HomeMy WebLinkAboutStaff Report 319-09CMR: 319:09 Page 1 of 8
TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE: JULY 20, 2009 CMR: 319:09
SUBJECT: Adoption of Resolution Calling a Special Election for November 3,
2009, for Submittal to the Qualified Electors of the City a Measure
Related to Business License Tax
EXECUTIVE SUMMARY
This severe economic crisis has placed additional financial burdens on the city as well as its
residents and businesses. A balanced budget will require a combination of significant
expenditure reductions and new and diverse revenue streams. One of the revenue initiatives
consistently suggested over the years has been a business tax, as Palo Alto is the only city in
Santa Clara County without such a tax. By diversifying the funding sources for the City’s general
fund, the establishment of a Business License Tax would help the City to fund and maintain
basic City services in this difficult financial climate.
As directed by Council, the proposed Business License Tax model is designed to net
approximately $3 million a year for the City’s general fund. After lengthy public review, the
proposed methodology has been changed from gross receipts to employee count. The employee
count methodology is cost-efficient to administer, imposes less recordkeeping and calculation
burdens on taxpayers, and requires that taxpayers disclose less financial information to the City
than alternative types of Business License Taxes. While an employee based methodology does
not have the same long term growth potential as a gross receipts tax, this method better addresses
privacy and administration concerns raised by the business community.
RECOMMENDATION
Staff recommends that the Council:
Adopt a resolution (Attachment A) submitting the proposed Business License Tax
Ordinance ballot measure to voters in the November 3, 2009 general municipal
election.
Designate up to four Council members to author the argument in favor of the
measure.
Authorize submittal of rebuttal arguments.
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Approve the revised rate structure that includes an exemption for all non-profit
organizations.
BACKGROUND
On March 10, 2009, staff reported to the Finance Committee (Committee) regarding a proposed
Business License Tax Program (BLT) and revenue models. Staff’s proposal recommended a tax
structure based on gross receipts with a $35 minimum tax and maximum tax payment of
$20,000. Under staff’s original proposal, the estimated annual revenue to the General Fund was
projected to be approximately $4.4 million. During the lengthy public comment session the
business community expressed general opposition to the City’s proposal to tax businesses. As a
result of the discussions the Committee asked staff to increase outreach efforts to the business
community and residents. The Committee also asked staff to analyze several different BLT
models, including raising the minimum business license tax, lowering the classification tax rates
and raising the annual cap for most classifications. Additionally, staff was asked to consider
either an exemption limit or a flat rate for home based businesses, and to explain how the tax
would be applied to companies that conduct business activity both inside and outside Palo Alto.
In addition, the Committee requested further information regarding key issues such as the
feasibility of using payroll expense as the taxing methodology for the City’s business license tax
program, impacts of raising the minimum business license tax, and defining apportionment
policies for venture capitalists and research and development companies. Staff was scheduled to
return to the Committee on April 21, 2009 to present additional information; however, staff’s
presentation was delayed until June 2, 2009 due to on-going business community outreach.
On June 2, 2009, the Committee again discussed staff’s proposed Business License Tax program.
During the discussion, several new issues and approaches were raised by the Committee. The
Committee requested that staff return with supplemental information before the proposal was
forwarded to the City Council on June 22, 2009. Specifically, the Committee requested that staff
refine the Services classification, revise the classification tax rates, and provide additional
revenue models based on gross receipts. In addition, the Committee requested new revenue
models with the major classifications taxed on an employee count basis. The Committee
reached consensus on supporting the concept of a business license tax; however, they were
divided on the methodology (Employee Count vs. Gross Receipts). The Committee directed
staff to return to the Finance Committee on June 15 with more detailed analysis on both gross
receipts and employee based methodologies.
Consistent with the Committee’s directives staff presented revised taxing models and revenue
forecasts at the June 15 Committee meeting. Again, the Committee split between the two
methodologies and the matter was forwarded to the full Council for review with the following
changes to the model as directed by the Committee. Staff reduced the number of classifications
and provided revised outputs based on gross receipts and employee count. The revised structures
made 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 companies with Retail and Hotel. In addition the Retail and Personal Services
classification was assigned a lower rate than Professional and Business Services. The BLT was
applied to all businesses, including home based businesses and a net revenue forecast of
approximately $3 million was achieved.
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At the June 22 meeting, the Council voted 6-2 to move forward with an employee based tax that
would net approximately $3 million annually and with a delayed implementation date of July 1,
2010. In addition, if the BLT is approved by the voters, staff would revisit the Use & Occupancy
Fee which is a fee collected by the Planning Department. Staff will review and make a
recommendation on reducing or eliminating the fee in the 2010-2011 budget process and make it
effective as of July 1, 2010.
DISCUSSION
Staff’s Revised Revenue Forecast and Rate Structure
Consistent with direction given at the June 22 Council meeting staff is presenting a revised
revenue model. As discussed in the Tax Exemptions section of this report legal staff has
determined that all non-profit businesses are statutorily exempt from the business license tax.
Modifications were made to the model to eliminate all non profits including Palo Alto Medical
Foundation and Stanford University Medical Center from the revised revenue projections. In
addition, other refinements were made to the model to incorporate Council’s earlier direction to
streamline the business categories and provide a lower tax rate for Retail, Personal Services, and
Hotels. The Professional, Retail, and Wholesale and Manufacturing per employee rates went
from $88, $40, and $40 to $95, $34, and $34, respectively.
Table A below shows the updated revenue forecast and rate structure and Table B below
provides a comparison of Palo Alto’s structure to three other Peninsula cities which have
comparable tax structures.
Table A: Staff’s Revised Business Tax Model
Classification
Number of
Employees,
Units, or
Square
Footage
Base Cost
For First
Employee
or
Minimum
Tax
Business
Tax Rates
(Per
Employee,
Unit, or
Sq. Ft. BLT Cap
Estimated
Average
Tax
Payment
Estimated
Median
Tax
Payment
Estimated
Business
License Tax
Revenue
Professional, Bus. Services, and Misc. (Tax Per Employee)23,607 75$ 95$ 30,000$ 669$ 239$ 1,760,560$
Retail, Personal Services, and Hotels (Tax Per Employee)20,928 75 34 20,000 360 129 715,431
Wholesale and Manufacturing (Tax Per Employee)12,391 75 34 30,000 1,378 190 333,496
Sub-total 56,926 2,809,487$
Multi-Unit Rentals (1-3 units exempt) (Tax Per Unit) (2)2,907 75 25 30,000 23 n/a 65,408
Commercial Property (Tax Per Square Footage)16,423,176 75 0.030 30,000 n/a n/a 443,426
Gross (Estimated) Business License Tax Revenue 3,318,321$
Less: Ongoing (Estimated) Administrative Cost (257,628)$ (1)
Net (Estimated) Business License Tax Revenue 3,060,693$
1) First year (implementation) administrative cost estimate is $274,500 thereafter it's $257,628.
2) Source of number of Multi-Unit Rentals in Palo Alto is the Executive Director of California Apartment Association, Tri County Division who cited his
source as Real Facts (a data management service).
Summary of BLT Rates and Estimated Revenues
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Table B: Comparison to Other Cities
Classifications
Palo Alto's Proposed
Median Tax Payment
(Per Employee Count)
Mountain
View Sunnyvale * Santa Clara **
Professional and Business Svcs. 239$ $30 $31 - $9,903 $15 - $500
Retail, Personal Services, Hotels, and Miscellaneous 129$ $30 - $100 $31 - $9,903 $15 - $500
Services N/A $30 $31 - $9,903 $15 - $500
Wholesale and Manufacture 190$ $30 $31 - $9,903 $15 - $500
Miscellaneous N/A $30 - $150 $31 - $9,903 $15 - $500
Mountain View has a true Flat Tax, while Sunnyvale and Santa Clara have an employee based structure.
This tax model comparison is not graphable due to the lack of available information regarding the comparison cities median flat tax.
Sunnyvale rates have increased during the process of writing this report. The new rates listed reflects their current FY2010 rates
Businesses in the former Services and Miscellaneous classifications for Palo Alto have been merged into Professional or Retail classifications.
Processing Fee
* Sunnyvale: $58 for new applicants or $24 for renewals in addition to Business License Tax
** Santa Clara: $45 annual for all businesses in addition to Business License Tax
Tax Exemptions
Following Council’s direction to draft an employee based tax legal staff performed additional
research on the ability to impose a business tax on 501(c) (3) non-profit organizations and
concluded that such organizations are exempt from business tax altogether, regardless of the
taxing methodology. This exemption is contained in Revenue & Taxation Code Section
7284.1(b) which states: “No charter … city…may impose any business license tax or business
license fee on any nonprofit organization that is exempt from [income] taxes by [Revenue &
Taxation Code] Section 23701d and is an organization described in Section 501 (c) (3) of the
Internal Revenue Code or the successor to that section.” To be consistent with the exemption
contained in State law, the revised ordinance exempts all 501(c) (3) organizations.
The proposed ordinance also contains a “catch all” exemption for any business that is exempt
from taxation by the Constitution or applicable federal or state laws. Common examples of this
would be banks which are exempt under Cal. Const. Art. 13, Section 27 and insurance
companies which are exempt under Cal. Const. Art. 13, Section 28.
Real Estate Brokers
The City has met with representatives of the real estate community to formulate a real estate
provision that is easily understood, equitable to both brokers and agents and simple to
administer. According to information supplied by the Silicon Valley Association of Realtors,
there are approximately 425 agents based in Palo Alto but more than a majority of those agents
are affiliated with 5 local brokerages. Under the proposed ordinance the Palo Alto based
brokerage firms would pay a tax for all of the brokers and agents affiliated with the local office.
If a broker/agent is included in the brokerage firm’s head count, the individual broker/agent
would not need to pay a separate tax. Independent brokers not affiliated with a firm, however,
would pay a tax for themselves and any employees they have. Standard apportionment rules
would apply to brokers performing business both inside and outside the City.
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New Businesses
As an incentive to new businesses, in the first year of operation all new businesses will be
required to pay the minimum tax based on their classification. Payment of the minimum tax will
reduce business start up costs, while satisfying the BLT ordinance requirement that all businesses
have a business license to operate in the City of Palo Alto. During the first renewal cycle,
businesses will be required to pay the BLT based on the actual number of FTE equivalents
employed during the prior year. If a new business is only open for part of the previous calendar
year, their first renewal payment will be reduced as well. This phase in period for new
businesses ensures that the tax structure does not discourage new businesses from entering town,
while also ensuring that they pay an equitable amount.
FTE Equivalent
The City’s business tax proposal is based on a full time employee (FTE) equivalent of 2,080
hours per work year, rather than a straight headcount. For example, if a company has three part-
time employees whose total hours worked equals 2,080 this would represent one full time
employee for the purpose of calculating the business license tax payment. Using this
methodology puts the City of Palo Alto on an equal par with cities that have a lower tax rate but
use a strict head count.
Apportionment Guidelines
A draft apportionment administrative guideline is attached as Attachment B. Under this
proposed guideline, employees are classified as either city-based employees (i.e. an employee
who works at least 50 percent of his or her work hours within the City) and non City-based.
City-based employees can deduct 50 percent of any hours worked outside of the city. Non city-
based employees can deduct all hours worked outside of the city. The guideline also permits
businesses to submit an alternate apportionment method if justified. Alternative apportionment
request must be submitted to the Director of Administrative Services for review and approval.
Phased-In Implementation
Staff is recommending that Council approve a phased-in implementation schedule. Throughout
the business tax development process the business community has expressed concern with the
implementation of a new tax given the current economic conditions. Staff recommends delaying
collection until the first quarter (calendar year) of 2011 and that the first tax payment is at a
highly reduced rate of 50 percent of the proposed tax rate. This delayed implementation will
allow some time for the economy to improve. As illustrated below the first full year tax will
represent business activity from January 1, 2011 through December 31, 2011 and will be due and
payable no later than February 15, 2012.
