HomeMy WebLinkAboutStaff Report 287-09TO: HONORABLE CITY COUNCIL
ATTENTION: FINANCE COMMITTEE
FROM: CITY MANAGER
DATE: JUNE 15,2009
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 287:09
SUBJECT: Continuation of Recommendation to Approve Proposed Business License
Tax Ordinance for November 2009 Ballot.
RECOMMENDATION
Staff recommends that the Finance Committee
I. Review and discuss the attached supplemental information relating to different
taxing methodologies;
2. Provide recommendations to the City Council regarding different taxing
methodologies analyzed in the supplemental information
BACKGROUND
On June 2, 2009, the Finance Committee (Committee) discussed a proposed Business License
Tax program. During the discussion, several new issues and approaches were raised by the
Committee. The Committee requested that staffretum with supplemental information before the
proposal is forwarded to the City Council on June 22. Specifically, the Committee requested that
staff refine the Services category, revise the category tax rates, and provide additional revenue
models based on gross receipts. In addition, the Committee requested new revenue models based
on employee count with the exception of multi-unit and commercial rentals, which will be based
on a per rental unit and square footage rates, respectively. The Committee also requested
information on whether the language in standard commercial triple net leases was broad enough
to allow landlords to directly pass the Business License Tax to their tenants. This report provides
the requested revenue models and responses to the issues raised by the Committee.
DISCUSSION
The Committee directed staff to reduce the number of elassifications and to provide revised
models based on gross receipts and employee count. The revised structure makes a distinction in
the former Services category between personal and business services. The business services
companies were consolidated with the Professional classification and personal services
CMR:287:09 Page I of9
companies with Retail. In addition, the Miscellaneous classification was merged with Retail.
The Committee also requested that the Retail and Personal Services classification be taxed at a
lower rate than Professional and Business Services. Consistent with the Committee's directive,
the new classifications, which apply to the revised and new models are:
I) Professional and Business Services
2) Retail, Personal Services, Hotel, and Miscellaneous
3) Wholesale and Manufacturing
4) Multi-Unit Residential Rentals
5) Commercial Property Rentals
Below are two revised gross receipt and two primarily employee count models for the
Committee to consider, The models have a minimum tax rate of $75 and a maximum cap of
$30,000, except for retail, which has a cap of $20,000. All models include home based
businesses and net revenue forecast of approximately $3 million. The accompanying graphs or
tables compare the median or average proposed Palo Alto business license tax to neighboring
jurisdictions. The primary difference between Model A and B and Model C and D are the wider
tax rate distlibution between ProfessionallBusiness Services and RetaillPersonal Services/Hotel.
Gross Receipts Models
Exhibit A: Revised Gross Receipts -Standard Rate Distribution
. .. ' .' .•..... .... . .".. ..... '. ....., :' ..
. '.>< ...•.....
Est. Average Est. Median .... E~!liitafi!~ .
Propo.ed Tax Payment Tax Payment :.::;~·~~IH~~.~":'
Busines. Tax with $75 with $75 ):,Icenee;rr\ix.
Classification Rats' BLTCap Minimum Minimum '?,'@~i\ntl~~:('
Professional and Business Sve.. $0.60 I $1 ,000 $ 30,000 $ 671 $ 200$;t1',e~1';4oti,'
Retail, Pefsonal .. ~erviees, Hotels, and Misc. $0.241 $1,000 20,2()() 971 75 ';.,·::.hS3(i;IlM:.:
Wholesale and Manuf~.ct.",ur'::.in,",-g ____ L"'$,0:~41 $1,000 30,000 936 75 :;':;'1i3~
Sub-total r,$!.~j.195;iti5;:(:
Multi-Unit Rent~I~(c:.1-.:::3.:::u::.:ni:;:",:.;",,,,x;::;em.:.:np'"'tt,--) __ + 1",$",0:;::.3;:c5.:..1 "'$1:..c,O:;,:0""0-t--c3:c;.o,ooo .... ' 1_-.:.:n,l"ac.... _ ~ __ , .. ';290:225'
I"c""o",m",m""e",fc:",ia..,1 p"r"]oPt"e ... rt,-y_~ ____ --,I,--,,$o:.jo I $1,000 30,oolll fila nla "12,~6~/
. Gros. (Eslim.tsd) Business License Tax Revenue <$ •. ~A08j~'Zlr.
