MEMORANDUM. Date: February 22, Honorable Mayor and City Council Members Warren Hutmacher, City Manager Justin Kirouac, Assistant City Manager

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1 MEMORANDUM Related Policy: Business Taxes and s Date: February 22, 2016 To: From: Honorable Mayor and City Council Members Warren Hutmacher, City Manager Justin Kirouac, Assistant City Manager Subject: Business License s - Updated Policy Summary: Business License s represent a portion of Schedules B & C of the City of Johns Creek Schedule. The taxes and fees are affixed to various business practices in the city; however, these taxes and fees are designed to serve different purposes. These polices can be divided into the following sections: 1. Business Taxes and s Occupation Tax Certificates for all businesses (including home-based businesses). Most businesses (see exceptions below) are taxed in Johns Creek on a gross receipt formula applied to a tax rate based on the business s fee classification profitability ratio (Standardized from NAICS Code) with a $50 flat rate for the first $20,000 of gross receipts and an additional $13 per employee and a $75 administrative fee. Financial Institutions are taxed in accordance with state law requirements. Professional Practitioners. Certain professional practitioners (as identified in State Law) such as engineers, architects, lawyers, doctors, amongst others, are eligible to pay a $400 flat fee in lieu of the gross receipts. Insurers s. State Law limits Insurers to a maximum of $150 License. Industry-Specific Regulatory s Certain businesses, such as Door-to-Door Salesmen, Adult Entertainment, Massage Therapy, Escort Services, and Taxicabs have either permit or additional regulatory fees associated with them. 2. Alcoholic Beverage Licenses s and Taxes Alcoholic Beverage License s. This fee is associated with businesses selling alcohol, including consumption on premises, retail package and wholesale. There are also permits associated with catering and pouring. Alcoholic Beverage Excise Tax. A 3% tax is assessed on all liquor by the drink sales. 3. Other s

2 Elections. A 3% fee of the total salary of the office sought is required for candidates. Animal Control & Parks and Recreation. Penalties associated with violations found in the City Code for the associated chapters are included in the policy. Analysis: Business Taxes/s: Municipalities may levy and collect occupation taxes on businesses and practitioners that have an office or location within the local government jurisdiction. There is a significant distinction, however, between occupational taxes and regulatory fees. Occupational taxes are levied with the intent of raising revenue, similar to ad valorem taxes on real and personal property. Regulatory fees, by comparison, may not be used for the purpose of raising general revenue and are imposed by the government for the purpose of covering the cost of business regulation. There are four different tax schemes available to cities under state law (Number of Employees, Profitability Ratio, Gross Receipts, and Flat or a combination thereof) and the Johns Creek employees a combination of number of employees with gross receipts. This fee schedule was adopted from the Fulton County schedule that existed prior to incorporation. Businesses are taxed a flat rate of $50 for the first $20,000 in gross receipts and then in accordance with their classification code and assigned a tax rate based on $1,000 of gross revenue. The general Occupational Tax Certificate schema is the most discretionary of the business tax/fees in that many of the other classifications are limited by state law. In accordance with state law, several businesses known as Professional Practitioners, may elect to pay a $400 flat fee rather than the tax based on gross receipts. Regulatory fees, by comparison, are payments required by a local government to fund the government s regulation of an occupation, profession or business. For example, licensing fees for a massage establishment would include administrative review of the location in accordance with the regulations of the massage ordinance, inspections and continued compliance with operational regulations. A comparison of Occupational Tax methods by jurisdiction is shown below: City OTC Model Basic Structure Additional s Home-Based Alpharetta Duluth Johns Creek Roswell Sandy Springs Suwanee Based on FTE's Gross Receipts/Profitability Ratio Gross Receipts/Profitability Ratio/FTE Based on FTE's Gross Receipts/Profitability Ratio/FTE Gross Receipts/Profitability Ratio $ $ $ $ and above - $150 plus $7 per FTE N/A Flat $90 % Based on business code $50 Admin Gross Receipts $50 for first $20,000 plus % based on business code $75 Admin $13 per FTE Gross Receipts $95 + $5 per employee $50 Admin $100 Regulatory Flat $100 $50 for first $20,000 plus % based on business code $75 Admin $13 per FTE Gross Receipts % Based on business code $50 Admin Gross Receipts In an examination of Johns Creek and five surrounding jurisdictions, two tax based on number of employees and two tax on gross receipts and two tax based on a combination of gross receipts and employees. Additionally, four jurisdictions tax home-based businesses the same as store-front