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Phased in Implementation Schedule
BLT Activity Tax Period
Covered
Tax Rate Due Date
Grace Period January 1, 2010 to
June 30, 2010
Tax waived N/A
1st Collection Date July 1, 2010 to
December 30, 2010
50% of the established
tax rate
January 1, 2011
2nd Collection Date January 1, 2011 to
December 31, 2011
100% of the established
tax rate
January 1, 2012
3rd Collection Date January 1, 2012 to
December 31, 2012
100% of the established
tax rate
January 1, 2013
ELECTION REQUIREMENTS
The business license tax ordinance must be approved by Palo Alto voters. The Palo Alto City
Council’s next opportunity to place a business license tax measure on the ballot is November 3,
2009. A general tax ballot measure must be submitted to the County of Santa Clara 88 days
(August 7, 2009) before the scheduled regional general election. If this deadline is not met, the
Council’s next opportunity to place a measure before the voters will be November 2011. If the
Council approves this Ordinance, staff will submit the Ordinance and other required materials to
the County to meet the November 2009 election deadlines.
RESOURCE IMPACT
Cost estimates are approximate and are based on staff’s cost models for implementation and
renewal. The estimated resource impact is summarized in the table below:
Revised Cost Estimates
Implementation Ongoing
Fixed Costs:
Staffing $174,000* $217,128
Variable Costs:
Forms, envelopes, software, hardware, etc. $90,500 $ 40,500
Contingency $ 10,000
Total: $274,500 $257,628
(*Implementation - staffing cost represents temporary staff. If the program is managed in-house staff
anticipates a staffing level of 2.5 FTE’s.)
Costs are preliminary and will be refined as the program progresses. In addition, if approved by
voters, staff will evaluate through a competitive process whether it is more cost efficient to have
a qualified firm or in-house staff implement and manage the City’s business tax program.
However, staff’s recommendation is that the enforcement component of the business tax
program should be administered in-house. The revised estimates reflect a change in the
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enforcement process and job description. Staff reviewed the collection process and determined
that rather than staffing at a Code Enforcement level, staffing could be filled at an Accounting
Specialist classification. Under the revised process administrative citations will be issued under
the direction of the Revenue Collections Supervisor rather than by support staff, making this a
two-step process which will require additional processing time. The revived implementation
costs represent a savings of $116,000 over staff’s original estimate and on-going cost will be
reduced by approximately $73,000 annually.
The Business License Tax election costs are approximately $100,000 and will be covered by the
Budget Stabilization Reserve Fund. Staff will include the funding in the 2010 mid-year budget
or return to Council with a Budget Amendment Ordinance prior to the election, if needed.
POLICY IMPLICATIONS
The actions described in this report are consistent with Council’s direction provided at its March
20, 2007 meeting. If approved by the electorate, the Business License 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 Act.
ATTACHMENTS
Attachment A: Resolution Calling Special Election (Ordinance establishing Business
License Tax is attached)
Attachment B: Apportionment Guideline
Attachment C: Council Meeting Minutes, June 22, 2009
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PREPARED BY:
JOYCE WHITE JOSIE STOKES
Senior Financial Analyst Senior Financial Analyst
______________________________________________________
TARUN NARAYAN
Senior Financial Analyst
APPROVED BY:
LALO PEREZ
Director, Administrative Services
CITY MANAGER APPROVAL:
JAMES KEENE
City Manager
base; and
ATTACHMENT A
NOT YET APPROVED
Resolution No --,---Resolution of the Council of the City of Palo Alto Calling a
Special Election for November 3, 2009 for Submittal to the
Qualified Electors of the City a Measure Related to a Business
License Tax
WHEREAS, the City's long term economic health is dependent on a diverse revenue
WHEREAS, The credit crisis, stock market plunge, sharp housing downturn, business
bankruptcies, unemployment increases, and eroding consumer confidence have led to
deteriorating revenue streams; and
WHEREAS, the nation is currently experiencing one of the most severe economic
downturns since the Great Depression which has led to unprecedented economic challenges for
all levels of government; and
WHEREAS, a sustainable City budget will require a combination of expenditure
reduction and new revenue sources; and
WHEREAS, the City desires to achieve a balanced overall tax responsibility between
residents and businesses in order to adequately fund basic City services; and
WHEREAS, the City of Palo Alto is one of a very few cities in California and the
only city in Santa Clara County that does not have a Business License Tax; and
WHEREAS, a Business License tax based primarily on the number of employees of a
business is cost-efl'ident to administer, imposes less recordkeeping and calculation burdens on
taxpayers, and requires that taxpayers disclose less financial information to the City than
alternative types of Business License Taxes; and
WHEREAS, the City has an infrastructure backlog estimated to be $307 Million for
the General Fund in the 2007-2027 project period; and
WHEREAS, a proposed Business License Tax is projected to yield $3 Million in
annual revenue to the General Fund; and
WHEREAS, by diversifying the funding sources for the City's general fund the
establishment of a Business License Tax would help the City to fund and maintain basic City
services; and
WHEREAS, a proposed ordinance, attached hereto and incorporated herein by
reference as Attachment "A" (the "Ordinance"), would implement a Business License Tax for
the City;
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NOT YET APPROVED
WHEREAS, by its Resolution No. 8930, the City Council called a general municipal
election for November 3, 2009 ("Election") and;
WHEREAS, pursuant to Government Code Section 53724 and Election Code Section
9222, the City Council desires to submit the Ordinance to the voters of the City at the Election.
NOW, THEREFORE, the Council of the City of Palo Alto does hereby RESOLVE
as follows: '
SECTION 1. Findings. The City Council finds and determines that each of the
findings set forth above are true and correct.
SECTION 2. General Tax Proposal. The City Council proposes to impose the general
tax set forth in the Ordinance and to present this proposal to the voters on November 3,
2009. The proposed type of tax, the rate of the tax, and the method of tax collection are as set
forth in the Ordinance.
SECTION 3. Special Election. The City Council hereby calls a special municipal
election on Tuesday, November 3, 2009. Pursuant to Elections Code Section 9222, the City
Council hereby submits the Ordinance to the voters at the Election and orders the following
question to be submitted to the voters at the Election:
Shall the Palo Alto Municipal Code be amended to establish YES
a business license tax in order to help maintain the City's
ability to fund basic City services? NO
This question requires the approval of a majority of those casting votes.
SECTION 4. Adoption of Measure. The measure tq be submitted to the voters is
attached to this Resolution as Exhibit A and incorporated herein by this reference.
SECTION 5. Notice of Election. Notice of the time and place of holding the election
is hereby given, and the City Clerk is authorized, instructed and directed to give further or
additional notice of the election, in time, form and manner as required by law.
SECTION 6. Impartial Analysis. Pursuant to California Elections Code Section 9280,
the City Council hereby directs the City Clerk to transmit a copy of the measure to the City
Attorney. The City Attorney shall prepare an impartial analysis of the measure, not to exceed
500 words in length, showing the effect of the measure on the existing law and the operation of
the measure, and transmit such impart~al analysis to the City Clerk on or before August 19,2009.
SECTION 7. Ballot Arguments. Pursuant to Elections Code Section 9286 ct. seq.,
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NOT YET ,APPROVED
August 12, 2009 at 5:30 p,m. shall be the deadline for submission of arguments in favor of, and
arguments against, any local measures on the ballot. If more than one argument for and/or
against is reeeived, the priorities established by Elections Code Section 9287 shall controL
SECTION 8. Rebuttal Arguments, The provisions of Elections Code Section 9285
shall control the submission of any rebuttal arguments. The deadline for filing rebuttal
arguments shall be August 19,2009 at 5:30 p,m.
SECTION 9, Consolidation Request. The Council of the City of Palo Alto requests
the governing body of any other political subdivision, or any officers otherwise authorized by
law, to partially or completely consolidate such elections and the City Council consents to such
consolidation.
SECTION 10, Request for County Services. Pursuant to Section 10002 of the
California Elections Code, the Council of the City of Palo Alto hereby requests the Board of
Supervisors of Santa Clara County to permit the Registrar of Voters to render services to the City
of Palo Alto relating to the conduct of Palo Alto's General Municipal and Special Elections
which are called to be held on Tuesday, November 3, 2009. The services shall be of the type
normally performed by the Registrar of Voters in assisting the clerks of municipalities in the
conduct of elections including, but not limited to, checking registrations, mailing ballots, hiring
election officers and arranging for polling places, receiving absentee voter ballot applications,
mailing and receiving absent voter ballots and opening and counting same, providing and
distributing election supplies, and furnishing voting machines.
SECTION II. Transmittal of Resolution, The City Clerk is hereby directed to submit
forthwith a certified copy of this resolution to the Santa Clara County Board of Supervisors and
to the Registrar of Voters,
1/
/I
1/
1/
1/
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NOT YET APPROVED
SECTION 12. Exemption from CEOA. The City Council finds that this resolution is
not a project under Section 21065 of the California Environmental Quality Act (CEQA).
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSENTIONS:
ATTEST:
City Clerk
APPROVED AS TO FORM:
Senior Asst. City Attorney
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4
APPROVED:
-";-----------Mayor
City Manager
Director of Administrative
Services
EXHIBIT A
Ordinance No.
Ordinance Adding Chapter 4.61 to Title 4 ofthe Palo Alto
Municipal Code (Business Licenses and Regulations)
Establishing a Business License Tax
The People of the City of Palo Alto do ORDAIN as follows:
SECTION 1. Title 4 (Business Licenses and Regulations) of the Palo Alto
Municipal Code is amended by adding a new Chapter 4.61 (Business License Tax) to
read as follows:
Sections:
4.61.010
4.61.020
4.61.030
4.61.040
4.61.045
4.61.050
4.61.070
4.61.090
4.61.100
4.61.120
4.61.130
4.61.140
4.61.150
4.61.155
, 4.61.160
4.61.170
4.61.180
4.61.190
4.61.200
4.61.220
4.61.230
4.61.240
4.61.250
4.61.260
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Chapter 4.61
BUSINESS LICENSE TAX
Purpose
Definitions
Tax Payment Required
Calculation of Number of Employees
Delayed Implementation
Maximum License Tax
Inflation Adjustment
Exemptions
Application and Payment Provisions
License Tax Certificate Issuance
License Tax Certificate Renewals
License Tax Certificate Display
Examination of Books and Records
Business Information Confidential
Determination of Tax Classification
Failure to File or Pay
Penalties for Delinquency
Refunds
Administrator Authority
Constitutional Apportionment
Apportionment Guidelines and Other Regulations
Misrepresentation of Material Fact
Civil Debt
Remedies Cumulative
4.61.010 Purpose
This Chapter is enacted solely to raise revenue for general municipal purposes. It
is not intended to be regulatory. The payment of a License Tax, and its acceptance by the
City, and the issuance of a tax certificate to any Person shall not entitle the license holder
to carry on any Business unless he or she has also complied with all of the requirements
of this Code and all other applicable laws, nor shall it entitle the lieense holder to carryon
any Business in any building or on any premises designated in such tax certificate if such
building or premises is or are situated in a zone or location in which the conduct of such
Business is in violation of any law.
4.61.020 Definitions
The following words and phrases, whenever used in this Chapter, shall be
construed as hereafter set out, unless it shall bc apparent from the context that they have a
different meaning.
A. "Administrator" means the Director of Administrative Services or another
city officer or employee charged by the city manager with the administration of this
Chapter, and his or her designee.
B. "Business" includes professions, trades, and occupations and all and every
kind of calling whether or not carried on for profit. Where a Person subject to the tax
acquires a Business, unless that Business is a Newly Established Business, the Business
shall be deemed a continuation of the previous Business and all activities of the Business,
whether occurring before or after the acquisition, shall be considered in calculating the
amount of any tax due from the Person.
C. "City" shall mean the City of Palo Alto.
D. "Employee" shall mean each individual engaged in the operation or
conduct of a Business, including, but not limited to owners, corporate officers, partners,
independent contractors, and employees. Family members of an owner of a Business, or
of the Person conducting a business, shall be considered Employees for the purposes of
this definition to the extent they devote hours of labor to the operation or conduct of the
business. Notwithstanding the foregoing, an independent contractor engaged by a Person
in conneetion with a Business shall not be considered an Employee of that Person if both
of the following conditions are met:
(i) the contractor was a Licensee (or the Employee of a Licensee) at the time the
contractor provided services to the Person seeking to exclude the contractor from
trcatment as an Employee; and
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(ii) each hour of services provided by the contractor to the Person seeking to
exclude the contractor from treatment as an Employee is included by the contractor (or
his or her employer) in the basis for calculation of the License Tax paid to the City by the
contractor (or his or her employer).
