CITY OF SIMI VALLEY MEMORANDUM

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1 CITY OF SIMI VALLEY MEMORANDUM AGENDA ITEM NO. 8A November 14, 2016 TO: FROM: City Council Department of Administrative Services SUBJECT: REQUEST FOR DIRECTION REGARDING CONTINUING THE TEMPORARY BUSINESS TAX RATE WAIVER FOR CERTAIN BUSINESSES IN THE CITY OF SIMI VALLEY STAFF RECOMMENDATION Staff recommends extending for one year through December 31, 2017, the waiver of Business Tax for businesses operating in Simi Valley that are not subject to flat tax amounts and have gross receipts of $300,000 or less. CITY MANAGER S RECOMMENDATION The five-year waiver of the Business Tax is scheduled to end on December 31, The City Manager is requesting City Council consideration to extend the waiver for one year to December 31, BACKGROUND AND OVERVIEW At its December 12, 2011 meeting, the City Council adopted Resolution No providing a five-year waiver of Business Tax beginning with the 2012 calendar year for businesses operating in Simi Valley that are not subject to flat tax amounts and have gross receipts of $0 to $300,000. Without an extension, the tax waiver is scheduled to sunset, and the Business Tax will be reinstated effective January 1, 2017, for those businesses with gross receipts of $0 to $300,000 as set forth in the applicable Business Tax rate resolutions. Attachment A (page 4) provides a history of the City s Business Tax ordinance. The origination of the tax waiver was based in part on a June 20, 2011, recommendation from the City s Ad Hoc Fiscal Advisory Committee advocating that the City, "Minimize the Business Tax burden through competitive pricing of all businessrelated fees and taxes." Council s adoption of the five-year waiver of Business Tax reflects its support of the Committee's desire for Simi Valley to send a business- friendly message to the community. Without the waiver, the tax for a business with gross receipts from $0 to $20,000 is $15, and the tax for a business with gross receipts from $20,001 to $300,000 is $50. On April 13, 2015, the Council approved updates to the City s Schedule of Service Charges which included the implementation of a Business Registration fee that went into effect July 1, The registration fee is separate from the actual Business Tax, and it serves to recover a small portion of the staff time and materials costs for annually

2 2 registering businesses. The Business Registration fee is $78 per new business with an address in Simi Valley, and $35 per new business with an address outside of the City. For annual renewals thereafter, the Business Registration fee is $15. During the current tax waiver period, an established business not subject to flat tax amounts and with gross receipts of $0 to $300,000, or less, is required to pay only the business registration fee of $15. If the business tax waiver sunsets after December 31, 2016, that same business with $300,000 in annual gross receipts will be obligated to pay $65: $50 Business Tax plus $15 Business Registration Fee. Fiscal Impact From July 1, 2015 through June 30, 2016, the City collected approximately $182,000 in Business Registration fees for almost 9,200 business certificates issued. This equates to just under $20 per certificate. According to the City s 2015 fee study, it takes.67 hours to register a new business. Based on staff time spent to issue Business Tax notices, collect the tax due, and issue a Business Tax Certificate via paper, the City s cost is $59.68 per business. Implementation of an online Business Tax renewal option in 2013 has served to reduce some staff costs required to process Business Tax registrations since businesses can now submit and pay online and independently print their own certificates. As more businesses utilize this option, the more cost effective the registration process becomes. In addition to this business process improvement, adoption of the Business Registration Fee has served to offset some staff costs associated with issuance of Business Tax certificates. A revenue analysis for fiscal years and shows that approximately 7,000 businesses were eligible for the Business Tax waiver. It is estimated that if the waiver were not in place, the City would have received additional General Fund tax revenues of over $200,000 annually. According to the California State Controller s Office, for Ventura County cities business tax activity in fiscal year , Simi Valley s per capita Business Tax revenue is just below average, the total Business Tax revenue is above average, and as a percentage of general revenues, the Business Tax revenue is average. A multi-year comparative history of Ventura County cities Business Tax statistics is provided in Attachment B, page 8. FINDINGS AND ALTERNATIVES The City's Business Tax rate, when compared to taxes and fees charged by other cities in the region that impact businesses, is comparable, and the Business Registration fee program implemented July 1, 2015 has served to offset some General Fund revenue loss associated with the Business Tax waiver. To maintain a business-friendly environment, it is recommended that the City extend through December 31, 2017 the current Business Tax waiver on businesses with gross receipts of $0 to $300,000.