Less: Ongoing (Estimated) Administrative Cost
Net (Estimated) Bu.in ••• License Tax Revenue
i) First year (implementstian) sdministralive cas/eslimsts Is $390,500 thereeff.r II's $330,500.
CMR: 287:09
:;$ i(~~;~O;)(1i
• $3,Oifi77~.
Page 2 of9
$700
$600
$500
$400
$300
$200
$100
$-
Palo Alto Proposed BU6insiI LIcense Tax
Exhibit A: Revised Gro •• Receipt
Comparison to Other Citles by Business ClassificatIon Median
.. I)C<%I .................••....
$609
Professional and Retail, Personal Svcs., Services'
Business Svcs. ($334.000) Hotels. and Miscellaneous
III Palo Alto Proposal
IZl San Mateo
I:.;] Menlo Park
121 East Palo Alto
Wholesale and Manut.
($94.009)
• Businesses in the former Services and Miscellaneous classifications for Paio Alto have been merged into
Professional Of Retail classifications
•
Exhibit B: Revised Gross Receipts Includes wider rate distribution between
ProfessionallBusiness and Retail/Personal
.... .. '.:
'. .., .. ; .J •.
...... ......•...•... : .... ,\ ..... :. .. .
estimated
fP-,-ro",fe",s",s",io",n",al.:a",nd:::..:::B.::;us",ln",e",s",s",S",e',.,v",ic::;ss,,-__ f-,$",O"" 6",9.:..1 ",$1",.()()0 $ 30.000 $_---'7 ... 5 ... 4+"$_ 230'~;:'li8a9i$~9..
fR",e",ta",II",. P",e""s",o",n",al:..:S",e::..,v",ics=s",H..::o",te",ls""""::.:n",d:;,M,,,ls:::c,-. +-"$,,,00":.2::::01$1,000 20.000. 884 75 :("c1;{4~f~*e:::
~stlle and M~nufacturirl~ $0.20 I $1,0",00"-..1._",3",0,,,,00,,,,,0 ...... __ Jl"!.L-.... 75';/156, its '
Sub-total ; ,$:>31~j)iio2';
M;;i!1:unit Rentals (1·3 u~it-s -ex-"-rnPt"",t:L)'-_-:'-:'-_'+' -,$",0""3c;:,0,,,' $:.1"',0::.:0c:.0+......:
3
3""00',.Oo·.·.Ooo,OCJ' :L.._."" n/a ___ L_..cnnc::',a ... _ ... ,'::'1il1.'O~' .• ~6Q ..• ~OO ..• ·.,.· •. ·
Commercial"Property $O,35:.!.'"$",1",O",0",0,,L._= _' lola '. u
Gross (Estimated) Business License Tax Revenue'$;;~~3"'5;262 ••
Less: Ongoing (Estimated) Administrative Cost
Net (Estimated) Business License Tax Revenue
1) First year (implementation) administrative cost estimate is $390,500 lhereafter it's $330,500.
CMR: 287:09
l';: :;>-"_:i,, '~~J(:;'<;;,'_;
ii$; (330{500);(1)
$:a;64/i,ie2
Page 3 of9
$700
~$500
$400
$300
$200
$100
$-
Palo Alto PropOMd Business License Tax
Exhib~ B: Revised Gros. Receipt
Comparison to Other Cities by 8usine'&'8 Clssslficatlon Median
professional and Retail, Personal Svcs.,
Business Svcs. ($334,000) Hotels, and Miscellaneous
($297,576)
Servlces '"
III Palo Alto Proposal
[2] San Mateo
E;:j Menlo Park
!§] East Palo Alto
Wholesale and Manu!.