E. "License Tax" means the tax imposed pursuant to Section 4.61.030 of this
Code.
F. "Licensee" means a Taxpayer who has been issued a License Tax
certificate pursuant to this Chapter.
O. "Newly Established Business" means a Business in which neither the
owner nor operator, nor any Person from whom the owner or operator acquired the
Business, engaged in during the immediately preceding calendar year. The following
shall not be considered a Newly Established Business:
1. A Business conducted at a new location whether within or outside the
City when the Business conducted and taxed at a previous location during the preceding
calendar year was discontinued at the same time, prior to, or within thirty days after
commencement of Business at the new location;
2. The Business engaged in during the current calendar year is the same
kind as that engaged in during the immediately preceding year, but not at the close
thereof;
3. The Business to be engaged in during the current calendar year, though
not the same kind of Business, is taxed under the same category as the Business engaged
in during, but not necessarily throughout, the immediately preceding calendar year.
Provided that the Administrator may, on written application by a Taxpayer, and after
considering all circumstances, find that a Business described in this paragraph is in fact
new and not a continuation of a Business engaged in during the immediately preceding
calendar year.
H. "Person" means and includes domestic or foreign corporation, firm,
association, syndicate, joint stock corporation, partnership, joint venture, club, business
or common law trust, society, estate, receiver, retirement plan, trustee individual or any
other group or combination of individuals acting as a unit.
L "Sworn Statement" means an affidavit or a declaration or certification
made under penalty of perjury under the laws ofthe State of California,
J. "Taxpayer" means a Person subject to a tax imposed by this Chapter.
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4.61.030 Tax Payment Requin,'tl
Except as otherwise provided in this Chapter, every Person who engages in
Business within the City, whether or not at a fixed place of business, shaH pay an annual
License Tax in an amount as provided in this section:
A, Professional or Business Services, Any Person who engages in the
Business of providing Professional or Business Services shall pay a License Tax of
$75,00 for the first Employee and $95,00 for each additional Employee, but not less than
$75.00 per year. For purposes of this Chapter, "Professional or Business Services" shall
mean any Business that consists of the practice of a profession or vocation that primarily
involves providing financial, business, educational or health care services. Such
professions or vocations specifically include, but are not limited to, the practices of
physicians, dentists, attorneys, accountants, general contractors, specialty subcontractors,
morticians, veterinarians, architects, engineers, teachers, pharmacists, opticians,
optometrists, chiropractors, and rcal estate brokers (other than real estate brokers counted
as Employees of an real estate brokerage pursuant to subdivision (G) of this section).
B. RetaiVHotel. Any Person who engages in a Business consisting mainly of
selling' goods, wares, or merchandise at retail and any Person who engages in a Business
consisting mainly of operating a hotel/motel shall pay a License tax of $75 .00 for the first
Employee and $34.00 for cach additional Employee, but not less than $75.00 per year
C, Personal Services. Any Person who engages in a Business (other than a
Professional or Business Services Business described in Paragraph A, above) consisting
mainly of providing services such as, but not limited to, grooming, gardening, automobile
repair or similar services shall pay a License Tax of $75.00 for the first Employee and
$34.00 for each additional Employee, but not less than $75.00 per year
D, Wholesale/Manufacturing. Any Person who engages in a Business
consisting mainly of wholesaling (carrying or selling goods, wares, or merchandise at
wholesale) or manufacturing (extracting natural resources, manufacturing, packing, or
processing any goods, wares, merchandise or produce) shall pay a License Tax of $75.00
for the first Employee and $34.00 for each additional Employee, but not less than $75.00
per year,
E. Multifamily Residential Rental. Any Person engaging in the Business of
renting or leasing four or more residential units in the City for tenancies of thirty or more
days shall pay a License Tax of $75.00 for the first residential unit above three units and
$25.00 for each subsequent residcntial unit, but not less than $75.00 per year, The record
owner of a propcrty that is rented or leased for such tenancies shall be presumed to be the
Person renting or leasing the property and liable for the tax due under this Section unless
that record owner demonstrates to the satisfaction of the Administrator that some other
Person is cngaged in the Busincss of renting or leasing a particular property, in which
case that other Person shall be liable for the tax due under tbis Section as to that property.
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F. Commercial Rental. Any Person who engages in the Business of leasing
all or part of parcels of land, buildings or structures of any kind (other than the rental of
residential units) shall pay a License Tax of .03 cents per square foot of leasable space,
but not less than $75.00 per year. For purposes of this Chapter "leasable space" shall
mean the area of all buildings and structures offered for leas.e (other than buildings and
structures used solely for residential purposes and parking-appurtenant to residential
uses).
G. Real Estate Brokerage. Any Person operating a real estate brokerage shall
pay a License Tax of $75.00 for the first Employee and $95.00 for each additional
Employee, but not less than $75.00 per year. For purposes of this Chapter, the
Employees of a real estate brokerage shall include, but not be limited to any contractor of
the brokerage who is licensed by the State of California as a real estate broker,
salesperson, or broker-associate and places his or her broker's license with the Real
Estate Brokerage (or an affiliated broker) as a prerequisite to brokering the purchase or
sale of real estate. Brokers, salespersons, and broker-associates who are treated as an
Employee of a Real Estate Brokerage pursuant to this paragraph shall not, as individuals,
be liable for a License Tax or be required to submit an application for a License Tax
certificate pursuant to this Chapter. The number of brokers, salespersons, or broker-
associates that are Employees of a brokerage shall be calculated pursuant to Section
4.61.040.
H. Miscellaneous. Any Person who engages in any Business other than a
Business specified in Paragraphs A through G shall pay a License tax of·$75.00 for the
first Employee and $95.00 for each additional Employee, but not less than $75.00 per
year.
4.61.040 Calculation of Number of Employees
For purposes of computing the License Tax due pursuant to Section 4.61.030, a Taxpayer
may calculate the number of Employees of a Business for a calendar year using any of
the following methods:
(i) Based on Hours. Dividing the total number of hours worked during the
calendar year in connection with the Business by all Employees by 2080. For
purposes of the calculation, the Taxpayer may choose to assume that the number
of hours worked by any specific Employee was 2080 hours during a calendar year
or 173 hours during a calendar month;
(ii) Monthly Average. Counting the total number of Employees engaged in the
operation of the Business during each calendar month of the calendar year (not
taking into account whether the Employee worked full-time or for only part of the
month), adding the results for each of the twelve months, and dividing by 12; or
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(iii) Cumulative. Counting the total number of Employees engaged in the
operation of the Business during the calendar year (not taking into account
whether the Employee worked full-time or for only part of the year).
4.61.045 Delayed Implementation
A. License Reguirement. All existing Businesses shall obtain their initial
License and pay the applicable tax by January I, 2010.
B. Reduced Rate for Calendar Year 20 I O. The tax rates applicable in
connection with the issuance of any License Tax certificate expiring on December 31,
2010 shall be one-half of the rates shown in this section. Furthermore, License Taxes due
in connection with the issuance of any such License Tax certificate for a Business shall
be calculated based on operations from July I, 2009 through December 31, 2009, as if the
Business had no operations or employees prior to July 1, 2009.
C. Reduced Employee Count for Calendar Year 2010. When computing the
License Tax due in connection with the issuance of any License Tax certificate expiring
on December 31, 2010, a Taxpayer using the methods set forth in 4.61.040 (i) or (ii) to
calculate number of Employees shall proceed as if the Business had no Employees from
January I, 2009 through June 30, 2009 and a Taxpayer using the method set forth in
4.61.040 (iii) to calculate number of Employees shall count only Employees engaged in
the Business subsequent to June 30, 2009 and shall multiply such count by 0.5.
4.61.050 Maximum License Tax
A. The maximum License Tax that any Taxpayer shall be required to pay
with respect to any year shall be $30,000. Notwithstanding the foregoing, the maximum
License Tax that any Taxpayer engaged in a RetaillHotel or Personal Services Business
shall be required to pay with respect to any year shall be $20,000.
B. A Taxpayer may elect to pay the maximum tax indicated in this Section
rather than paying the tax that would otherwise be due under this Chapter. In such event,
the Taxpayer need not report the number of Employees in the statement required by
Section 4.61.100.
4.61.070 Inflation Adjustment
A. By October 30th of each year, beginning 2011, the Administrator shall
adjust in the manner required by this Section each of the following tax rates or amounts,
and those adjusted rates or amounts shall be used in calculating taxes due in the following
calendar year:
(1) Each of the minimum tax amounts set forth in Section
4.61.030;
(2) Each of the fixed tax rates set forth in Section 4.61.030;
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(3) The maximum License Tax amount set forth in Section
4.61.050.
B. Each rate or amount shall be rounded to the nearest dollar for inflation by
mUltiplying the then effective rate of the annual increase in the Consumer Price Index for
All Urban Consumers, San Francisco Bay Area (or any successor to that index) ("CPI")
for the most recent 12 months for which data has been published when the adjustment is
calculated, except for the rate set forth in Section 4.61.030 (F) (Commercial Rental)
which shall be adjusted by the above stated CPI rate without rounding.
C. The Administrator shall publish the adjusted rates and amounts by
November 15th of each year, beginning in 2011, at least once in a newspaper of general
circulation within the City, or if there is none, a newspaper of general circulation in the
County.
D. The City Council may, by resolution, suspend the effectiveness of all or
part of one or more such adjustments for such period or periods as it may determine.
However, such suspension shall not be taken into account by the Administrator when
making the calculations required by this Section. The expiration or termination of any
such suspension shall not require voter approval, provided that the tax is not imposed on
any Person in an amount in excess of the inflation-adjusted rates or amounts authorized
by this Ordinance.
4.61.090 Exemptions
A. The requirement to pay a License Tax pursuant to Section 4.61.030 does
not apply to:
I. Constitutional Exemption. Any Person transacting or carrying on
any Business exempted by the Constitution or laws of the United States or of the State of
California from the License Tax, but such exemption shall only extend to such exempt
Business and not to any other Business in which such Person may engage;
2. Disabled Veteran. Any disabled veteran holding an honorable
discharge from a branch of the military service of the United States, if he or she is
physically unable to earn a livelihood by manual labor;
3. Non-Profit. Any organization certified by the Internal Revenue
Service as an exempt organization pursuant to Section 501(c)(3) of the United States
Internal Revenue Code;
4. Minor. Any individual under 18 years of age. However, a
Taxpayer, who is not themselves under 18 years of age, may not exclude from the
calculation of tax due Employees who are under 18 years of age.
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B. A Person elaiming an exemption under this section, in addition to filing
the written statement required by Section 4.61.100 of this Code, shall file a Sworn
Statement with the Administrator stating the facts upon which the exemption is claimed.
In the absence of a statement substantiating the claim, the Person is liable for the payment
of the License Tax required by Section4.6L030.
C. Upon proper showing contained in the Sworn Statement, the
Administrator shall issue a License Tax certificate to the Person claiming exemption
without payment to the City of the Lieense Tax otherwise required by Section 4.61.030.
D. The Administrator, after giving a Person receiving a lieense pursuant to
Paragraph C of this seetion notice and a reasonable opportunity for hearing, may revoke
such License Tax certificate upon receiving information that the licensee is not entitled to
the exemption elaimed.
4.61.100 Application and Payment Provisions
A. Each Person engaging in Business within the City, whether or not at a
fixed place of Business, shall file a "",ritten statement each year with the Administrator
upon forms provided by the Administrator indicating the business activity to be
conducted, the location of the Business, the officers or other principals of the Business,
the number of Employees, residential rental units or commercial leasable space used to
calculate the License Tax, the anlOunt of License Tax due for that period, and sufficient
information to allow computation of the License Tax due.
B. The statement required by Paragraph A of this section shall also include a
list of all contractors or subcontractors engaged by the Taxpayer to conduct business in
the City during the preceding year.
C. The Administrator shall not accept a statement unless accompanied by
payment of the License Tax due.
D. The License Tax with respect to each calendar year (other than the initial
calendar year of business operations) shall be due on January 1 of that year and shall be
delinquent on January 30 of that year. The amount of the License Tax due for a calendar
year shall be calculated based on Business operations actually conducted during the prior
calendar year.