3 3 The following alternatives are available to the City Council: 1. Extend for one year through December 31, 2017, the current Business Tax waiver on businesses with gross receipts of $0 to $300,000, and return on a future date with a resolution for City Council approval to implement said extension; 2. Allow the current Business Tax waiver on businesses with gross receipts of $0 to $300,000 to sunset on December 31, 2016; 3. Extend the current Business Tax waiver on businesses with gross receipts of $0 to $300,000 for a period longer than one year from December 31, 2016, and return on a future date with a resolution for City Council approval to implement said extension; 4. Provide staff with further direction. Staff recommends Alternative No. 1. SUGGESTED CITY COUNCIL MOTION I move to extend for one year through December 31, 2017, the current Business Tax waiver on businesses with gross receipts of $0 to $300,000. SUMMARY The City s Business Tax waiver for those businesses with gross receipts of $0 to $300,000 is scheduled to end on December 31, Effective January 1, 2017, businesses previously eligible for the waiver will be required to pay both a Business Registration fee and a Business Tax. If the waiver is extended, the reduction in tax revenue is estimated to be $200,000. After direction from Council is provided, a resolution to amend Business Tax rates will be presented for Council approval at a subsequent Council meeting. Jody Kershberg, Director Department of Administrative Services Prepared by: Jody Kershberg, Director of Administrative Services INDEX Page Attachment A History of City Business Tax Ordinance....4 Attachment B State Controller s Business Tax Revenue Reports..8

4 4 ATTACHMENT A History of the Simi Valley Business Tax Ordinance October 10, City of Simi Valley Incorporated. December 22, As one of the first orders of business, the City Council requests that a Business Tax ordinance be drafted for business license tax based on gross sales to generate revenues for general use of the City. April 23, Staff report prepared for the City Council providing a projection of revenue generated through adoption of a Business Tax. May 4, Public Hearing held regarding proposed Business Tax ordinance, introduction of ordinance continued to May 11, May 11, Ordinance 52 introduced to create a business license tax with several flat tax categories as well as tax based on gross receipts, amended to delete a proposed 10% contribution to the Chamber of Commerce and modify fees for auto dealers. May 25, Ordinance 52 adopted. November 25, Ordinance 208 introduced, making 34 changes to the Business Tax Ordinance to clarify issues that have come up after implementation and to conform the Ordinance to the League of California Cities model on which the original Ordinance was based. An important change was to clarify how real estate transactions were handled in regard to Business Tax. Another change was to amend Section 2120 of the Ordinance [Now ] authorizing the Finance Director to waive Business Tax penalties and compromise claims where there are justifying reasons to do so. December 9, Ordinance 208 adopted. May 10, Ordinance 247 introduced, removing reference to "License", clarifying the Ordinance is a non-regulatory revenue generator, redefining "Business", adding exemption for minors, and modifying fees in the $0 to $20,000 gross receipts categories based on a survey of Business Taxes in Camarillo, Oxnard, Thousand Oaks and Ventura. June 14, Ordinance 247 adopted. November 16, Ordinance 377 introduced, deleting "real estate salesmen" from the list of professions allowed a flat tax rate of $50 under the Business Tax Ordinance based on a survey of seven cities in Ventura County. Real estate brokers continued to qualify for a flat annual Business Tax fee of $50. December 4, Ordinance 377 adopted.