($94,009)
>I< Businesses in the former Serviees and Miscellaneous classifications for Palo Alto have been merged into
Professional Or Retnil classifications
Employee Based Models
The employee count revenue forecasts are based on the number of full time equivalent (PTE)
employees. The FTE is determined by the total hours worked divided by 2,080 hours rather than
a head count. The Multi-Unit Rentals and Commercial Property classifications revenue forecasts
are not based on FTE but on per rental unit or square footage, respectively. The Multi-Unit
Rentals, for four or more rental units, is $20 per unit in Exhibit C or $30 per unit in Exhibit D.
The Commercial Property forecasts use a square footage from $0.024 ccnts to $0.039 per square
foot. Based on the $0.024 per square foot rate, a business would have to lease 3,125 square feet
to meet the minimum BLT of$75. The existing available Palo Alto's square footage used in the
revenue forecasts were obtained from the San Jose Mercury News article on commercial space
availability in Silicon Valley (Source: Collins International. San Jose Mercury News 8 June
2009: E3).
Staff reviewed the ordinances of seven California cities to determine how other cities apply the
square footage tax. The tax rates for these cities ranged from $0.01 per square foot in San Bruno
to $1.50 per square foot in Anaheim. The mean rate for cities in the survey is approximately
$0.23 per square foot. Most cities charge a base rate of $36 to $88 in addition to the square
footage tax rate.
CMR: 287:09 Page 4 of9
Exhibit C: Employee, Unit, and Square Foot Tax Bases -Includes PAMF/SUMC and
Standard Rate Distribution
Summary of BlT Rilles and Estimated Revenues
! Ba.se Cost auslness:
Number of t=or First T~x Rates
Employess, i Employee {Por Estimated Estimated
Units, or
!
or employee, Estimated Median Business
Square Minimum Unit, or Avorage Tax Tax [1,c:on80 rex
Classification Footage Tax SQ, Ft, BLTCap paymont Payment Reverl!.IG
Professional and.~u$ine$$ Sv~. (T,~.,:*,,~) 30,105 $ 75 $, SO $ 30,000 $ ~5,,5e:4,+,,$~_2<o1,,2 '$ 1;e1e~a52
--~.i~;p~rsonaISarviOGS, a~Miso. (f~_P$_,_c_m'_il:':~~_ ... , 21,52~t-----.... ~~_~~~ _ .... , 20,OO,I!. __ ... ~ _~_1l1 .. ' _J5_t.~
Who\esa!& and M~~ufactutjng fT1'YP>ff~WI) 12403 75 35 30.000 . ..1 ,411 194 342'.789
$ ,~910 398 r~~~55?~~_---~--.... -.. -----~--.. -" 64,034
iMulti.UnItRent~ls(1-3u~itsexe'!!E!) (T,,~~~.:.UiIA}(t) ~'~~ .~,907 20 ~t~,
,Commercial Property (f8XPfJf"Sq~fIf$ Fw/BJ1Il)
75 20 f---3.O,00O
LQ!!_jca_s_p_·~~_a_M_'_~r ~~_"'_'_D;·_i~~::;;···:==~~;';;"··_·~· "~B-, 1-3-7-,6-9-2+-'-~--t-----t~~~-'t--"""._+-~n/a . ,W6,8&1
: Re$earch.~nd Development :T"'~P~fllq.9*,*Fa<l!ag~) 10,285,484 nfa 222"100', '
75 O.Q36 3-0,000 nla
75 0.024. 30,000 a"
Gross (Estimated) Bualness License Tax Revenue $,' --3,36'3;16'(
"." , ....