E. Newly Established Businesses. The License Tax with respect to the initial
calendar year of operations of a Newly Established Business shall be due upon the
commencement of the operation of the business and shall be delinquent 30 days
thereafter. The tax due with respect to the initial calendar year of operations of a Newly
Established Business shall be the minimum tax set forth in Section 4.61.030 for the
applicable type of business. The License Tax due for the second calendar year and
subsequent years shall be based on the numbcr of Employees as calculated in Section
4.61.040.
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F. With respect to any License Tax the statement is due at the time the
License Tax is due.
4.61.120 License Tax Certificate Issuance
A. The Administrator shall issue a license tax certificate to each Taxpayer
who submits an application and pays the License Tax as required by Section 4.61.030 (or
submits a statement indicating that no License Tax is due, if such statement is accepted
by the Administrator pursuant to this Chapter). The certificate shall indicate the name of
the Business for which the License Tax is paid, the Person paying the License Tax, the
location of the Business, the type of Business for which the License Tax has been paid,
the period for which it has been paid and such other information as is deemed necessary
by the Administrator for the administration of the tax. Unless otherwise specified, all
License Tax certificates shall expire on December 31 of the year issued.
B. A License Tax certificate is not transferable, except that if the holder of a
License Tax certificate changes his or her place of Business he or she may apply to the
Administrator for a transfer of the License Tax certificate to the new location. The fee for
such a transfer application shall be established from time to time by resolution of the City
Council. A transfer application must be filed within 30 days of the establishment of a new
location.
C. No License Tax certificate shall be issued to any Person until any previous
indebtedness for taxes and fees imposed by this Chapter upon that Person, and with
respect to the Business for which the Person seeks a License Tax certificate, has been
paid.
D. A separate License Tax certificate is required for each branch or location
of a Business. Each License Tax certificate shall authorize the tax certificate holder to
transact and carryon only the Business stated therein at the location or in the manner
designated in such certificate; provided, however, a Business may obtain certificates for
separate locations either by submitting combined or separate applications for each
location.
4.61.130 License Tax Certificate Renewals
A. No renewal of a Business license shall be issued until payment in full of
all delinquent License Taxes, including accrued interest and applicable penalties thereon
is received by City.
B. It shall be the responsibility of each Business licensee to obtain and pay
for a renewal license regardless of whether or not such licensee has received a renewal
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notice from the City. Any failure to receive such notice shall not affect the applicability
of penalties for nonpayment or late payment set forth in this Section.
4.61.140 License Tax Certificate Display
A. Each Taxpayer shall display his or her License Tax celtificate as follows:
I. If the License Tax certificate is issued with respect to a Business
carried on at a fixed place, the Taxpayer shall post the lieense in a eonspieuous location
at that place;
2. If the License Tax certificate is issued with respect to a Business
that has no fixed place of Business, the Taxpayer shall keep the license upon his or her
person at all times while conducting Business;
B. The Administrator, code enforeement personnel, or any Person authorized
by the Administrator to do so shall have the authority to enter any place of Business taxed
under this Chapter at any reasonable time and demand exhibition of the License Tax
certificate issued with respect to that place of Business.
C. Any Person who willfully fails to exhibit a License Tax certificate in the
manner required by this seetion is guilty of a violation of this code punishable as a
violation of this Chapter punishable as a misdemeanor pursuant to Section 1.08.010 of
this Code.
4.61.150 Examination of Books and Records
A. Taxpayers shall maintain and preserve, for a period of at least four years
following the date the tax was due, such records as may be necessary to determine the
amount of thc tax due.
B. The Administrator is authorized to examine the books, papers and records
of any Person subject to this Chapter for the purpose of verifying the accuracy of any
return made or, if no return was made, to ascertain the License Tax due under this
Chapter. Every Person subject to this Chaptcr is directed and required to furnish to the
Administrator, the means, facilities and opportunity for making such examination and
investigations as are authorized by this section. The Administrator is authorized to
examine any Person, under oath, for the pU1pose of verifying the accuracy of any return
ruadc, or, if no return was ruade, to ascertain the license fee due under this Chapter, and
for this purpose may compel the production of books, papers and records and the
attendance of all persons before himlher, whether as parties or witnesses, whenever
he/she believes such persons have knowledge of such matters.
C. The refusal of such examination by any employer or Person subject or
presumed to be subject to the License Tax shall be deemed a violation of this Chapter.
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D. If upon examination of such records, the Administrator determines the tax
imposed by this Chapter has not been paid in full, the Administrator shall notify the
Taxpayer of the balance due, including any accrued penalties and interest. Such amount
shall be paid within thilty days after notiee is issued by the Administrator. If an
inspection revcals an underpayment of twenty-five dollars ($25.00) or less, the
Administrator need take no action to collect the underpayment.
E. If an inspection reveals an overpayment, the Administrator shall notify the
Taxpayer of the amount overpaid. Unless the Taxpayer requests a refund of the
overpayment within thirty days after notice is issued by the Administrator, the
overpayment shall be applied as a crcdit against the next annual tax due from that
Taxpaycr.
F. Nothing in this Section shall be construed to require the disclosure of
confidential information protected by doctor/patient, psychologist/patient, attorney/client
or other applicable privilege.
4.61.155 Business Information Confidential
Information concerning the business affairs, operations, or financial information
furnished or secured pursuant to the provisions of this Chapter shall be confidential, shall
not be subject to public inspection, and shall not be made available to anyone not charged
with the administration of this Chapter provided, however, the provisions of this Section
shall not be construed to prevent:
A. Disclosure to, or the examination of records and equipment by, another
city official, employee, or agent for the collection of taxes for the sole purpose of
administering or enforcing the provisions of this chapter or collecting the business taxes
imposed by the provisions of this chapter;
B. The disclosure of information to, or the examination of records by, federal
or state officials, or the tax officials of another city or county, if the reciprocal
arrangement exists, or to a grand jury or court of law upon a subpoena;
C. The disclosure of information and the results of examination or records or
palticular taxpayers, or relating to particular taxpayers, to a court of law for proceedings
brought to determine the existence of the amount of any business tax liability of such
particular taxpayers of the City;
D. The disclosure of the names and business address of persons to whom
business tax certificates have been issued and the general type and nature of their
business;
E. The disclosure of general statistics regarding business taxes collected or
business done in the city.
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F. Disclosures required by state or federal law or the order of any court with
jurisdiction over the City.
4.61.160 Determination of Tax Classification
A. If two or more activities of a single Taxpayer are taxable pursuant to
Section 4.61.030 at the same rate, the Taxpayer may calculate and report the tax due for
the aetivities as a group. If two or more activities are taxable, but at different tax rates, the
Taxpayer may calculate the tax for each activity separately or may elect to calculate the
tax for the activities as a group by applying the highest tax rate applicable to any activity
in the group.
B. The detenuination of the class of business in which an applicant for a tax
certificate is engaged for pm'j)oses of Section 4.61.030 shall be a ministerial task of the
Administrator. The Administrator may, at any time within one year after receiving a
statement pursuant to Section 4.61.100, correct the classification reported by a Taxpayer
and recalculate the tax due. The Administrator shall then treat the results of this
recalculation as the results of an audit.
C. In the event an applicant disagrees with the detetmination of the
Administrator as to the class of business in which the applicant is engaged, the applicant
may file an application for reclassification with the Administrator. This application shall
set forth with specificity the facts upon which it is based. Upon receipt of a
reclassification application, the Administrator shall review the matter and either affirm
the original classification or assign a new classification and shall notify the applicant in
writing of the decision, which shall be final.
D. The Administrator may refuse to accept an application for reclassification
from an applicant who has applied for reclassification within the previous twelve months
if the application fails to state material and relevant faets that were not and could not have
been presented in the previous reclassification application.
4.61.170 Failure to File or Pay
A. If a Person fails to file a required application or statement, fails to pay the
License Tax or fails to file a corrected statement within fifteen days of a demand by the
Administrator, the Administrator may determine the amOlmt of License Tax due, using
the information he or she is able to obtain.
B. When the Administrator makes a determination under paragraph A of this
Section, he or she shall give a notice of the amount of License Tax due by serving it
personally or by mail, postage prepaid, addressed to the Taxpayer at his or her last known
address.
C. Payment of the corrected tax shall be due within fifteen days of the service
or mailing of the notice pursuant to Paragraph B of this section.
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4.61.180 Penalties for Delinquency
A. Upon a taxpayer's failure to pay the entire tax when due, the
Administrator shall add a penalty in an amount specified by the City Council or ten
percent of the unpaid tax on the first day of eaeh month following the month the tax was
due, whichever is greater; provided, however, no penalty shall be assessed in excess of
fifty percent of the tax due. For the purposes of this Chapter, a payment made by mail
shall be deemed received on the date of a postmark on the envelope in whieh the payment
is received, or if payment is made by means other than U.S. Mail, payment shall be
deemed received on the date the payment is stamped "received" by the Administrator or
his or her designee.
B. On the first day of the month following the date on which the maximum
penalty provided for in Paragraph A has acerued, interest at the rate of one percent per
month shall begin to accrue. Interest shall acerue at this rate on the amount of the unpaid
tax, exclusive of penalties, for eaeh month or portion of a month until the tax is paid.
4.61.190 Refunds
No tax shall be refunded unless it is determined by the Administrator that it has
been paid in error, computed incorrectly, overpaid, or collected illegally. No refund shall
be made unless a written request is received by the Administrator within one year ofthe
payment of the tax.
4.61.200 Administrator Authority
The Administrator shall have the power, for good cause;
A.
B.
C.
D.
E.
4.61.220
To extend the time for filing any required Sworn Statement;
To waive any penalties which would otherwise have accrued;
To adjust the amount of the business tax due;
To make refunds or prorations of taxes paid;
To issue citations for violations of and otherwise enforce the
provision of this Chapter.
Constitutional Apportionment
A. If a Person believes that the License Tax, as applied to him or her, places
an undue burden on interstate commerce or violates the due process or equal protection
clauses of the United States or California Constitutions, he or she may apply to the
Administrator for an adjustment of the tax. Such adjustment shall be supported by a
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Sworn Statement setting forth the method of business and number of Employees and such
other information as the Administrator may consider necessary to consider the claim.
B. The Administrator shall review any application pursuant to paragraph A of
this section, and shall fix as the License Tax an amount that is reasonable,
nondiscriminatory and consistent with applicable law. The amount so fixed shall not
exceed the amount that would otherwise be due pursuant to this Chapter.
4.61.230 Apportionment Guidelines and Other RegUlations
The Administrator, in consultation with the City Attorney, and subject to the
approval of the City Manager, may:
A. Promulgate guidelines for the apportionment of the License Tax
for businesses which operate both inside and outside the City to assist taxpayers in
calculating the portion of their activities subject to the tax imposed by this Chapter; and,
B. Adopt any other rules or regulations necessary or desirable for the
enforcement of this Chapter. Any apportionment guidelines or rules or regulations for the
enforcement of this Chapter shall be effective only after they have been published in the
manner required for an ordinance of the City.
4.61.240 Misrepresentation of Material Fact
It is a violation of this Chapter punishable as a misdemeanor pursuant to Section
1.08.010 of this code to knowingly or intentionally misrepresent to any officer or
employee of the City any material fact, relative to any tax imposed under the provisions
of this Chapter.
4.61.250 Civil Debt
The amount of tax, fee, penalty, or interest imposed by the provisions of this
Chapter shall be deemed a debt to the City. An action to recover such debt may be
commenced in the name of the City in any court of competent jurisdiction.
4.61.260 Remedies Cumulative
The conviction and punishment of any Person for faillU'C to comply with the
provisions of this Chapter shall not relieve that Person from paying any tax, fee, penalty,
or interest due and unpaid at the time of sueh conviction, nor shall payment prevent
prosecution of a violation of any provision of this Chapter. All remedies shall be
cumulative, and the use of one or more remedies by the City to enforce this Chapter shall
not bar the use of any other remedy.
SECTION 2. Amendment or Repeal. The City Council may repeal Chapter
4.61 ofthe Palo Alto Municipal Code or amend that Chapter without a vote of the people
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except that any amendment to Chapter 4.61 that increases the amount or rate of tax due
from any Person beyond the inflation-adjusted amounts and rates authorized by this
Ordinance may not take effect unless approved by a vote of the people.
