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HomeMy WebLinkAboutCC AG PKT 2005-06-13 #OO rt V AGENDA REPORT DA'1 E: June 13, 2005 /� TO: Honorable Mayor and Council Members / g" 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 DD • ., 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 Tess 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 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. June 13, 2005 Business 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. J 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 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. 1 If Staff also requests Council give direction to have staff increase the business license fax by the CPI for ►A fiscal year 2005 -06. Pamela Arends -King Director of Administrative Services /Treasurer N • p D a D APPR D: 4,14 o o • ":. Bahorski Ci Manager