3 businesses, while two utilize a flat fee for home-based businesses. Johns Creek s fee structure is similar to Duluth and Suwanee and identical to Sandy Springs. It should be noted that the primary difference between Duluth/Suwanee and Johns Creek/Sandy Springs is a six vs. twenty-four (respectively) business tax classification under the profitability ratio for businesses. Alpharetta and Roswell s utilization of employee-based tax schema typically results in a lower tax number. In addition to the revenues generated for the city, it is important to consider the effect of taxes on businesses ability to operate. In general, municipal occupation taxes are considered to be de minimis on the overall operations of a business as they represent a fractional cost of the overall business expense. While Alpharetta offers lower business taxes than Johns Creek, it offers a higher ad valorem rate and substantially higher rent rates. The following examples illustrate the difference: Business 1: Computer Equipment Wholesale Square t 1,500 Taxable Gross Receipts $2,480,000 Number of Employees 70 Johns Creek Alpharetta Annual Rent $27,000 $36,000 Annual OTC $4,674 $640 Total Expense $31,674 $36,640 Business 2: Residential Construction Company Square t 13,866 Taxable Gross Receipts $980,000 Number of Employees 60 Johns Creek Alpharetta Annual Rent $249,588 $332,784 Annual OTC $1,125 $570 Total Expense $250,713 $333,354 Business 3: Other Computer Related Services Square t 25,000 Taxable Gross Receipts $4,000,000 Number of Employees 112 Johns Creek Alpharetta Annual Rent $450,000 $600,000 Annual OTC $7,725 $934 Total Expense $457,725 $600,934 While it is important for the city to maintain its revenue streams, it wants to be mindful of ensuring that its taxes are not overly burdensome on the businesses and do not prevent barriers of entry into the city. A graph showing the typical tax burden, taken from Business 1 (above), further illustrates the relatively minor impact of the current local tax.

4 Local OTC 2% Taxes Paid State Tax 15% Federal Tax 83% While business taxes do play a role in site selection criteria for companies, the local tax rate is generally not factored especially when considering the states tax rates can vary from 0 to 9 percent. Johns Creek Advantage and the Johns Creek Chamber of Commerce were queried on whether the business taxes or fees amount had been discussed amongst the membership as excessive or stifling to business success. Both organizations stated that their respective memberships had not indicated the current tax/fee amounts as being burdensome. JCA also explicitly asked this question of twelve local businesses during recent contact meetings and all twelve indicated that the taxes were not inhibiting growth or their ability to operate. This does not necessarily indicate 100% satisfaction with the current taxation levels but does indicate the levels are generally not creating barriers to economic success. Comments were received; however, indicating a desire for increased online fee and form submission as a means to expedite the process and provide greater convenience. Alcohol s/taxes The majority of the items in the fee schedule related to alcohol concern licensing requirements and the enforcement of requirements. A summary of the city s fees, in comparison to surrounding jurisdictions is found below. Although jurisdictions have different permutations in the alcohol licensing fee structure, Johns Creek s methodology remains generally consistent with surrounding jurisdictions. It should be noted that Johns Creek s Alcohol License Application applies to the initial year s application with an annual renewal fee of $100. Johns Creek Roswell Milton Doraville Alpharetta Sandy Springs Dunwoody Duluth Suwanee Alcohol License Application $1, $ $ $ $ $1, $100/$200 * $ N/A Consumption on the Premises (COP): Beer $ $ $1, $ $ $ $ $ Wine $ $ $1, $ $ $ $ $ Beer & Wine $1, $1, $1, $2, $1, $1, $ $1, $1, Beer/Wine & Distilled Spirits $4, $3, $4, $4, $3, $4, $3, $6, Distilled Spirits $3, $3, $3, $3, $5, Brewpub $4, $ Tavern $4, Wine Tasting Rooms/License $ $75.00 Sunday Sales $ $ $1, $ $ $1, Additional Bar $1, $1, $ $ $ Retail Package: Beer $ $ $ $1, $1, $ $ $ $ Wine $ $ $ $1, $1, $ $ $ $ Distilled Spirits $3, $2, $3, $3, $2, $3, $3, $5, $5, Beer & Wine $1, $ $ $ $1, $1, Beer/Wine & Distilled Spirits $3, $3, $3, $4, $3, $6, $6, (*) $100 Beer/Wine $200 Liquor Admin All A comparison between cities is difficult because each city opts to structure the fees in a different manner; however, Johns Creek resides around the median point for alcohol fees.