SECTION 3. Severability. If any section, subsection, sentence, clause, phrase,
or portion of this Ordinance is for any reason held to be invalid or unenforceable by a
court of competent jurisdiction, the remaining portions of this Ordinance shall
nonetheless remain in full force and effect. The people hereby declare that they would
have adopted each section, subsection, sentence, clause, phrase, or portion of this
Ordinance, irrespective of the fact that anyone or more sections, subsections, sentences,
clauses, phrases, or portions of this Ordinance be declared invalid or unenforceable.
SECTION 4. Effective Date. This ordinance shall be effective immediately
upon adoption.
SECTION 5. Execution. The Mayor is hereby authorized to attest to the
adoption ofthis Ordinance by the voters of the City by signing where indicated below.
I hereby certify that the foregoing Ordinance was PASSED, APPROVED and
ADOPTED by the People of the City of Palo Alto voting on the 3rd day of November,
2009.
ATTEST:
City Clerk
APPROVED AS TO FORM:
Senior Asst. City Attorney
090716 syn 0130492
15
Mayor
APPROVED
City Manager
Director of Administrative
Services
ATTACHMENT B
CITY OF PALO ALTO
BUSINESS TAX APPORTIONMENT GUIDELINE (DRAFT)
July 14, 2009 Revision
Pursuant to the authority granted by Palo Alto Municipal Code ("PAMC") Section
4.61.230, the following Business Tax Apportionment Guideline ("Guideline") is
hereby adopted and determined to be desirable for the implementation and
enforcement of Chapter 4.61 (Business License Tax) of the PAMC. All defined
terms used in this Guideline shall have the meaning set forth in PAMC Section
4.61.020.
Overview: The purpose of this Guideline is to establish the procedures by
which: (a) Persons subject to the License Tax may request an apportionment of
the License Tax to reflect activities within the City, and (b) the City will review and
act on requests for apportionment of the License Tax.
The obligation to pay License Tax is defined by PAMC Chapter 4.61. PAMC
Section 4.61.220 generally provides that the obligation to pay business license
taxes is not intended to conflict with exemptions established by State or Federal
law. California Government Code Section 37101(b) provides, in pertinent part,
that if the City imposes a business license tax "upon a business operating both
within and outside the [City's] taxing jurisdiction, the City shall levy the tax so that
the measure of tax fairly reflects that proportion of the taxed activity actually
carried on within the City."
Procedure: A Taxpayer who is subject to a tax based on number of Employees
may request that the number of employees upon which its License Tax is based
be reduced by one or more apportionment factors (outlined below) so long as it
submits, along with the application and apportionment request, payment of the
license tax that it believes is due based on the claimed reduction.
A. Submission of Application
Any request for apportionment must be supported by documentation in the
taxpayer's possession establishing the facts set forth in the request. The request
must be submitted under penalty of perjury, and shall be subject to the
Examination of Books and Records procedures set forth in PAMC Section
4.61.150.
B. General Apportionment Rule
1. A Taxpayer may exclude from the total number of work hours counted for
purposes of Option (i) of PAMC Section 4.61.040:
(a) Any hours worked by an Employee (other than a City-Based
Employee) at a physical location outside of the City.
1
(b) 50% of any hours worked by a City-Based Employee at a physical
location outside of the City.
2. For purposes of Subdivision 1, above, an Employee is a City-Based
Employee during any calendar month in which:
(a) The Employee works at least 50% of his or her work hours for the
Business at a location within the City; or
(b) There is no one city (or county, with respect to work conducted in an
unincorporated area) in which the Employee performed at least 50% of
his or her work hours for the Business and the location at which the
employee's principal desk, office, locker,or timecard is located is within
the City.
The purpose of this apportionment rule is to allocate the tax fairly when work is
performed outside of the City but based inside of the City and when work is
neither performed nor based in the City.
C. Alternative Apportionment Rules
The Taxpayer may apply to the Administrator for modification of the general
apportionment rule as applied to his or her Business if he or she believes that the
tax calculated under the general apportionment rule would exceed the amount
permitted by law or if he or she believes that it is not practical to compute the tax
using the general rule using available business records. Such request shall be
submitted along with the request for apportionment and shall be accompanied by
a statement of facts setting forth the proposed alternative formula and supporting
its appropriateness at fairly apportioning Business activities.
D. Apportionment of Minimum Tax
Any Taxpayer who would, based upon the apportionment claimed pursuant to the
Guideline, be subject to a minimum tax set forth in Section 4.61.030 of the
PAMC, may apply along with their request for apportionment, for a reduction of
the minimum tax due from them. Such minimum tax reduction shall be
calculated by multiplying the minimum tax by the number of work hours excluded
by virtue of apportionment dividing the product by total unapportioned work
hours.
E. Decision by Administrator Final
The Administrator shall analyze the Taxpayer's request for apportionment and
shall determine that the requested reductions and any modifications to
percentages are appropriate in order to fairly apportion gross receipts to in-City
as opposed to out-of-City activities.
2
If the Administrator determines that the request for apportionment is not
supported by the Taxpayer's documentation, or is otherwise improper, the City
Collector shall so inform the Taxpayer in writing and shall inform the Taxpayer of
additional License Taxes due, together with interest and penalties thereon. Any
such determination by the Administrator shall be final.
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MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER
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Special Meeting
June 22, 2009
REPORTS OF COMMITTEES AND COMMISSIONS
9. Finance Committee Recommendation to Direct Placement of Proposed
Business License Tax Measure on November 2009 Ballot.
City Manager, James Keene reviewed Council’s directives since 2007 and
their progress on the Business License Tax (BLT), its priority to preserve
General Fund services while also reducing the significant infrastructure
backlog. Impacts to the business community were considered. He noted
that if Council proceeded with the BLT, this was scheduled for the November
2009 ballot. The revenue from the BLT, if approved, cannot be used to
balance the newly adopted budget. It potentially provided a revenue stream
toward funding General Fund services and brought with it an increased
ability to deal with the infrastructure backlog for the City. No specific
identifications for the potential BLT funds have been made, however. Under
$2 million was estimated to remain in the City’s infrastructure reserve by the
end of 2010. He reiterated that he, his staff, and the Finance Committee
had been working on the BLT for a long period of time. He reviewed that the
deadline for action on the BLT for the November ballot included an ordinance
adoption by Council by July 20, 2009.
Administrative Services Director, Lao Perez reviewed with Council where the
process for the BLT began to where talks ended with the Finance Committee.
This included information on the consultant service which helped to review
the varied tax methodologies and also to determine the number of potential
businesses in the City. Data determined there were 9,000 businesses
existing in the City, and 2,500 businesses were identified from Sales Tax
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data in determining gross sales data which was then categorized by business
sectors. Revenue assessments and modeling were done to approximate
revenue generation. Information was obtained from Reference USA in
ascertaining the number of employees in the community. The cost of doing
business in Palo Alto was analyzed versus the costs in neighboring
communities. Ten meetings were held with members of the business
community between March and May of 2009 with significant feedback.
Comments from these meetings were reviewed. Meeting and discussion was
hosted by the Chamber of Commerce of Palo Alto in consideration of
alternative revenue generations. Three suggestions from the Chamber
meetings included: 1) Increasing the Utilities User Tax (UUT) to generate
approximately $3 million; 2) Increasing Sales Tax, for the generation of
approximately $4 million; and 3) Increasing the Documentary Transfer Tax
(DTT) to generate approximately $3 million. Discussion-only was held and
no action was taken.
Management Specialist, Sherilyn Tran spoke on the cost of doing business in
Palo Alto. Staff, by Finance Committee’s directive in March 2009, did an
analysis and cost comparison for doing business in Palo Alto versus
neighboring cities. Six cities were in the study: Sunnyvale, Mountain View,
Santa Clara, Redwood City, Menlo Park and San Mateo. Three cost areas
were studied: fees, taxes, and commercial property rental rates. The
current costs for doing business in Palo Alto were not significantly higher
than the comparison cities. The City’s fees and taxes are not significantly
higher than the other cities with the Transient Occupancy Tax (TOT), which
is 2 percent higher than the majority of the cities, while its UUT is in line
with Redwood City. Palo Alto is the only city in the comparison group which
does not currently have a BLT. Additional mandatory costs for doing
business in Palo Alto included development impact fees, planned check
reviews, and signage costs, which are conditional and dependent on the
business type and specific needs. All cities in the study have their own
mandatory conditional costs dependent on the specific needs of each
community. Water, gas and electrical cost comparisons for doing business
were studied. Utility user data from three businesses in the City were
compared to the rates for the comparison cities. Overall, Palo Alto
businesses pay less for utilities than the comparison cities. The cost of
commercial property rental comparisons for research and development
(R&D), retail, and office were reviewed, with Palo Alto coming in with one of
the highest rents when compared to the other cities. However, the City also
had the lowest vacancy rate for office space and the second lowest vacancy
rate for R&D space. The cost of doing business in Palo Alto, based on the
above study, brought Staff to the conclusion that doing business in the City
is not significantly higher than the neighboring cities in terms of city-
mandated costs.
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Mr. Perez summarized the Finance Committee’s actions spanning March
through the present time. Motions and directions from the Committee
included moving forward with the BLT recommendation to full Council with
an annual generated revenue of approximately net $3 million, with an
implementation date of July 1, 2010, and an option to delay the effective
date, with all businesses subject to the BLT with no exemptions other than
statutory exceptions for the first three units of a multi-unit rental class. The
cap was increased to $30,000 for all businesses other than retail which
remained at $20,000. Using the full-time equivalent (FTE) in order to
determine employee numbers was recommended. The Finance Committee
was evenly divided on the tax methodology between gross receipts and the
employee headcount methodologies. Direction was given to reduce the
business classifications and/or merge categories as one classification;
personal services and hotels was merged with retail while business services
merged with the professional classification. Guidance was given on
development of a wider tax rate distribution between professional and retail
classifications. Direction was given for the provision of additional revenue
models based on gross receipts and employee FTE count. Staff was asked
to evaluate alternative tax methodologies for multi-unit rental and
commercial property. Staff’s original recommendation was for gross receipts
with the direction to do per-unit rents for the multi-units and square footage
for the commercial property. He recapped the tax methodologies and tax
models which he and staff studied. After reviewing comments from the
business community and the Finance Committee on reducing the tax to $3
million in forecasted revenues, Staff reduced the tax by more than 50
percent in the business categories. He addressed the concerns over double-
taxation and pass-through from landlords to the tenants. He noted Staff
needed direction from Council on the type of tax methodology. An additional
directive was needed for the administration costs of the BLT program. The
issue still stood on whether or not to provide an exemption for nonprofits
under the employee tax methodology. He reviewed the administrative cost
approximations for implementing and enforcing the BLT. Staff decided to
start with temporary staffing for administration as well as implementation
and enforcement of the BLT to better assess staffing needs for the long-
term. Staff recommended beginning with 2.5 temporary staffing positions in
order to perform the varied functions which he reviewed. Variable costs
were noted for forms, envelopes and software. A $10,000 contingency was
requested in this regard. When the exact needs for administration of the
BLT were known, Staff would then return to Council for authorization to
convert any existing temporary positions to permanent status. The
estimated costs for this change-over went from the temporary
administrative cost estimates of $160,000 to $290,000 in permanent
administration. The rise in costs reflected the ability for these positions to
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also provide code enforcement on the collection of the BLT when necessary.
