending the required information forms that need to be filled out by businesses to meet NPDES water quality issues. Staff estimates that with the implementation of the tiered system at least an additional 10 hours a week would need to be devoted to processing and monitoring business licenses during the fiscal year leaving only 10 hours a week to complete critical accounting functions. During business license renewals the staff person would spend a minimum of 40 hours a week for at least 2 '/2 months, therefore without staff available the critical accounting functions would not be completed. June 13,2005 Business Licenses How will businesses prove what their gross receipts /revenues are? The businesses would need to provide the City a copy of its tax return for the prior calendar year. For example, the City's next fiscal year is July 1, 2005 through June 30, 2006. The next business license cycle is July 1, 2005 through June 30, 2006. If a business qualifies for a reduced business license tax, that business would have to submit to the City a copy of it's 2004 federal income tax return it filed with the Internal Revenue Service (IRS) and or a copy of the businesses audited financial statements for its fiscal year ending in 2004. If a business submits a copy of its federal income tax return they must also submit a signed form giving the City permission to request a copy of their income tax return from the Internal Revenue Service to verify the return submitted to the City is the same as the return filed with the IRS. Will the City's business license tax revenue decrease with the implementation of the tiered system? Yes. Business license tax revenue will decrease. At this point staff is unable to determine how much revenue the City will lose because staff does not have any information regarding the average gross receipts /revenues the businesses licensed with the City are. Staff does know it sent out 250 business license applications to real estate agents. According to real estate brokers that have spoken publicly only 13% of those agents sale 90% of the properties available for resale. If that is the case 217 real estate agents would probably qualify for the 66% tax rate which is $117. Total minimum estimated loss in revenues would be $11,482. This is just one small segment of the business license population that pays only the base tax rate and does not include the many small businesses licensed that pay more than the base rate that would probably qualify for at least the 66% tax rate. What is the financial impact to the City' General Fund if a tiered system for business license tax revenue were implemented? Staff does not know what the financial impact to the City's General Fund would be if a tiered system for business license tax revenue were implemented. It is likely that revenues will decrease and expenditures will increase because more staff will needed to be hired to handle the additional work created with the new system. A majority of the businesses doing business within the City of Seal Beach are small businesses therefore the probability of up to 35% of those businesses could possibly qualify for the reduction in business license tax. The City's fiscal policy is "ongoing expenditures should not exceed ongoing revenues ". With the tiered system, ongoing expenditures will exceed ongoing revenues, therefore a decision would have to be made as to what expenditures would be eliminated if the tiered system was adopted by the Council. Because the financial impact to the City's General Fund is unknown if the tiered system were implemented staff requests Council approve hiring financial consultants to perform an analysis on the financial impact before a decision is made to change the business license tax ordinance to a tiered system. 1 . -i . June 13,2005 Busincss Licenses Would contractors qualify for the tiered system? Yes. As the Municipal Code is written contractors would qualify for the tiered system unless the ordinance is written in such a way to exclude contractors form the tiered system. The implementation of the tiered system for contractors would be very difficult and time consuming for the building department. Currently no contractor can pull permits unless they have purchased a city business license. With the tiered system the contractor would have to submit the appropriate paperwork that would need to be reviewed by the finance department. This would be very time consuming and cause many delays in the building permit process. If the contractors business license is tied to the tiered system is could also mean a material loss in revenue as the City issues an average of 590 contractor business licenses each year. FISCAL IMPACT: At this time staff is unable to determine the fiscal impact on the General Fund due to lack of adequate information, however any loss of revenue to the General Fund would require corresponding reduction in expenditures in order to meet a balanced budget. Staff concludes the implementation of the tiered system based on gross receipts/ or revenues for the business license tax would require additional staff the City will experience a loss of revenue. RECOMMENDATION: Council receive and file the business license report. Staff also requests that if Council determines a tiered system of business license tax based on gross receipts /revenues or by another method is appropriate a fmancial consulting firm be hired to determine the financial impact to the General Fund before the ordinance is adopted. Following a financial analysis if Council determines a tiered system for business license tax based on gross receipts /revenues is appropriate staff will return with an ordinance amending the existing code, a budget amendment for additional funds to hire staff and a recommendation for the necessary budget cuts that may be necessary to match the actual loss of revenue. Staff also requests Council give direction to have staff increase the business license tax by the CPI for fiscal year 2005 -06. Pamela Arends -King Director of Administrative Services /Treasurer NOTED AND APPROVED: John B. Bahorski City Manager