Less.: Ongoing (Estimatad) Administrative Cost pi ':(330.000},ill
Net (Estimated} Business Llcenae Tax Revenue
1) FilS! yesr(fmplamentation) arJmJnistroiiv8 cos/8/Slimato 1$ $39(),5(}(J lheroafter 11'$ $330,500.
2) Source of numbar 01 Multl-Urnt Renlal$irt Palo Alto is 1M excullvfa Dfroctor Qf CalifOrnia Aparlmal1/ AUO$Iatiol1, rtf County OiYf.sion who cited illS
$Out'tre as Real Facts (a data managemont Sflrvlce).
IM'W"'faln Vi~w hes a true Fief Tax, while Surtrlyvale and Santa Clara have an employee based slrvclul9.
tax model comparison is not graphabla due to the lack of avallab/e inlQrmalion regarding the comparison cities median fIal fax.
. $ 3.06'.261
IB'''I''''~ ... in the former Services and Miscellaneous classijfcations for Palo Alto have been merged inl0 Professionei or Retail classifications.
Sunnyvale: $58 for flaw applicants or $24 for renewals
... Sanla Clara: $45 annual for alJ businesses
Exhibit D: Employee, Unit, and Square Foot Tax Bases -Excludes SUMC/PAMF and
includes larger rate distribution between ProfessionallBusiness and RetaillPersonal
CMR:287:09 Page 5 of9
Summary of BLT Rates and Eslima1edRevenues
I ~ ••• "ost BusIness
Numbero( For First Tax Rates
Employee-5, Employee (Per EsUmated Estimated ' estimated
Units, or or Employee, Avaraga Median auaine'sfil
Square Minimum Unit, or Tax Tax llcense.:r ax
Classification Footage Tax Sq. Ft. BlTCap Payment Paynumt Reven-ue
PiOfessional and Business Svcs. (Tex Pf$r E~') 28,146 S 75 $ 91 $ 30.0~Q .. ~ ... 595 $ 231 $ r,9~§.O"!.. r=-~~ ........ ~~-...... _----
.~~aj[, Perso.~al Services, an~L~_~~, (f,,~ Pw e..'fr\::",s) ~1,g6 75 26 .. 20,000 309 116 628,451
YVholesale ~fld _~an\Jfactu(ln9 (fa~~(ff Empk16~: 12.403 75 26 30,000 M __ 1,191 166 ~~8~
62,075 $ 2845,969
~:Unit Re.~!?ls (1-3 units exempt). 2,907 75 30 30,000 27 nla 7,6,499
CommerCial prop.~.~~~:slJ"'''''F«>la:J<>J --...... --~
...... -.. _._. ........ -
. Offlce_~pace (TIDIf'>uSqulruFooIa!lt» 6,137,692 75 0.039 3~!O~ nla nla .', ?1'-S;43S
Research ~nd Develop!!!~~t IT$); P~I squ~:e Fo-~e} 10.,285,484 75 0.020 30.000. nla nla 240,600-
Gross (Estimated) Busln&ss License Tax Revenu& $, ~.380,G7~
I'".es$:: Ongoing (Estimated) Admini$1rative Cost ' $ (330,sbOI'"
N&t (Estimated) Business LI(:eO$B Tax Revenue $3;050,Oi2 '. .
1) Flml year (Implementation) aQmln/strafive cosf estlmare Is $390,500 thereafter II~ $330,500.
2) EifCludes se1ectad non-profils (e.g. Stanford Unlverslly Medical Center (SUMC) and PeJo Afto MedIcal Founda/Ion (pAMF).
3) SOlifCe Of number 01 Mulll-Unlt RBIllt1/s In Palo Alto Is the CxclJlivle D/teCtor of CaJifornia Apartment ASSOCiation, Tn County DivisIon whO Cited hilS
$Cl.1rCfI 9s Reat Facls (a data manggement sarll/ce).