Based on the review done by the consultants, as well as the history of
neighboring cities in California, it was noted that 80 percent of businesses
self-report and pay. Collection efforts were necessary for the remaining 20
percent of the businesses which did not report or pay. He reviewed their
suggested employee count and costs for administration of the BLT with that
of surrounding cities. Cities with and without enforcement costs for the tax
were included in their comparison. He stated Staff’s recommendations for
2.5 positions were comparable based on this information. He stressed that
starting the program on their proposed temporary basis with these 2.5
employees lent for an opportunity to adjust along the way to better fit the
long-term outlook for the tax and its enforcement. He stated any costs for
enforcement of non-registered and non-paying businesses was offset by the
recovery of these BLT revenues. He reviewed the duties of the 2.5
employees, which included community outreach and education on the BLT,
development and reporting of forms, instructional guidelines and letters of
introduction of the BLT as well as the creation of a database with existing
information with the goal to have an online system in the future. BLT
staffing would also process payments and mail BLT certifications, do
enforcement and prepare and submit the data required by the State. He
reviewed the necessary steps BLT staffing would follow in managing the
program. In closing his presentation, he noted Staff’s recommendations for
the BLT in following with the recommendations from the Finance Committee,
which included addressing the City’s infrastructure backlog. For that reason,
Staff recommended the gross receipts model. Staff was in agreement with
the $3 million net in revenue forecasted in the models. Staff asked for
direction on continuing to finalize the BLT ordinance for placement on the
ballot of November 2009, with a return to Council on July 20, 2009 with this
document.
Council Member Kishimoto asked, if 80 percent of the City’s businesses were
likely to comply with reporting and payment of the tax, what method was
proposed for auditing the remaining 20 percent.
Mr. Perez stated if a comparison of available data noted that a particular
business did not have a BLT, then followup, verification and enforcement
would ensue. A walk-through of the business district to review the addition
of new business was also suggested as a manner in which to audit the
situation. New utility account data for new business was an additional way
to track and contact new businesses that had not yet registered and paid
their BLT. Another trigger that may attract their attention is a large
business with significant revenue generation, who has submitted the
minimum BLT, may require further followup and verification. With the
suggested staffing level at a temporary start-up of 2.5 employees, full
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enforcement throughout the City was not planned. BLT staff’s duties were
dedicated to processing and administration of the program. During the non-
renewal cycle, BLT staff had the freedom to follow along with data
comparisons and follow through to catch up any unreported businesses.
Vice Mayor Morton asked if the City had access to State information on sales
tax accounts and 1099 issuances, and if the BLT ordinance was in place.
Mr. Perez noted this was his understanding as well; once a BLT ordinance
was in effect, the City then had access to State data.
Council Member Kishimoto asked what kind of cross-checking and auditing
measures might take place under the employee headcount tax method.
Mr. Perez stated followup and cross-checking was along the same lines as he
had previously mentioned, although it was less clear on how they would do
this since there is less information available for comparison. Experience and
process, however, was the same as he had discussed previously with the
expectation going in that approximately 80 percent of the businesses were
likely to comply and follow through. Any available State data was also
available for cross-checking.
Council Member Kishimoto noted the State’s Employee Development
information was an access area as well if the ordinance passed.
Mr. Perez agreed, once the ordinance was in place, the City then had access
to this data.
Council Member Kishimoto asked what measures were taken in protecting
confidentiality regarding fee and tax information.
Cara Silver, Senior Assistant to the City Attorney noted the amount of taxes
paid by taxpayers was typically kept confidential. However, there was
distinction between taxes versus fees. Development fees and the like were
not confidential.
Vice Mayor Morton noted this was the same for the utility actions, which
were also not public information.
Ms. Silver stated similar rules governed sales tax and the like.
Mr. Perez added language had been worked into the ordinance which
clarified that the BLT staff was not privy to client and other privileged
information files.
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Council Member Kishimoto spoke to some concerns and questions she had
received from a community member, Herb Borock, with regard to the
presumed employee numbers for Stanford Hospital and Palo Alto Medical
Foundation (PAMF).
Mr. Perez stated it could not be ascertained from the information provided as
to whether or not the number of positions provided were FTEs or headcount.
The estimate of 5,000 was for FTE status, but headcount was higher. Staff
used conservative numbers at this point since they did not have the exact
data on headcount versus FTE.
Council Member Kishimoto asked if the determination of this was likely to be
clearer, after the ordinance passed, and once they had access to State
information.
Mr. Perez stated this was the likely case. They do not have access to this
information as of yet. He noted they were following the self-reporting rule of
thumb that employers follow through with this information. They can then
look at the data received from Reference USA in trying to cross-check and
discuss with the businesses on their numbers.
Council Member Kishimoto asked for clarification and any estimations on the
revenue caps.
Mr. Perez noted several issues arose in this area in that they do not know
how a company might apportion their employees. An exact number of
employees working within the City was necessary in this assessment as well
as their FTE status. Based on data they have already reviewed, Staff
noticed that 8-10 businesses would exceed the cap on the per-employee
basis and nearly the same would exceed with the gross receipts
methodology. Only one or two businesses were consistent in these findings
while the others different dependent on the tax methodology.
Council Member Kishimoto asked for clarification on why Staff recommended
the gross receipts methodology over employee headcount, other than the
apportionment being much easier.
Ms. Silver noted this was not stated in the Staff report, but this was actually
the opposite in that apportionment was easier for the employee headcount
methodology. Typically, employee headcount apportionment included the
number of employees physically present in Palo Alto, which were then
attributed to the City’s taxable activity. Those employed outside the City
were apportioned outside the City. She noted the language in Staff’s report
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may have been confusing, but the point remained that there were
apportionment issues with any type of methodology. However, staff
believed that the employee count methodology was easier to apportion than
the gross receipts methodology.
Council Member Kishimoto noted the proposed costs for administration of
the tax were $300,000 for both the employee headcount and gross receipts
methodology. She asked if this was a rough estimate of costs since it
appeared that the headcount methodology was easier in administration.
Mr. Perez stated the estimated costs were based on the assumption that
there were 9,000 businesses existing within the City and their activities. It
was estimated to take 15-20 minutes to process initial applications. It may
prove less staff was necessary, once the process was initiated and better
understood, which is why Staff had recommended the use of 2.5 employees
on a temporary staffing basis at lower cost while determining the need.
Council Member Kishimoto asked how much thought was given to
streamlining the administration of the BLT tax process for both the City and
the payee. If computerized as much as possible, she questioned whether it
was conceivable that the payee would spend no more than 5 minutes per
year, as well as the City spending no more than 5 minutes per year on each
application.
Mr. Perez stated it was difficult to assess or estimate the time and costs at
this point but administration of the BLT planned to reach the highest level of
efficiency. A meeting with a vendor who had implemented an online system
for the City of Houston was planned for the near future. Eight fields of
information were required by the State on BLT applications. Additional fields
may be added by the City as they assess the makeup of the BLT applications
and forms.
Vice Mayor Morton noted, when talking about these required fields, some
fields were as simple as the business name, address and phone.
Mr. Perez stated this was correct; most cities use a one-page form. The
form itself was not at any great expense. He had a sample for Council’s
review.
Council Member Kishimoto was interested in seeing a sample form. She
noted, even with those common fields, this was the same as the County
Assessor filing forms. Once an account was established, renewal every year
is less time consuming since many fields auto-filled at renewal time.
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Mr. Perez stated this was correct; fewer changes or new information existed
at renewal time. He noted the initial setup required more time with the
ongoing information gathering easier with some automatic notifications
going out to the businesses as a long-term goal and part of their scope
review. The more automated they became, a business had the ability to
sign on to the system at any time of the day.
Council Member Yeh stated that Staff’s information on the cost comparisons
for doing business in the City were helpful in this current discussion as well
as in future discussions. He asked how accurate their estimate was for the
presence of 9,000 businesses in the City. He asked what percentage of
businesses this potentially captured.
Mr. Perez stated it was difficult to answer this when considering the
businesses on the professional side. However, they were fairly confident in
their numbers for the retail businesses since a data set existed because of
the sales tax information. They know, for example, where they stand on
their estimates with regard to home-based businesses and any other
businesses which existed under their radar. He assured Council that Staff
had vetted out seven different data sets. The estimated number of
businesses in the City had originally been 20,000. However, after reviewing
the data and eliminating any duplications or businesses which had moved
out of the area, they had arrived at the 9,000 number. In comparing the
City to the area communities and their average number of businesses, they
were reasonably in line in their estimates.
Council Member Yeh asked about the process used in developing the
research data. If Staff mapped out an ideal process in which to develop all
of these estimates, would it be preferable to have a registry in place prior to
any analysis.
Mr. Perez stated there was no doubt that a registry, already in place,
provided a more confident set of numbers for potential tax revenues.
However, the consultant had advised Staff in that it took approximately
three years to establish a base of data upon the implementation of the BLT.
He reiterated that 80 percent of businesses self-report and this three-year
approximated start-up allows for the remaining 20 percent of the businesses
to get onboard.
Doug Jensen, Community Services, elaborated on how they had come up
with the 9,000 estimate for businesses within the City. He stated they had
used a database integration technology where multiple diverse databases
including sales tax, property tax, phone records, marketing directories, State
licensing and contractor files, along with any data source available were
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used. These data sources were then honed down to a valid Palo Alto
address. Anything within the databases was not physically within the City
were purged in order to come up with a business distributive subset which
came to 9,000 by estimate. He echoed Mr. Perez’s concern that a
percentage of accuracy was not feasible for that number at this point, but
the number had been carefully vetted. Professionally, he stated their
estimate of 9,000 was very close.
Council Member Yeh asked how other jurisdictions approached this in order
to develop their BLTs.
Mr. Jensen stated the cities, in their comparison study, had held a BLT
ordinance for many years and that this had been developed over time.
Costs of implementing a registry and enforcement of a voluntary registry still
involved holes or missing information.
Council Member Yeh asked for a description of the registry aspects within
some of the other jurisdictions. He questioned if there was any kind of cost
recovery associated and how fees were structured on the registry side. He
asked what other cities had done with any additional information they had
received in these registries.
Mr. Jensen noted cities using a registry-only on a voluntary basis had no
enforcement and routinely received information from 80 percent of their
businesses. Cities with a BLT ordinance in place for many years had more
accurate numbers with regard to their business community and the business
types.
Council Member Yeh asked if they had seen any specific usage of that data.
Mr. Jensen stated certain things were recommended, such as employee
headcounts, emergency contact information, alarm system information, and
public safety information.
Council Member Yeh stated the CMR included discussion over
implementation of the BLT and collections in the first quarter of 2011. He
noted three years was cited as an adequate timeframe to gather and build
an accurate business registry. He asked what steps were included in
assessing this information at the one-year point in a three-year process of
data accumulation to be sure they were moving towards a more precise
number.
Mr. Perez stated a registry database was assistive in reaching the more
accurate number of businesses in the City. He reiterated that 100 percent
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compliance was not expected. A dataset for home-based businesses would
arise in their ongoing establishment of the BLT.
Council Member Yeh stated the timing of the election process for the
proposed BLT was either November 2009 or November 2011. He asked if
collections were initiated in January 2011, and there was also an election in
November 2011, given what had been said with regard to the potential
benefits of additional provisions in estimating revenue, number and type of
businesses and their distribution throughout the City, how would Staff view
ramping up something if there were a vote in November 2011. He asked if
this was facilitated by having a business registry in place already, or not.
Mr. Perez stated the process was likely to establish more quickly with more
data and time to set up the tax process, itself, with the business registry
database in place by the time the election occurred in 2011.
Mr. Keene stated the value added by the business registry was related to the
yield of the total revenues the City received being totally accurate. The
focus was on the equity or impact of the individual business owner which
was separate from the yield to the City of the revenues from a BLT. He
noted another issue arose in whether or not the estimates of the average
per category or the median per category were accurate. Without the
business registry it was important to keep in mind the realm of the realistic
based upon all the factors that exist.
Mr. Perez reviewed with Council, in PowerPoint, a BLT application form used
by the City of Menlo Park. He noted copies of other cities’ forms existed as
well to provide Council with further examples.
Council Member Burt asked for clarification of the logistics if Council asked
them to return with two alternatives: 1) a form of the BLT, and 2) an
alternative real estate transfer tax type. He questioned whether Staff had
adequate time to return with these alternatives while also having time to
engage the public and gauge their opinions.
Mr. Keene stated this was predicated on whether or not Council directed
them on what they wanted to see in either case. Pending any results of any
survey data, the ordinances in either case would be in draft form.
Additionally, he asked Mr. Perez what additional things were possible other
than simply a survey mode or gear.
Mr. Perez noted the simple mode for public information and opinion included
the use of some phone-sampling along with public survey.
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Council Member Klein asked for clarification on the issue of business of
nonprofit and their place in the BLT ordinance.
