AuditorControllerTreasurerTax Collector Internal Audit Sonoma County For the Calendar Years Ended December 31, 2012 and December 31, 2013 A total of $55.7M in taxable receipts and $5M in Transient Occupancy Tax (TOT) were reported by the eight (8) operators whose tax returns we audited. Our audit identified $27,000 in under remitted TOT. The primary reason for the under remittance was the operators misunderstanding that resort fees are not taxable. We identified $13,000 in additional under remittance using reports provided by one of the operators who had not filed a return. However, due to incomplete records provided, we are unable to conclude that no additional amounts are due. Three operators did not provide us records as required by the TOT ordinance. Audit No: 3565 Report Date: December 31, 2014 Audit Manager: Kanchan K. Charan, CPA, CGMA Audit Supervisor: Damian Gonshorowski, CPA, CGMA Auditor: Scott Jann
Table of Contents Audit No. 3565 For the Calendar Years Ended December 31, 2012 and December 31, 2013 Internal Auditor's Report Executive Summary... Introduction and Background... Objectives and Scope... Procedures and Results... Recommendations and Management Responses... Appendix A Schedules of Operators Reviewed January 1, 2012 to December 31, 2012... January 1, 2013 to December 31, 2013... Delinquent operators... Appendix B Management Response Letter Page 1 2 4 5 7 8 9 10 11
Executive Summary The Internal Audit Division (IA) of the Sonoma County Auditor Controller Treasurer Tax Collector s Office (ACTTC) audited TOT returns of eight (8) operators selected by the TOT Administration for the calendar years ended December 31, 2012 and December 31, 2013. These eight (8) operators reported a total of $55.7M in taxable receipts and paid $5M in TOT for the period covered by our audit. We identified $27,000 in under remitted TOT, which was primarily due to the operators misunderstanding that resort fees are not taxable. We identified $13,000 in unpaid TOT by one of the delinquent operators we audited. However, since the records were incomplete and no supporting documents were available, we are not able to provide any assurance that there are no additional amounts due from this operator. Annual recurring operators Our audits support that five (5) out of the eight (8) entities audited under this category collected and remitted TOT in compliance with the ordinance. The remaining three (3), under remitted TOT by $27k as detailed on pages 8 and 9. Delinquent operators The TOT Administration identified five (5) registered operators who had not filed TOT returns for calendar years 2011, 2012 and 2013. Three (3) of the five (5) operators are in violation of the record keeping requirement of Sonoma County Code, Article III, Chapter 12, Ordinance No. 5823 (TOT ordinance) that states At a minimum, the records deemed necessary for this determination shall be a chronological cash journal showing tax and room rate separately, or other means acceptable to the County Auditor Controller/Tax Collector of summarizing the Operator s monthly or quarterly revenue, supported by room registrations (including the name and address of the transient), the automobile license plate number of the transient, a calendar of advance registrations, copies of forms used to claim exemption from the tax, and prenumbered payment receipts showing payment for occupancy which state the room rate separate from the amount of tax paid and which may, with reasonable effort, be identified with the revenue summary. For these three (3) operators, we are not able to calculate the total amount of TOT they owe for the period covered by our audit. See page 6 for additional details regarding the five (5) delinquent operators. For one of the three operators discussed above we were able to determine, from the incomplete records provided, that at least $13,000 is owed in TOT. One operator in this category provided adequate support that no taxable rent was collected during the audit period and no TOT was due to the County. We were unable to conclude our audit work on one remaining operator. We plan to include this operator in the next audit cycle. Audit No: 3565 Page 1
Introduction and Background Introduction The Internal Audit Division (IA) of the Sonoma County Auditor Controller Treasurer Tax Collector s Office (ACTTC) has completed compliance audits of selected Sonoma County (County) (TOT) returns for the calendar years ended December 31, 2012 and December 31, 2013. We conducted the audit in accordance with the International Standards for the Professional Practice of Internal Auditing (Standards). These Standards require that we identify, analyze, evaluate, and document sufficient information and evidence to achieve audit objectives. We believe that the evidence obtained provides a reasonable basis for the results, and recommendations contained in our audit report. The purpose of this audit report is to furnish management independent and objective analyses, recommendations, and other information concerning the activities reviewed. The audit report is a tool to help management identify and implement improvements. In performing our work, we have not assumed any responsibility for the design, implementation, or operation of any part of TOT Administration s internal control system. We would like to thank management and staff for their time, information, and cooperation throughout the audit. Background Overview The (TOT) is authorized under California State Revenue and Taxation Code Section 7280, as an additional source of non property tax revenue to local governments. TOT is assessed by operators on transients who occupy lodging facilities (e.g. hotels, motels, campgrounds, or vacation rental homes) in the unincorporated areas of the County for fewer than 30 consecutive calendar days. This tax is levied at a rate of 9%, effective October 1, 1993. To assist in the enforcement of the TOT ordinance, the County Administrative Officer engaged IA to audit selected TOT returns. TOT Administration is responsible for maintaining a system of internal controls over the assessment and collection of TOT. Our responsibility is to audit the TOT returns selected by TOT Administration. Audit No: 3565 Page 2