IMeunf"in VIew hes a true FlfJt Tax, whflo Sunnyvale and S9n/a Clara hfJve an amployee based slruclure.
tax model comparison is not graphabfe due to Ihe lack Of avallabla inf{)rmef/On rsgarding the companso(t cWes median flallex,
lansln,'sses in the tonYlQr Services and Miscelioneous classifications for Palo Alto have been merged into Professional or Reteil classifications.
Sunnyvale: $58 for new applioants Of $24 for renewals
,.~ Santa Clara: $45 annual for afl busInesses
Other Issues
One of the issues raised by switching to an employee based tax is the scope of the non-profit
exemption. State law prohibits cities from imposing a business license tax on non-profits to the
extent such tax is based on gross receipts. Specifically, this exemption applies to business
license taxes that are "measured by the licensee's income or gross receipts" (Government Code
Section 37101(c», An employee-based or square footage based tax is not subject to this State
law exemption requirement This issue may have significant revenue potential as it applies to the
Stanford University Medical Center (SUMC) and Palo Alto Medical Foundation (PAMF)
facilities and perhaps other medical uses which sometimes are fonned as "not for profit"
organizations. Under a traditional gross receipts methodology, these two large employers would
be almost entirely exempt from BLT. On the other hand, under an employee based method they
would not be automatically exempt. The Exhibit C model includes these two non-profits while
the Exhibit D model excludes them.
CMR: 287:09 Page 6 of9
Another issue related to an employee based tax IS the definition of an employee. Staff
recommends the following definition:
A person who works for or at a business, including any owner, manager, or agent, the
mUl1ber of employees is based on the number employed on an average throughout the
year. If a business has pati-time employees, each part-time employee shall be counted as
a fraction of an employee based on the number of hours worked assuming a 40-hour
work week.
Third, the Committee requested staff research on was whether most commercial leases passed
through Business License Tax attributable to a landlord's commercial leasing business. Staffs
researeh concludes that most commercial leases are designated as "triple net" leases. Under a
triple net lease, in addition to rent, the tenant also pays the costs associated with taxes, insurance
and building maintenance. While historically these taxes were limited to real property taxes,
over time the pass throughs have expanded to include a litany of other taxes, fees and charges.
The type of tax passed through under a commercial lease now depends on the particular wording
of the pass through provision. City staff has reviewed several commercial leases for buildings in
Palo Alto and found that there are a variety of boilerplate provisions dealing with tax "pass
throughs." Some leases contain narrow tax pass through provisions that would not include a
BL T tax pass through, but the majority of leases reviewed by staff contain expansive boilerplate
language that arguably could include a BLT pass through. For illustrative purpose only, the
City's lease for Elwell Court includes a tax pass through provision which could be interpreted as
applying to a BLT based on gross reeeipts of the landlord: "other taxes, fees and eharges as used
herein include any and all taxes payable by Landlord (other than state and federal personal or
corporate income taxes meas1l1'ed by the net income of Landlord from all sources, and premium
taxes) ... upon, allocable to, or measured by the rent payable hereunder, including, without
limitation, any gross income or excise tax levied by the local, state or federal government with
respect to the receipt of such rent." Local real estate professionals also expressed the opinion
that many existing leases would permit the pass through of business taxes.
RESOURCE IMPACT
Cost estimates for implementation and ongoing maintenance of a BLT progl'atll are approximate
and are based on staff s cost models. The estimated resource impact is summarized in the table
below:
Implementation Ongoing
Fixed Costs:
Staffing: $290,000 $290,000
: Variable Costs:
• Forms, envelopes, software, hardwat'e, etc. 90,500 40,500
i Contingency 10,000 nJa r Total $390,50~ $330,500
Costs are preliminary and will be refined as the program progresses. In addition, if approved by
voters, staff will evaluate whether to use a qualified firm, selected through competitive bidding,
to implement and manage the City'S business tax program. However, staff recommends that the
CMR: 287:09 Page 70f9
enforcement component of the business tax program be administered in house. If the program is
managed in-house, staff anticipates (with enforcement) a staffing level of2.5 FTE's.