Ms. Silver stated nonprofits were statutorily exempt from a gross receipts
tax but were not necessarily statutorily exempt from the employee-based
tax. If Council gave direction for implementation of an employee-based tax,
an issue under consideration was whether they also wanted to exempt the
nonprofits. Many or most ordinance exempted these nonprofits. Two large
nonprofits in Palo Alto, Stanford University Medical Center and PAMF, were
two of the City’s highest employee counts.
Mr. Keene added it was Council’s discretion to exclude nonprofits above a
certain size from this exemption.
Council Member Klein stated they were leaning toward the exclusion of the
largest nonprofits if he had understood materials and slides already
presented. If this were the case, he asked if the smaller nonprofits had been
included in the BLT calculations.
Mr. Perez stated these were included in the employee base dependent on the
information received from Reference USA.
Council Member Klein asked for an explanation of the rationale for including
the smaller nonprofits but excluding the larger nonprofits.
Mr. Perez stated their recommendation was to exclude any nonprofit that
had 100 FTEs or less, unless advised otherwise by Council.
Council Member Klein asked how they arrived at the threshold of 100 FTEs
or below.
Mr. Perez stated this was likely to include most of the smaller nonprofits.
Vice Mayor Morton asked if nonprofits could be excluded by activities as well
as by size, such as including medical nonprofits but exclusion of all others.
Ms. Silver stated they needed to research that issue since she had never
seen it done in the past.
Vice Mayor Morton addressed the sample BLT form presented by Staff by
example. He noted this was the initiation form and had lines for additional
years’ calculations. He asked for clarification of this.
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Mr. Perez stated he was not able to speak on the example form they had in
Powerpoint which was for the City of Menlo Park. He had not reviewed this
form personally. Staff had an example form from the City of Oakland,
however, where they have two forms; one form was for initiation and the
second form for an existing business. He noted they could look at either
option; one form with additional lines for additional years’ calculations, and
or the two-form system.
Vice Mayor Morton asked for clarification on the implementation period for
the BLT. He noted there was the struggle in the current year to fill the $10
million gap in the City’s budget. He questioned what the downfalls were in
implementing this tax later than July 1, 2010, since the first reporting period
was January or February of 2011.
Mr. Keene stated if the tax was not implemented before July 1, 2010, this
lent to impacts on the Fiscal Year 2011 budget, in the second year of the
City’s bi-annual budget process. An almost $3 million existing deficit was
projected in the tentative budget adoption. Addressing reductions was
necessary in the 2011 budget already. Potential uncertainties also existed in
relationship to the State’s budget, which may increase the estimated $3
million gap. Deficits beyond the $3 million level had significant City service
impacts. Reinvestments in the City’s infrastructure were also in a
compromised position, which was projected to be sitting at $1-1.6 million
remaining in the City’s infrastructure reserve at the end of 2011.
Vice Mayor Morton noted that there was two-fold importance in that the
Union needed to see that the community was contributing, while at the same
time the community needed to see that the Unions were contributing.
Council Member Espinosa asked why Staff has not come back with the
recommendation for a taskforce in studying the broader range of issues, and
also having a more transparent discussion about other tax alternatives.
Mr. Keene stated Staff was specifically responding to prior Council directives
which date back to 2007 when considering the BLT. While there had been
no taskforce, they have not been lacking in reaction, input, commentary and
alternative recommendations. He noted they were talking about taxation,
which was always a heated issue. In order for effective dialogue, it was
important to clearly define the new tax revenues they wished to proceed
with. Discussions with representatives of the business community were
fraught with opposition to the gross receipts tax methodology and the
employee basis was preferable. However, even in pushing forward on the
employee headcount methodology, there was no clear sense of support from
the business community.
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Mayor Drekmeier asked for clarification of the employee headcount
methodology in an instance where work is being done within the City by
hired contractors from within a business that exists outside the City.
Ms. Silver stated Council had the flexibility to define how an employee can or
will be taxed and also the definition of an employee within the ordinance.
Staff proposed that contractors which are a part of the primary aspect of a
business were considered as employees if they did the majority of their work
inside the City limits. This was distinguished from consultant-type
employees who rarely work within company and inside the City.
Mayor Drekmeier asked if a Motion was needed to clarify this or whether
they were voting on it as is.
Ms. Silver stated they wanted further direction and clarification on this.
Mayor Drekmeier stated one of the concerns over the gross receipts tax was
that it may penalize employee-heavy businesses such as restaurants that
operate on a margin. Many businesses were more opposed to gross receipts
versus the employee headcount methodology. He asked if there were any
businesses that were more opposed to the headcount methodologies than
the gross receipts method.
Mr. Perez stated no one had reported a better liking for the gross receipts
tax methodology in any of the meetings he had attended in the business
community.
Mr. Keene stated, even with the adjustment of the tax rate in order to result
in a yield in using the gross receipts tax, this did not necessarily translate
into a shift in opinions regarding the methodologies. He stated the gross
receipts tax also brought with it the concern over access to information for
any business.
Council took a break at 9:13 p.m. and returned at 9:18 p.m.
Lee Wieder, 637 Middlefield Road, was of the opinion that BLT based on the
gross receipts methodology was not the answer. He noted small and large
business community members that had met with Council Members Burt,
Klein and Schmidt were unanimously opposed to this tax methodology. He
stressed more time was necessary to clarify the complexities involved in
implementation of the BLT as well as exploration of other revenue avenues.
He suggested further exploration of the businesses in town and compilation
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of a business tax registry prior to further discussion of a gross receipts tax
methodology.
Matthew Stewart, 3325 Louis Road, spoke on the need for common sense
reformation in this time of economic downturn. He stated the gross receipts
tax was one example of a common sense reform. While the alternative
methodology of employee headcount was more expedient, he stressed
expediency was not to be confused with good policy. Gross receipts was the
best policy, and he was in support of this, citing his reasons for support.
Dr. Earl Whetstone, 744 Middlefield Road, a dentist within the City, spoke on
the gross receipts methodology and concerns he had over this with regard to
businesses such as his own practice. He stated the gross receipts
methodology was not reflective of his business. He noted the sizeable
amount in his business, which is written off every year due to insurance
issues and other un-collectables. This lent to potential billing for money he
never collected.
Dr. Susan Kaplan, 550 Hamilton Avenue #201, a licensed psychologist,
spoke on the flawed process on the creation of the BLT and the preferred
gross receipts methodology, if the ordinance passed. She concurred with
concerns and comments expressed by the Chamber of Commerce. She
believed further alternatives have not yet been fully explored and hoped
discussions would continue. She noted professionals held a strong
preference for the employee headcount methodology versus the gross
receipts method. She spoke on the continued concern over invasion of
privacy with the gross receipts method.
Jack Birnbaum, 3520 Greer Road, noted that the biggest challenge was not
whether the BLT should be a gross receipts methodology versus employee
headcount. He noted, more importantly, one does not raise costs and prices
during hard economic times. He noted that public employee benefits and
salaries far exceed those of 43 percent of the people in private industry. He
suggested further cuts could be made versus implementation of a BLT on an
already stressed business community.
Dr. Beth Rosenthal, PhD, 550 Hamilton, also a psychologist within the City
limits, waived her opportunity to speak since her points were well-made by
two earlier speakers, Dr. Kaplan and Lee Weider. She added, however, that
she was in support of Council Member Burt’s suggestion to do some polling
to understand where residents and the business community stood on the
issue.
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Joshua Howard, Executive Director for the California Apartment Association,
and the Tri-County Division, spoke as a representative of the multi-unit
housing industry in the City. He spoke on behalf of several rental property
owners in the City. They recognized the City’s need for additional revenues.
Their position on this, however, remained the same in that they opposed the
gross receipts tax but would not oppose a flat rate tax if this came forward.
Sherry Bijan, Palo Alto Downtown Business and Professional Association,
noted her personal stance as Executive Director of PAD/BPA was the strong
feeling that the business community has not been engaged in adequate
dialogue regarding the business licensing tax matter. They strongly
recommended the setup of a taskforce and further discussion. She also read
and submitted a letter from a venture capital business owner in the City.
Greg Osborn, 1450 Greenwood Avenue, stated behavior in the City’s
business community was likely to change with the implementation of a gross
receipts tax methodology. He stressed this was not the right time for such a
tax implementation and cited the already vacant storefronts in the City. He
questions what restraints would be in place if this type of tax methodology
were put in place.
Jeff Selzer, 171 University Avenue, spoke and represented Palo Alto Bicycles.
He noted his business was not going anywhere and was very much a part of
the City. However, he stressed that his business was incredibly civically
minded and wanted the City to succeed. He noted the gross receipts tax
was not the best option.
Robert Moss, 4010 Orme Street, stated the City was more than 30 years
overdue in instituting a Business License Tax. He stressed the City should
move forward on this and was in support of this. He noted reasons why this
tax was better off using the employee headcount method instead of gross
receipts. However, he felt a small gross receipts portion could also be added
in case this method was more effective for the future. He made suggestions
on the nonprofit exceptions as well.
Dennis Martin, 69 Lester Avenue, spoke in representation of National
Association of Industrial and Office Properties (NAIOP). NAIOP supported
Palo Alto Chamber of Commerce in supporting the gross receipt tax and the
establishment of a business registry with a nominal fee in order to engage in
comprehensive outreach and dialogue with the business community on the
needs and options of the BLT. He was in support of postponement of this
item for the November ballot.
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Paula Sandas, Palo Alto Chamber of Commerce, noted the Chamber was
against the gross receipts methodology and had continued their request for
the establishment of a Blue Ribbon Taskforce on the BLT and the institution
of a revenue-neutral business registry in order to get an accurate picture of
the number and type of businesses in the City.
Mayor Drekmeier asked if the Chamber had a position on the employee
headcount methodology or whether they stood neutral on this.
Ms. Sandas stated they stood neutral on this.
Mayor Drekmeier asked if it were safe to say that the Chamber felt the
employee headcount was the lesser of the two tax evils.
Ms. Sandas stated it was safe to say they felt it was the lesser of the two
evils when considering both methodologies.
William D. Ross, 2103 Amherst Street, was in opposition of Staff’s
recommendations and the implementation of a gross receipts BLT. He
supported the Chamber’s views on the matter and as articulated by previous
speakers. His opposition was also based on his 27 years experience with the
gross receipts methodology usage at the site of his second office in Los
Angeles, where he was audited three times in formal audit and six times
informally. He spoke to the inadequacies in confidentiality of client records
in his experience.
Robert Herriot, 2066 Byron Street, noted the City’s budget does not present
historical data, so there is no way to track whether the City is spending in a
sustainable manner. He hoped for rejection of the proposal for the BLT and
hoped that future budgets would bring along with them some historical facts
to support their changes. He spoke and gave examples of the pros and cons
of such a tax.
Herb Borock, P.O. Box 632, spoke on the two independent sources for the
number of employers in the City, the US Census Bureau and the
Employment Development Department. He noted an ordinance was not
needed to obtain aggregate data. He noted the varying ways this
information could be used in cross-checking and auditing. He discussed
apportionment issues, surveys of public opinion, and comparisons with other
cities all with regard to the BLT.
Adam Montgomery, 19400 Stevens Creek Blvd. #100, Cupertino, in
representation of the Silicon Valley Association of Realtors, spoke in support
of the comments made by Ms. Sandas on behalf of the Chamber of
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Commerce. He illustrated two additional points on the timing of the BLT and
the alternatives of such taxation.
John Halkmann, Palo Alto, spoke in opposition of the BLT. He noted the
income and gross receipt tax methodology was upsetting to the community.
He suggested looking into existing tax structures to increase tax revenues
for the City. He also suggested looking into volunteer contributions or a
voluntary tax acceleration in this regard.
MOTION: Council Member Barton moved, seconded by Council Member
Yeh, to direct Staff to create a revenue neutral business registry and a Blue
Ribbon Task Force Committee to create proposals for revenue development
and savings to potentially appear on 2011 ballot.
Council Member Barton noted there were several components related to this.
