April 27, 2010 Ad Hoc Commission on Revenue Efficiency (CORE) Collections of Documentary Transfer Tax for the City of Los Angeles

Transcription

1 April 27, 2010 Ad Hoc Commission on Revenue Efficiency (CORE) Collections of Documentary Transfer Tax for the City of Los Angeles Martin Coren Partner HdL Coren & Cone My name is Martin Coren. I am a partner with HdL Coren & Cone. We provide property tax consulting to cities, redevelopment agencies, counties and special districts. Among our services are audits of the distribution of property tax revenues and documentary transfer taxes. We have been in business since Currently we have on-going property tax service contracts with 173 California cities, including 60 cities in Los Angeles County. Since 1995 we have been providing Document Transfer Tax audits, currently for 50 of the Los Angeles County cities. Through 2009 we have successfully recovered more than $5 million for these cities. Section et. seq. of the Revenue & Taxation Code authorizes cities and counties to impose documentary transfer taxes when an ownership interest in land is transferred (exclusive of the value of any lien or encumbrance remaining thereon at the time of sale). The typical transaction tax is $1.10 per $1,000 per the value of the property conveyed. When a city and county are both taxing the transaction, the $1.10 is split evenly between the city and the county. Some cities increase their tax. In those events a county retains the $1.10 and the city receives the amount collected above the $1.10. For example, the tax rate for the City of Los Angeles is $4.50 per $1,000. In Los Angeles County, properly administered, the total transfer tax would be $5.60 per $1,000 (A $300,000 transaction in Los Angeles County would generate $1,680 of transfer tax with $330 going to the County and $1,350 going to the City). Other cities in Los Angeles County with a higher rate include Culver City, Santa Monica, Pomona and Redondo Beach. We typically recover hundreds of thousands of dollars for these cities. From 2004 through 2006, we recovered the following amounts for these three cities Total Culver City 290, , , ,824 1,342,853 Redondo Beach 55,061 78, , , ,841 Santa Monica 73, , , , ,044 Total 419, , , , ,739 The transfer tax is imposed by the Los Angeles County Recorder s office when the deed, or other sale documents are recorded. The Recorder for the most part relies on the documents presented to determine the jurisdiction where the property is located. The location is usually identified by the title company or the escrow company. Since mailing addresses are not always exact, mistakes do occur. HdL Coren & Cone has developed an automated program which compares real estate sales activity data with the county data to verify matching transactions. Data not found on the county reports suggests a missed allocation to the correct city. We also compare the amount of transfer tax charged by the County Clerk Recorder with the tax rate of the jurisdiction of the property. We typically find errors of location and calculation. Cities can recover lost revenue for the current fiscal year and the three preceding fiscal years. We review transfers on a quarterly basis for our subscribing clients and submit the errors we identify to the County Recorder s office in Norwalk for review and correction. Typically 75% to

2 80% of the erroneous transactions we identify are confirmed and our clients recover revenue that had been diverted from them. We bill our clients a percentage of what they recover once they have received their revenue. Because of our experience in other LA County cities we performed a sample survey of the City of Los Angeles. Our early samples indicated that there could be as much as $1 million per quarter available for Los Angeles County to recover. Including the current year and the three previous fiscal years could mean as much as $16 million of recovered revenue for the City. The period under review included those years in the height of the real estate bubble. In June 2008 we were engaged by the City Controller s Office to review the sales transactions occurring between 2004 and 2008 within the City s borders to determine the correctness of the assignment of the Real Estate Transfer Tax receipts apportioned to Los Angeles. HdL Coren & Cone submitted the 2004 and 2005 calendar years exceptions to the Recorder for review. The 2004 calendar year was transmitted to the County Recorder in June, 2008 and the 2005 calendar year followed in August Two additional years 2006 and 2007 are awaiting transmittal. To date the Recorder s Office has provided responses related to the 2 nd Quarter in 2004 (sales between April and June 2004). Of the 325 documents submitted, 77 deeds were identified by the Recorder staff as relating to sales transactions that, due to exemptions or re-recordings, would not have generated a real estate transfer tax. Another portion of the listing received from the Recorder (86 deeds) contains notes from staff that state the system coded the deed correctly. In many of these instances the sale price of the property was not used to calculate the taxes owed. Were all of the sales noted in this manner taxed at a lower percentage or were the values reduced based on a lien or encumbrance prior to the tax being calculated? Many of these transfer tax collections were distributed between the City of Los Angeles and the County but at both a lower rate and in a distribution that wouldn t bear out the County s % ratio share of the tax collected in the City of LA. (County share $1.10/$1000; City share $4.50/$1000 = County/19.64%: City/80.36%) The balance of the reviewed submittals, 162 filings for the 2 nd Quarter of 2004, were on properties where the parcel number involved is located in a tax rate area assigned to the City of Los Angeles and the transaction should have generated revenue for the City of Los Angeles. We matched the parcel number with the tax rate area assigned to the parcel for verification of the correct jurisdiction for the tax due and the tax rate area assignment is included on the attached report. On 48 of these transactions the tax was sent to another jurisdiction based, in part, on the city name provided by the agent filing the deed. The Agreement for the Collection of Taxes between the City and County specifies in item 2. If for any reason County is unable to collect the tax when the instrument or writing is presented for recordation, County will record the instrument or writing if otherwise recordable under the law and will transmit to City copies of the documents in which the tax was unpaid at the time of recordation. The responsibility of thereafter collecting the tax shall be that of the City. In no case has the County made an attempt to contact the City when the incorrect tax or no tax was collected. In many instances with the property recordation identifying a city other than Los Angeles, the County has collected a tax of $.55/$500 of value (the other $.55/$1,000 should have been remitted to the incorrect city) however the County has retained the full $1.10/$1000 share as would be appropriate for any sale within a jurisdiction that had imposed an additional tax or if the sale were located in the unincorporated area of the County. In order for the County to retain the full $1.10, the sale would have had to occur in the cities of Los Angeles, Pomona, Redondo Beach, Culver City or Santa Monica or the county unincorporated area. If the sale was not in the unincorporated area, research should have been performed to identify the sales transaction as being in the City of Los Angeles and the City should have been notified as prescribed. 2