5 1. Financial Impact: Occupational taxes contribute approximately $1.9 million towards the Fiscal Year 2016 General Fund Budget, representing a little over 3% of the General Fund. Financial Institutions, which are taxed independently, contribute $117,500 towards the General Fund Budget. The alcohol excise tax is projected at $822,297 in revenue. Alcoholic Beverage Licenses represent $407,500 in revenue. Any change to the tax scheme could have a significant impact on the budget. Should the Council elect to pursue any of the alternatives listed below, the financial impact should be considered and weighed against other factors. The city collected $308,450 in Occupation Taxes from home-based businesses in Were a flat $100 tax to be assessed, revenue would decrease to $127,100. If all businesses were taxed on a flat $100 fee (as an example) approximately $1.65 million in revenue would be lost. Staff s recommendation for consolidating the 24 taxation tiers into 6 will have marginal overall impacts on the revenue and individual businesses may experience marginal increases or decreases in their overall tax bill, depending on the classification. 2. Alternatives: State law enumerates four different tax schemes that could be utilized in the assessment of business taxes. The city s method must be derived from one the following four methods or a combination thereof: Number of Employees. Taxes based on number of employees would calculate the tax based on the number of full-time employees multiplied by a given tax rate. A city may adopt more than one rate of taxation per employee, for example a regressive rate table could be applied so that the per-employee rate decreases as the number of employees increase. Profitability Ratio. Taxes based on profitability ratio would calculate by dividing net income by gross receipts and then applying a tax rate. Profitability ratios are found based on standardized (typically NAICS) code classifications to divide businesses into subgroups. Gross Receipts. Cities may utilize the gross receipts of a business to levy occupation taxes. Often gross receipts are used in combination with profitability ratios so that the businesses are classified according to standardized codes. Flat. City may impose a flat fee occupation tax on businesses. Under this scheme, all businesses must pay the same amount for each office or location. Johns Creek currently utilizes a combination of the first three methodologies in creating its business tax numbers. Additionally, the city could opt to alter any of the taxation rates. Similarly, the city could look to alter the alcohol fee amount. The primary decision required of the City Council is the desired outcome of the business tax. 3. Committee or Staff Recommendation (Updated): The current fee schedule utilizes gross receipts, profitability ratio and number of employees to reach the final taxation amount. After reviewing the options and examining the effect on businesses, staff recommends consolidating the existing 24-tiered tax rates into a simplified 6-tiered system that conforms more closely to the other cities utilizing the industry profitability ratio to determine the occupational taxation number. This change would lower the top bracket of taxation from $2.20 per $1,000 of gross revenue to $1.85 per $1,000 of gross revenue. This change to a significantly simplified tiered system would create a more easily understood method for businesses to utilize and facilitate the transition to online submittal once the software system allows. A review of the existing OTC fees indicates that the

6 total change in revenue for businesses would be approximately $5,000. If the goal by the Council is to reduce the taxation level, a revised schedule will be created to that end and the tier multiplier can be adjusted. Staff does not recommend any additional changes to the alcohol-based fees or excise taxes at this time as the fees remain generally consistent with surrounding jurisdictions with the exception of removing the $1,000 fee for additional bars. This change would bring Johns Creek s structure more in line with the surrounding jurisdictions. Any change to the fee schedule will require a public hearing prior to approval. Additionally, staff also recommends pursuing as many online payment options as possible to further improve efficiency for both the city and businesses. 4. Recommended Review Cycle: Staff recommends reviewing the fee schedule every five years.