The Business License Tax election costs are approximately $100,000 and will be covered by the
Budget Stabilization Reserve Fund.
POLICY IMPLICATIONS
The actions described in this rcport are consistent with City Council's direction provided at its
March 20, 2007 meeting. If approved by the electorate, the Business LiGtlUSe Tax Ordinance will
require that all businesses, except statutorily exempt businesses including non-profits, pay a tax
to operate a business in the City of Palo Alto.
ENVIRONMENTAL REVIEW
The actions described in this report do not constitute a project under section 21065 of the
California Environmental Quality Aet.
ATTACHMENTS
Attachment A: Finance Committee Meeting Notes, June 2, 2009
CMR:287:09 Page 8 of9
PREPARED 8""--;;:::: --'A6 """ / Shrnlz; -p:." b
TARUNNARAYAN & I SHERI TRAN I
Senior Financial Analyst Management Fellow
APPROVED BY:
CITY MANAGER APPROVAL:
City Manager
CMR:287:09 Page 9 of9
Attachment A
FINANCE COMMITTEE MEETING NOTES
BUSINESS LICENSE TAX PROPOSAL
JUNE 2,2009
On June 2, 2009, Staff presented to the Finance Committee a report detailing the different proposed business license tax models,
These models included tIlree revised options for gross receipts, a flat tax, and a tax based on employee count The reporl also
included an analysis on the cost of doing business in Palo Alto and the draft Business License Tax Ordinance, The revised tax
models are based on tile direction Staff received from the Finance Committee at the meeting on March 10, 2009, Staff also
Included the Input received from the buSiness community during Ihe outreach meetings.
The Finance Committee reached consensus on the following:
• Move forward to Council with a recommendation for a Business License Tax, to generate revenues of up to $3 million for
implementation-on'July1, 2010, wilh the option 10 delay the effective date,
Larry Klein YES
(net)
The Finance Committee was unable to reach consensus on the following:
• Employee Count vs. Gross Receipts
• The Structuring of Tax -How to tier the tax rates?
Count would be easy to
adnlini:,ter therefore, lower
cost
The Committee decided to have Staff return on Monday, June 15, 2009 at 5:30pm with further details on the two proposed
tax models (Employee Count vs. Gross Receipts) with the following direction:
1. Reduce Business Classifications:
a. Professionals and Business Services -includes financial advisors
b, Retail, Personal Services, and Hotels
c. Wholesate and Manufacturing
d, Multi-Unit Rentals
e, Commercial Property
2. No exemptions. All businesses, including those making under $85k are subJect to the Business License Tax with
a minimum tax of $75.
3. Greater gradation between the different business classifications (ex: 3 to 1 between Professional and Retail) for
both Gross Receipts & Employee Count models
4. Under the Employee Count Tax Model, Contractors/Part Time Employees will be calculated based on the full time
equivalent (FTE) rule.
Based on 40 hour work week with 52 weeks in a year (2,080 hours worked annually) = 1 FTE
5. Committee agreed that a Cap or maximum annual tax of $30,000 should be In place for all business
classifications with the exception of Retail, Personal Services, and Hotels (a smaller cap for this category)
Page 1012
Attachment A
6. What is the reasoning for the distinction of Homa-basad businesses?
FINANCE COMMITTEE MEETING NOTES
BUSINESS LICENSE TAX PROPOSAL
JUNE 2, 2009
7. Staff to look into the various ways to calculate the tax for Commercial Properties -square footage, gross rent,
per unit
Need to consider equity for the different types of ccmmercial spaces (disparity in rent charges)
Triple net pass down?
8.~Staff to look into the various ways to calculate the tax lor Multi·UnitRentals -gross receipts, flat rate per unit
Committee agreed that if per unit rate is implemented, the tax should be at least $20 per unit for all rentals with
4 or more units.
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