Introduction and Background Policies and Procedures Each operator is required to self report and remit TOT collected on a quarterly basis. TOT Administration sends the TOT return form to all active operators approximately two weeks prior to the end of the calendar quarter, and requests 9% TOT be paid on the gross rent receipts, net of qualified exemptions, collected for the period. Operators are not required to collect and remit TOT on rents collected from qualified federal, state, county, or foreign government officers or employees on official business. Penalties and interest are applied if the returns are not filed timely or the tax is unpaid. For late filings, a penalty of 10% of base tax is assessed for each month the return remains delinquent. For late payments, interest of 1.5% per month on the base tax is charged from the delinquent date to the date of payment. If payment is not received in full by the first working day of the second month of delinquency, the account is transferred to the Central Collections section of the ACTTC. From this point, Central Collections assists the TOT Administration with collection activity. A Certificate of Delinquent TOT Lien is filed with the Recorder s Office by the TOT Administration when payments from an operator become two quarters late. Audit No: 3565 Page 3
Objectives and Scope Objectives The objectives of this audit were to determine: Scope 1. Whether the entities selected by TOT Administration collected and remitted TOT owed to the County in a timely manner and materially complied with the TOT ordinance 2. The amount of TOT owed by the delinquent entities selected by TOT Administration IA audited eight (8) operator TOT returns selected by the TOT Administration for the calendar years ended December 31, 2012 and December 31, 2013. TOT Administration agreed in advance to the scope of the audits. Returns reviewed by IA, reported $2,553,022 and $2,463,945 in TOT for calendar years 2013 and 2012, representing 24% and 26% of the total TOT collected for the respective years. Five (5) operators who were registered to pay TOT but did not file TOT returns during calendar years 2011, 2012 and 2013 were selected by the TOT Administration for audit as well. The scope of our work included the following: Discussions with TOT Administration staff to determine operators selected for review Interviews with lodging owners/operators Review of lodging owner/operator accounting records to achieve stated objectives Audit No: 3565 Page 4
Procedures and Results Procedures For each operator selected for audit, we compared the general ledger detail and Transient Occupancy Tax exemption forms supporting the taxable rents reported on the quarterly Returns. From the general ledger detail, we judgmentally selected and tested a sample of transactions, tracing to individual registration documents showing room(s), amount(s) paid and dates rented. We also reviewed the reservation systems, if available, to identify room rentals that may not have been reported on the quarterly TOT returns. For those identified as exempt, we reviewed appropriate supporting documents. Results Annual recurring operator audits For five (5) of the eight (8) entities referred to us to audit in this category, we noted minor or no exceptions, and concluded that they materially complied with the TOT requirements during the audit period. One operator, Sonoma Orchid Inn, owed $4,875 in TOT for failing to timely file a TOT return for the fourth quarter of 2013. Two operators, Vintners Inn and Kenwood Inn & Spa, owed $8,753 and $13,401 respectively for not including the taxable mandatory resort (or facility) fees in their quarterly returns for the period covered by our audit. Taxable rent for each was understated by $97,260 and $ 148,914 respectively. In 2012, The Vintners Inn under paid TOT by $4,316 by excluding $46,892 in resort fees from taxable rent. In 2013, the Vintners Inn again understated TOT by $4,437 and taxable rent by $49,296 for the same reason. Kenwood Inn & Spa, under paid TOT by $6,652 and $6,749 by excluding $73,919 and $74,994 in resort fees from taxable rents for calendar years 2012 and 2013 respectively. The total tax under paid in 2012 was $10,920 and $16,124 in 2013 (see pages 8 and 9 for details).. Audit No: 3565 Page 5