7 CITY OF JOHNS CREEK FEE SCHEDULE B BUSINESS LICENSE FEES FEES Non-refundable administrative fee for handling and processing business occupation tax registrations - $75 ( (d)) Flat rate of $50 for the first $20,000 of gross revenue, and $13 per employee. Gross revenues above $20,000 are taxed using a fee class table based on profitability. The fee class table ranges from $0.50 to $2.20 $1.85 per thousand dollars of gross revenue based on the SIC Code of the business. ( (c)) Professional Practitioners listed below may select to pay a flat fee of $400 or compute their fee using the Gross Receipts methods and the appropriate class fee. (11-1-9) OCCUPATION TAX (Gross Receipts Tax) (11-1) Class Applied Psychology Class 63 Law 135 Marriage and Family Architecture Class 145 Therapist Class 74 Chiropractor Class 63 Massage and Physiotherapy Class 63 Civil Engineering Class 145 Mechanical Engineering Class 1 Dentistry Class 63 Medicine Class 63 Electrical Engineering Class 145 Optometry Class 63 Embalming Class 105 Osteopathy Class 63 Funeral Director Class 105 Podiatry Class 63 Hydraulic Engineering Class 145 Professional Counselors Class 74 Class Land Surveying Class 145 Public Accounting 145 Landscape Architect Class 84 Veterinary Class 84 Penalty for failure to pay tax and fees when due, failure to file and application by 3/31 when the business/practitioner was in operation the preceding calendar year, and failure to register/obtain a occupation tax certificate within 30-days of the commencement of business. ( (a)) Delinquent taxes and fees ( (b)) 10 percent of the amount owed for each calendar year or portion thereof Interest at 1.5% per month FEE SCHEDULE B - Proposed 20166d ATTACHMENT Tracked changes Johns Creek Schedule B 1 of 4

8 BUSINESS LICENSE FEES (CONTINUED) FEES INSURERS FEES FINANCIAL INSTITUTIONS DOOR TO DOOR SALESMEN Type License $150 Type /Rate Tax on all depository financial institutions 0.25% of the gross receipts Minimum annual business license tax due for a depository financial institution $1,000 Type Penalty for violation of 11-5 Fine of not less than $25 nor more than $200 for each offense Type License $4,000 Advertising $1,179 ADULT ENTERTAINMENT FEES MASSAGE THERAPY ESCORT SERVICES TAXICABS Fire Department Investigation $30 Background Check $800 Permit New Employee $300 Permit Renewal For Employee $50 Background Investigations Employee (New and Renewal) $50 Penalty for failure to display the occupation tax certificate $50 Type License /Renewal License $250 Background Investigation $50 Type License /Renewal License $250 Background Investigation $50 Type Taxicab fee (per annum) $150 per each taxicab maintained or operated Driver s permit $50 FEE SCHEDULE B - Proposed 20166d ATTACHMENT Tracked changes Johns Creek Schedule B 2 of 4

9 ALCOHOL BEVERAGE LICENSE FEES, TAXES, AND PENALTIES FEES Type/License Type Investigation fee for all licenses (except below) $800 Investigation for prior valid 2006 Fulton County License holder $500 Beverage Fire Inspection s $30 Advertising (Should actual costs for legal ad exceed $200, applicant shall be responsible for those additional costs) Individual $300 Partnership $300 Corporation $300 (Note: For locations with valid 2006 Fulton County Licenses, the fee for 2007 will be $0 ALCOHOLIC BEVERAGE LICENSE FEES Temporary Licenses s (These fees are credited toward the license fee for permanent license issued within same calendar year.) Sale of distilled spirits for consumption on premise Package sales of Beer and Wine Sale of Beer and Wine for consumption on premise Wholesaler s or Distributor s License $500 $200 $250 $750 (Note: No temporary license permitted for package of sales of distilled spirits) Liquor $3200 Consumption on Premises Beer $650 Wine $650 Each Additional Bar $1000 Pouring Permit (Individual) $30 Liquor $3000 Retail Beer $400 Wine $400 Liquor $3500 Wholesale Beer $500 Wine $500 Distiller or Manufacturer $4000 FEE SCHEDULE B - Proposed 20166d ATTACHMENT Tracked changes Johns Creek Schedule B 3 of 4