5 5 February 2, Ordinance 463 introduced, clarifying the non-regulatory nature of the Business Tax, modifying a portion of the flat tax provisions to exempt solicitors for nonprofits, and removing the $50 flat tax for fortune tellers as an ordinance banning fortune telling in Simi Valley was also being introduced. February 9, Second Reading not approved as the fortune telling ban was also not approved. Ordinance 463 was modified and scheduled for first reading on February 23, February 23, Modified Ordinance 463 approved for first reading. Staff report presented to City Council identifying issues with Business Tax payment procedures, particularly in regard to the Business Tax collection process versus other regulatory processes such as Zone Clearance and the confusion generated by mixing the two. Staff recommends continuing face to face interaction with new businesses at the front counter to avoid confusion. March 9, Ordinance No. 463 adopted. September 14, Letter from Jack Spotts, President of the Chamber of Commerce, requesting that Business Tax for businesses such as real estate brokers be based on gross receipts by commission rather than home sale prices. October 10, Memo to the City Manager outlining survey results for Business Tax rate structure from sixteen cities. The memo states: "The majority of cities surveyed use gross receipts as the primary means of assessing Business Tax for real estate offices. Simi Valley's minimum Business Tax fee, and tax based on gross receipts under $200,000 was found to be 50% to 65% less than the average of the other sixteen cities. Business Tax based on gross receipts above $200,000 was found to be comparable to the average of the other sixteen cities October 24, Ordinance 556 introduced, eliminating flat tax for all businesses except location filming, amusement activities and swap meet vendors. Language added to transition flat tax businesses to gross receipts in three years per Chamber of Commerce recommendations. Page 3 of the staff report states: "All other businesses which currently pay a flat tax will pay based on their gross receipts. Agent or broker type businesses such as real estate brokers, stock brokers and travel agencies will determine their gross receipts by commission rather than gross income." October 26, Chamber of Commerce submits a letter requesting a two week extension of the Ordinance adoption to allow for more business community input. October 31, Second reading not approved and the Ordinance is referred back to staff for further input from the business community. The staff report indicates that meetings were held with the Chamber of Commerce and the Board of Realtors and that the proposed changes were based on the consensus of these meetings. The fee Resolutions with the Ordinance were not adopted and also continued to the December 5, 1983 meeting.

6 6 November 7, City Council has a lengthy discussion regarding the private nature of gross receipts information that could be divulged in a Business Tax audit and approved the formation of a Business Tax Committee to review the issues raised. November 9, Letters sent to 3,396 businesses requesting input on proposed changes to the Business Tax ordinance. November 14, Ordinance amendment introduced extending Business Tax filing deadline from January 1, 1984 to April 30, The City Council appointed an Ad Hoc Business Tax Committee as follows: Dr. Douglas Aberle; Jerry Hovell; Dr. Sanford King; Gordon Lundeen; Bill Morris; Jack Spotts; and Fred Tabor. November 15, Staff provides the Business Tax Committee with information on the current and proposed Business Tax Ordinance. November 19, The Business Tax Committee meets and develops Business Tax recommendations for City Council consideration. November 23, The Business Tax Committee submits recommendations to the City Council which includes a recommendation for flat rate tax for professionals (engineers, doctors, lawyers, dentists, real estate brokers, etc.). December 5, Ordinance 556 re-introduced. The staff report submitted to City Council recommends excluding from gross receipts those revenues for businesses that perform the services of agent or broker, except that portion of the gross receipts that represents commission or other income to the agent or broker. The staff report includes resolution establishing a flat tax of $37.50 for professionals (including real estate brokers). The resolution was not adopted, despite the recommendations of the Business Tax Committee. An amended Ordinance 556 is approved for second reading with all businesses converted from flat tax to a gross receipts tax grandfathered for a three year transition period. December 12, Second Reading of Ordinance 556. Revised resolution adopted with no flat rate tax for professionals (including real estate brokers/agents). Flat fee adopted for delivery trucks ($25), booths operating at fairs and special events ($10), Special Events ($100/day for-profit and $25/day non-profit), Location Filming ($100/day, waived for non-profit), and swap meet vendors ($2/day). There have been no changes to the Business Tax Fee Schedule since December February 13, City Council approves $13,600 for a Business Tax Compliance Program. October 1, City Council approves an additional $4,500 for a Business Tax Compliance Program. February 11, Ordinance 600 introduced to revise Business Tax Ordinance by exempting rental of one dwelling unit from Business Tax.

7 7 February 25, Ordinance 600 adopted. There have been no changes to the Business Tax Ordinance since February FY Staff conducts a Business Tax Compliance Program with MBIA MuniServices Company (MMC) generating an additional $100,000 in revenues. March 5, City Council approves $19,600 for a Business Tax Compliance Program with MBIA MuniServices Company (MMC) generating approximately $101,000 in new Business Tax certificate revenues. March 8, City Council approves a Business Tax Compliance Program with the State Board of Equalization generating approximately $212,000 in new Business Tax certificate revenues. December 12, City Council adopts a resolution to waive the Business Tax charged by the City for those businesses with annual gross receipts of $0 to $300,000 for the period of January 1, 2012 through December 31, April 13, City Council approves amendments to Schedule of Services Charges including Fee AS-193 New Business Registration: In-Town Business, $78 per business and Out of Town Business, $35 per business, and Fee AS-194 Renewal Business Registration $15. Business Registration fees to be effective July 1, 2015.

8 8 ATTACHMENT B California State Controller s Reports comparing Simi Valley business tax revenues to other cities in Ventura County.