Procedures and Results Delinquent operators 1) Grape Leaf Inn (Cert. #604N) Based on the revenue reports provided by this establishment, the total TOT owed for the period January 1, 2011 to December 31, 2012 is $13,400. According to the operator, all detailed records have been seized by the Sheriff s Office. As such, we are not able to conclude whether this operator owes additional amounts in TOT. 2) Rio Vino (Cert. #574N) The operator of this establishment did not respond to our requests for information. 3) The Lodge at Wikiup (Cert. #735N) We did not complete the audit of this operator, due to a lack of available audit hours. We plan to include this operator in the list of audits for the upcoming period. 4) Valley Ford Hotel (Cert. #306) This operator provided customer receipts for the periods we requested (October 1 through December 31, 2010, January 1 through March 31, 2011 and October 1 through December 31, 2012). Other documents and records required by the TOT ordinance were not provided, preventing us from completing this audit. We are unable to determine the amount due from this operator for the period covered by our audit. 5) Rykoff, Andrei & Kim (Cert. #823N) The operator of this establishment provided sufficient evidence to the TOT Administration supporting that the property has been used as a primary residence since July 1, 2011. TOT Administration staff cancelled this operators TOT certificate and concluded that a TOT return is not required for the audit period. Audit No: 3565 Page 6
Recommendations and Management Responses Recommendation No. 1: We recommend that amounts over or under paid, as identified in the Schedule of Operators Reviewed, be refunded or collected from the operators as appropriate. Recommendation No. 2: For delinquent operators who did not respond to repeated requests for records, we recommend that management take steps to compel compliance with the TOT ordinance. Recommendation No. 3: We recommend that TOT Administration include an insert in the Quarterly TOT returns sent to operators, or use other means, to clarify and reinforce sections of the ordinance that operators commonly have questions about or that audits have identified as common noncompliance items, such as exemptions and resort fees. Management response No. 1: The Treasurer Tax Collector has historically followed through with the collection and/or refunding of amounts identified in the report. These procedures will be followed consistent with prior years. Management response No. 2: It is the Treasurer Tax Collector s policy to progressively employ all remedies necessary to enforce the tax collection process. Management response No. 3: The Treasurer Tax Collector will implement this at the next quarterly mailing. Audit No: 3565 Page 7
Appendix A Schedules of Operators Reviewed County of Sonoma Schedule of Operators Reviewed January 1, 2012 to December 31, 2012 Annual Recurring Review Taxable Taxable Tax Receipts Receipts Tax Tax Over (Under) Reported Per Review Paid Per Review Paid Healdsburg Property Management Sonoma Valley Escapes Fairmont Sonoma Mission Inn Safari West Bodega Bay & Beyond Sonoma Orchid Inn Vintners Inn Kenwood Inn & Spa $ 381,986 $ 390,451 17,373,830 1,478,502 2,436,416 269,443 2,656,423 2,390,085 381,986 $ 390,451 17,373,831 1,477,754 2,436,416 269,644 2,704,388 2,464,004 34,379 $ 35,141 1,563,645 133,066 219,277 24,250 239,079 215,108 34,379 $ 35,141 1,563,645 132,998 219,277 24,270 243,395 221,760 68 (20) (4,316) a (6,652) b Total Annual Recurring Review $ 27,377,136 $ 27,498,474 $ 2,463,945 $ 2,474,865 $ (10,920) a b 2012 TOT was under paid by $4,315.88, of which $4,220.32 was due to not including $46,892.44 in taxable mandatory resort ("facility") fees collected by Vintners Inn. 2012 TOT was under paid by $6,652.74 due to not including $73,919.35 in taxable mandatory resort fees collected by Kenwood Inn in the quarterly returns. Audit No: 3565 Page 8
Appendix A Schedules of Operators Reviewed County of Sonoma Schedule of Operators Reviewed January 1, 2013 to December 31, 2013 Annual Recurring Review Taxable Receipts Reported Taxable Receipts Per Review Tax Paid Tax Per Review Tax Over (Under) Paid Healdsburg Property Management Sonoma Valley Escapes Fairmont Sonoma Mission Inn Safari West Bodega Bay & Beyond Sonoma Orchid Inn Vintners Inn Kenwood Inn & Spa $ 503,310 $ 544,980 17,844,457 1,754,869 2,267,523 209,967 2,841,738 2,400,086 504,044 $ 544,901 17,844,497 1,754,870 2,267,523 264,124 2,891,033 2,475,081 45,298 $ 49,048 1,606,001 157,938 204,077 18,896 255,756 216,008 45,364 $ (66) 49,041 7 1,606,005 (4) 157,938 204,077 23,771 (4,875) a 260,193 (4,437) b 222,757 (6,749) c Total Annual Recurring Review $ 28,366,930 $ 28,546,073 $ 2,553,022 $ 2,569,146 $ (16,124) a b c 2013 TOT was under paid by $4,875.20, of which $4,846.48 is due to the 4th quarter return never being submitted, as well as 3rd quarter gross room rents being under reported by $308.05 and the 1st quarter miscalculated by $1.00. 2013 TOT was under paid by $4,436.95, of which $4,436.59 was due to not including $49,295.49 in taxable mandatory resort ("facility") fees collected by Vintners Inn, plus the accumulation of various rounding errors on the submitted returns. 2013 TOT was under paid by $6,749.52 due to not including $74,994.62 in taxable mandatory resort fees collected by Kenwood Inn in the quarterly returns. Audit No: 3565 Page 9
Appendix A Schedules of Operators Reviewed County of Sonoma Schedule of Delinquent Operators Reviewed January 1, 2011 to December 31, 2013 Delinquent Operator Review Grape Leaf Inn 2011 2012 2013 Taxable Taxable Tax Receipts Receipts Tax Tax Over (Under) Reported Per Review Paid Per Review Paid $ 42,865 $ 76,992 $ 71,905 42,865 3,858 $ 6,929 $ 6,471 3,858 (6,929) (6,471) Total Delinquent Operator Review $ 42,865 $ 191,762 $ 3,858 $ 17,258 $ (13,400) a a TOT under paid by $13,400.78 due to no returns submitted in 2011 and 2012. In 2013, TOT was submitted by Wine Country Getaway, a property management company hired by Grape Leaf Inn. Audit No: 3565 Page 10
APPENDIX BManagement Response Letter Audit No: 3565 Page 11
APPENDIX BManagement Response Letter Audit No: 3565 Page 12