3 SUMMARY OF 2ND QUARTER 2004 RECORDER RESPONSE TO DTT SUBMITTAL FOR CITY OF LOS ANGELES General Comment from County Recorder Staff Number of Records HdLCC Calculatio n based on sale price Distributed to another jurisdiction Distribu ted to the County of Los Angeles Distributed to the City of Los Angeles City DTT not on face of document, DTT not collected 117 $223,698 $5,646 $47,027 $7,490 Also Comment : DTT NOT COLLECTED Revenues to Another City but TRA for parcel sold in LA City 45 $125,377 $51,243 $15,584 $0.00 (Document states- City other than LA) System Recorded Correctly, however 86 $595,590 $4,032 $49, $181,744 amount of DTT not related to sales price and County share not mathematically = to % Deeds that were exempt from DTT levy 77 n/a n/a $ n/a (some were re-recordings where original Deed may need to be submitted) Claim for this amount plus interest $349,074 Further explanation from county on reason for not applying the full LA City $595,589 DTT share on the sale price recorded TOTALS $944,663 $60,920 $112,426 $189,234 3

4 Some if these issues were raised at a meeting between the City Controller s Office and the Recorder s Office. HdL Coren & Cone was specifically excluded from the meeting by the Recorder s Office. After the meeting we were informed of some of the discussion. Accordingly, the county has said that based on their calculation they owe the City $39,000 for charges not collected due to county miscalculations; but with regards to $509,000 not remitted correctly by escrow companies, the county bears no responsibility for those errors. The county believes they are held harmless by their contract and that the statue of Limitations would only go back to (Ordinance and contract is attached) The County has stated that they did not realize there was an issue of collecting $1.10 instead of the $4.50 city share. When the city indicated that they wanted to have an additional meeting between the County recorder and HdLCC, it was met with resistance. Apparently a meeting was held by the Controller s Office with the City Attorney s office and City Attorney deferred taking on the Clerk s office on this issue. Had we been at that meeting we would have raised some of the following issues: The county has corrected and paid out errors for Santa Monica, Culver City and Redondo Beach for short collections. The county has made corrections for the current and prior 3 years for numerous audits filed in the past. If the county was not aware of the increased fee that should have been collected in the City s case, why did they retain the full $1.10/$1,000 which they only do in the event of a city election of a larger DTT fee? We understand the City Attorney s office is declining to pursue the Los Angeles County Clerk for their failure to collect and transmit all the DTT revenue due the City of Los Angeles. The City Attorney s reaction is primarily due to Section 9 of the Agreement for Collection of taxes between the City and the County. While we are not attorneys, it does seem to us that there may be recourse for the City under the contract, especially considering the amount of money that could be recovered. In the Recital (c) the County agrees to collect the tax for City under the terms and agreements as hereinafter provided for. In Section 1 The County Registrar-Recorder/County Clerk agrees to collect for City a tax imposed on each transfer. - As indicated by the HdL Coren & Cone audit, the County in many cases failed to collect for the City the tax imposed on transfers Section 2 If for any reason County is unable to collect the tax when the instrument or writing is presented for recordation, County will record the instrument or writing if otherwise recordable under the law and will transmit to City copies of the documents which indicate the tax was unpaid at the time of recordation. The responsibility of thereafter collection the tax shall be that of the City. 4

5 - The County failed to transmit the records to the City. - Since the County failed to transmit the records to the City, the responsibility to collect still resides with the County Section 3 County will refer to City for disposition any dispute regarding payment of the City Real Property Transfer Tax for settlement. - The County failed to refer to City for disposition any disputes (if there were any) Section 4 County will refer to City for disposition any requests for refund of the tax paid. County, under no circumstances, will make a refund. - The County failed to refer to City for disposition any requests for refunds (if there were any) Section 5 All City real Property Transfer Taxes collected by County shall be transmitted to City monthly. - The County collected taxes for the City that it did not transmit to the City. Some taxes it sent to the wrong jurisdictions. In some cases the County kept the City s portion. Section 6 County agrees to permit authorized personnel of City to examine the records and procedure of the County Recorder concerning the collection of the City Real Transfer Tax. - County has not let HdL Coren & Cone examine the records or the procedure of the Transfer Tax that were disallowed during the audit. County refused to meet with HdL Coren & Cone to discuss these items. Section 9 City hereby agrees to indemnify and hold harmless County in connection with any claim or suit filed arising out of the collection or non-collection of said real property transfer tax by County for City. - This is an ambiguous sentence. claim is not defined. It could be assumed that claim applies to taxpayers, especially since the County s duty is to collect for City a tax imposed on each transfer. The City s claim goes not to each transfer but to the failure of the County to collect and distribute taxes. - The sentence does not say the City cannot make a claim or suit. The City s real issue is that the County failed to perform numerous sections of the Agreement. The County s failure is such as to render the Agreement meaningless. Had the County performed its responsibilities competently the City would have had recourse to recover revenues the County failed to collect. Further, in some cases, the County s negligence resulted in the enrichment of the County itself. 5