10 ALCOHOLIC BEVERAGE LICENSE TAXES Excise Tax (A 3% excise tax is levied on all mixed drinks and is to be reported and paid monthly to the City of Johns Creek. An excise tax of.22 per liter on Liquor and Wine and.05 per 12 oz. container of beer is levied and is to be reported and paid monthly to Fulton County by wholesalers) ALCOHOLIC BEVERAGE LICENSE PENALTIES Alcoholic Beverage License renewal applications and payments are due November 15 of each year. Renewal applications and payments received between November 15 and December 15 are subject to a 10% late filing fee. Businesses failing to renew their alcoholic licenses prior to December 15 must reapply for an alcoholic beverage license OTHER FEES s Type ELECTIONS Candidate for Municipal Election 3% of the total salary of the office sought ANIMAL CONTROL PARKS AND RECREATION Penalties for violation of Chapter 5, Animal Control Penalties for violation of Chapter 8, Parks and Recreation Fine of $500 and/or imprisonment in jail for a period not to exceed 60 days, or both, for violations of this chapter guilty of a misdemeanor. Any person who violates the provisions of this chapter pertaining to a potentially dangerous dog will be fined not less than $150 for a second conviction and not less than $300 for a third conviction. Any person who violates the provisions of this chapter pertaining to a dangerous dog shall be guilty of a misdemeanor of a high and aggravated nature and will be fined not less than $500 for a second conviction and not less than $750 for a third conviction. Any person violating the provision of this chapter or harboring, assisting or protecting a person charged with or convicted of a violation of this chapter shall be punished by a fine not to exceed $250, by a sentence of imprisonment not exceeding 90 days, and to community service for a period not exceeding 90 days, either or both of such fines and imprisonment, or community service, at the discretion of the Municipal Court Judge. FEE SCHEDULE B - Proposed 20166d ATTACHMENT Tracked changes Johns Creek Schedule B 4 of 4

11 SCHEDULE OF FEE CLASSES & RATES The business occupation tax is based on the total gross receipts of the business in combination with the most current profitability ratio, number of employees and flat rate of $50.00 per the first $20, of gross revenue. The employee tax rate is $13.00 from 0 to 1 employee and $13.00 for each additional employee. An administrative fee of $75.00 is non-refundable and is levied on all applications except professional practitioners paying the professional flat fee. (See below) PROFESSIONAL PRACTIONERS Professional Practitioners may select to pay a flat fee of $ per practitioner or compute their fee using the gross receipts method. Class Profession Class Profession 135 Attorneys 63 Medicines 63 Osteopathy 63 Chiropractic 63 Podiatry 63 Dentistry 63 Optometry 63 Applied Psychology 84 Veterinary 84 Landscape Architecture 63 Massage & Physiotherapy 74 Social Workers 74 Professional Counselors 74 Marriage & Family Therapist 105 Embalming 105 Funeral Directing 145 Civil Engineering 145 Mechanical Engineering 145 Hydraulic Engineering 145 Electrical Engineering 145 Architecture TAX RATES The following rates should be multiplied times all gross receipts exceeding $20, Class Tax Rate Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Common Industry Classes OCCUPATION DESCRIPTION NAICS CODE FEE CLASS Interior Decorating (Design) New Single Family Housing Construction Residential Remodelers Grocery Stores General Merchandise Retailers Gift, Novelty & Souvenirs Retailers Investment Advice Real Estate Investments Trust Lessors of Residential Bldgs. & Dwellings Office of Real Estate Agents & Brokers Activities Related to Real Estate Residential Property Managers Nonresidential Property Managers Custom Computer Programming Services Computer Consultants Other Computer Related Services Admin. Mgmt. & Gen. Mgmt. Consulting Ser. Business & Marketing Consulting Other Mgmt. Consulting Services Corporate, Administrative & Holding Offices Janitorial Services Landscaping Services Full Service Restaurants Limited Service Restaurants Hair Salons Nail Salons Dry Cleaning & Laundry Services

12 STATE OF GEORGIA FULTON COUNTY FEE SCHEDULE C LICENSE FEES FOR INSURERS Section 1. Insurers License s There is hereby levied for the year 2007 and for each year thereafter an annual license fee upon each insurer doing business within the City of Johns Creek, Georgia in the amount of One Hundred Fifty Dollars ($150). For each separate business location in excess of one not covered by Section 2, which is operating on behalf of such insurers within the City of Johns Creek, Georgia, there is hereby levied a license fee in the amount of One Hundred Fifty Dollars ($150). For purposes of the application of these fees, the term insurer means a company which is authorized to transact business in any of the classes of insurance designated in O.C.G.A. Subsection Section 2. License s for Insurers Insuring Certain risks at Additional Business Locations For each separate business location, not otherwise subject to a license fee hereunder, operated and maintained by a business organization which is engaged in the business of lending money or transacting sales involving term financing and in connection with such loans or sales offers, solicits or takes application for insurance through a licensed agent of an insurer for insurance said insurer shall pay an additional license fee of Fifty Two and 50/100 s ($52.50) per location for the year 2007 and for each year thereafter. ADOPTED FEE SCHEDULE C 2007 Page 1 of 1