He was generally opposed to the tax whether it was a gross receipts or per
capita tax. He did not feel the timing was appropriate for the City to look at
such a tax. He felt additional savings potentials existed within their budget
over the next period of time. There was an opportunity to work with the
business community in looking for savings in process and potential for
revenue in ways that serve the City and business community in a win-win
situation. The current proposed tax was a win-lose situation and not the
proper route for the City to take at the present time. He was skeptical of
the cost of the business analysis presented by Staff and felt it did not cover
the extractions which came along with building permits and the time it takes
to secure and sign off on these permits in moving a business fully into the
City or expand a business. He believed further discussion and study was in
order.
Council Member Yeh was in support of the Motion in that he thought there
were other opportunities for the City to continue in their dialogue with the
business community. Once the tax is in place it is in place for good,
generally speaking, and he did not know any cases where a tax went off the
books at a later date. This merited more thought and discussion in getting
things right the first time. He spoke to the accuracy issues and making sure
that an adequate dataset is available to allow for correct predicted revenues
for any business-based licensing tax. Precision was important when working
on budget issues versus the potential budget deficits or surpluses.
Additionally, he asked if there were some kind of November 2011 vote, with
a registry in place, would these potential funds actually be collected in
January of 2012. If so, this lent to a one-year gap. He noted a registry in
place expedited the implementation of the tax and the usage of its funds.
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Mr. Perez stated this one-year gap assumption was correct if it was also
assumed that they would collect on the prior year’s data of the registry.
Businesses would pay the tax in January of 2012 on the prior year’s data in
keeping with Council Member Yeh’s comment and question.
Council Member Yeh noted a taskforce then allowed for the business
community and the City to determine what data was needed in order to
make sure they were collecting what was most appropriate. Whether they
collected by the gross receipts or employee headcount method, there was no
set form for what the business registry actually required. He stated data
empowered the City and the business community to work together in the
promotion of economic vitality.
Vice Mayor Morton noted November 2011 was the next time this item would
reach the ballot if it did not make the November 2009 general election
ballot.
Mr. Keene stated this was correct in that there was a two-year delay in
voting on this if it missed the November 2009 ballot; however, a business
registry implementation for cost recovery was possible prior to this.
Council Member Klein stated he was in opposition of the gross receipts tax
methodology. He wished that these items would be discussed together
because the Finance Committee, of which he was a member, had made a
mistake in separating the two items since methodology counted a great deal.
He did not support the gross receipts methodology and would speak on it
further if the Motion failed. He was not in support of the Motion. If they
could speed up the collection of the tax from January 1, 2012 from July 1,
2012, they would not be saving a year, but would be saving half a year. At
best, a two-year delay remained a delay of at least 18 months of revenue,
which was a loss to the City and increased the budget gap by $4.5 - 6
million. It was unacceptable to spend money on a Blue Ribbon Taskforce at
this time for this issue as it was fraught with problems and also delayed a
decision on the BLT. He noted this was an issue for the entire City and
merited outreach and discussion with both the entire community and not
just the business sector.
Council Member Espinosa did not agree that the development of the
taskforce was a delay tactic. He was not in support of the gross receipts
approach, but did support the Motion with the reasons for it already being
well stated. He added that the timing of the task was wrong in that the
current economic times and factors made it important to do everything
possible in ensuring every business in the community was successful. He
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noted further discussion and study was still warranted with regard to the
BLT.
Vice Mayor Morton noted that this issue had been debated for decades with
Palo Alto being one of the few cities in Northern California without a business
license tax. He did not believe that there was a big threat of businesses
leaving town due to the tax. He stressed what this potential revenue did for
existing services in the City as well as ramping up of these services and
building on the City’s infrastructure. He did not agree with deferment of
these potential revenues for up to two years while it was further assessed
and discussed.
Council Member Burt noted that the Finance Committee and Council had
struggled with the BLT issue for a considerable amount of time. He was
disappointed that this tax had not been implemented sooner. He did have
some concerns about moving forward in the current timeframe. There was
still a lack of good information though they had heard from a sizable
sampling of the business community. He noted Palo Alto Online contained
imprecise polling which has raised the question of whether the resident
community is in support of the BLT. He addressed the possibility of
increasing the Real Estate Transfer Tax. He stressed the need for additional
information and was disappointed that there was not majority support in
pursuing the option of an employee-based BLT and the real estate transfer
task to look at gauging this for community support. He agreed the City
faced economic difficulties and had already made sizable cuts in staffing and
asked employees to make sacrifices with similar or greater problems
possible in the next several years. The necessity existed to invest in the
infrastructure and to have some portion of the budget shortfalls come from
new revenue. He suggested a Substitute Motion which did not preclude the
potential to adopt the primary Motion already on the floor.
SUBSTITUTE MOTION: Council Member Burt moved, seconded by Council
Member Kishimoto, to direct Staff to come back in two to three weeks with a
gauge of public support for three alternatives; 1) Postpone the Business
License Tax until additional evaluation has been completed, 2) Evaluate
interest in real estate property tax based upon the gain of property value;
and 3) Gauge public support for employee headcount base Business License
Tax.
Council Member Burt stated his Substitute Motion held the best chance for
not stalling their discussions. It provided a better opportunity for a more
informed decision. Another area he hoped might receive further evaluation
for the employee headcount method of the BLT included a modification to
what was in the Staff’s report with regard to nonprofits and further
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gradations between professional and business services and those of retail
and personal services in the rate structure. His last thoughts were
comments and not binding components of his Substitute Motion.
Council Member Kishimoto asked for clarification on the estimated startup
and ongoing costs for a business registry. She asked if it was the same
$330,000 which had previously been discussed.
Mr. Perez stated it was this same $333,000. If this was done permanently,
Staff suggested using temporary staffing to ensure themselves of the
adequate amount of staffing and administrative costs.
Council Member Kishimoto asked if this meant they were basically taking the
gross receipts option off the table for discussion. Of the two choices, she
definitely favored the employee headcount in its stability and ease of
administration. Confidentiality issues did not come into play with the
employee headcount methodology. She understood from the need from the
business community there was a desire for better outreach, but in reading
through the detailed analysis she agreed with Councilmember Klein that the
structure proposed for the employee headcount approach with the BLT was
concise, straightforward and rational. She noted the frustration of both
businesses and the community at large, the system was biased against the
Council and community holding any control over personnel costs. The newly
passed budget included an increase in salaries and benefits each year at $5
million per year.
Mr. Perez stated this was not true for the salary portion of the budget.
Council Member Kishimoto asked if this was true of the benefit portion of the
newly adopted budget.
Mr. Perez stated this required a further look at the actual numbers in the
newly adopted budget.
Council Member Kishimoto stated she remembered this pretty distinctly as
being the case unless someone had information otherwise. As she recalled,
salaries and benefit increases were lumped together in the new budget, with
a year-to-year rise at $5 million per year.
Mr. Keene stated in looking at 2010 there was actually a reduction in salary
and benefits since there were basically no pay increases for the majority of
City employees. They had yet to receive an additional $3 million in revenues
and other compensation adjustments in order to balance the 2010 budget.
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Mr. Perez recalled there was $2.5 million in benefits that were not allocated
in 2009 but were reallocated for 2010 as part of the numbered increase.
Mayor Drekmeier, in Point of Order, noted Council Member Kishimoto was in
the midst of commenting on this while they awaited a firm answer to her
question. However, he stressed adherence to the Motion and Substitute
Motion on the table.
Council Member Kishimoto stated she had pointed this out due to the fact
the business and residential community desire more control over the budget
and salary negotiations. With regard to the Substitute Motion, and given the
disagreement which existed, this was the only way to move forward.
Mr. Perez directed Council to page 29 of the General Fund summary where
the increase from the 2008-2009 to the 2009-2010 budget was $2.7 million.
The 2010-2011 figures were at a $5.5 million increase, which included an
assumed 3 percent salary increases across all labor groups.
Mr. Keene noted the budget also included the approximate $3 million deficit.
Mayor Drekmeier stated he was not in support of the original Motion or the
Substitute Motion. He noted the problems for each with the Substitute
Motion providing little time for Staff to take its components. There was also
not time in one week to draft the ballot language needed for completion and
vote at the July 20th Council meeting. He agreed with Council Member Klein
that a Blue Ribbon Taskforce was not appropriate for the BLT issue. What
was appropriate was similar to what had been done with the plastic bag ban
wherein Council gave direction to Staff to explore the ban, the many
stakeholders were invited for discussion, input was considered, but Staff
then moved forward with the recommendation which they felt was most
compatible with Council direction. His sense was the business community
was willing to compromise even though the idea of a BLT is not their favorite
idea, and the employee headcount method was something they could live
with. He was willing to compromise some and support the employee
headcount methodology for the BLT as well. For the future, he suggested
they look for ways in which businesses that had been within the City for
many years carried their weight more fully. Commercial rentals also needed
further discussion since the City worked hard at making Palo Alto a desirable
location for business to which the landlords derive benefit. He looked
forward to more diversity among the businesses as well.
Council Member Yeh supported the intentions of the Substitute Motion. He
expressed concern, however, about the timeframe and if the Substitute
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Motion held a sufficient timeframe in terms of conducting a survey with also
a return to Council.
Mr. Keene repeated his earlier comment in that whatever Motion or
combination thereof came forward, Staff required explicit directives on the
components of the BLT in order to begin drafting the ordinance in readiness
for action. It was not a sequential action between doing polling and then
drafting of the ordinance but needed to be done concurrently. It was hard
for Staff to predict how effective a survey was when done in such a short
timeframe.
Vice Mayor Morton asked what they were asking the community, and how
specifically, since specific formulation of the question brought about a
specific expected answer. He reiterated he was against both the Motion and
the Substitute Motion because the City needed the BLT and shifting it back
to the individuals in the community made it the disproportion of the tax
burden even greater.
Council Member Klein agreed with Vice Mayor Morton’s comments and was in
opposition as well on the main Motion. He was also opposed to the
Substitute Motion because he did not have faith in the quality of information
they might receive in their polling they suggested with due consideration of
the short timeframe. Community education and careful drafting of the
questions was necessary to which adequate time for this did not exist. With
regard to timing, he stated any tax under discussion was scheduled to take
effect on July 1, 2010, with the Council’s ability to defer this task for a year
if need be at this time.
Council Member Barton was in opposition of the Substitute Motion but
appreciated the intent. He was worried, however, that the Substitute Motion
was precipitous and would not have the desired effects.
Council Member Burt clarified a second reading of the proposed ordinance
that was needed at the July 20, 2009 Council meeting. If not, he asked if
this could then be scheduled for the meeting on July 27, 2009. In this case,
they had a total of five weeks in order to proceed with the two functions of
the Substitute Motion of engaging the public and giving Staff adequate time
to compose the ordinance.
Mr. Keene stated there was no need for a second reading on a fiscal
ordinance. He stated there was a Council meeting on the July 27th and
asked the City Clerk if this was possible as an addition to the Agenda for that
meeting.
Deleted: 2
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Donna Grider, City Clerk, stated it was possible and the decision could be
made on July 27, 2009.
SUBSTITUTE MOTION FAILED: 2-6 Burt, Kishimoto, yes, Schmid absent
Council Member Yeh, prior to the vote on the original Motion, asked Staff for
clarification on whether a BLT is collected on an ongoing basis or a one-time
basis during any given calendar year.
Mr. Perez stated Staff had proposed a BLT collection on a one-time per year
basis.
Council Member Yeh asked if it was an 18-month loss, if they were on a 12-
month collection schedule which made it either January 2010, 2011 or 2012,
where the revenue ideally came in within the 30-day order and collections
period. He asked if this was a potential $4.5 - 6 million loss if the
anticipated revenue was approximately $3 million or was this just a $3
million loss.
Mr. Perez, in terms of the timeframe, stated the Finance Committee had
recommended the July 1, 2010 effective date with the collection in the
spring of 2011. If this went to the election of November 20, 2011, Council
Member Yeh’s question was whether or not it was possible to collect this in
the spring of 2012. He agreed with the City Attorney that this was possible
based on the returns of the prior year. Revenue received in the spring of
2012 was based on the collection amounts due from the calendar year of
2011.
Council Member Yeh clarified the impact, then, was not 1-1/2 years, but one
year’s worth of revenue since it was a one-time collection.
Mr. Perez stated, assuming that they were collecting on the full year in
January of 2012, this was correct.
Council Member Klein appreciated the correction but had also understood in
the Motion that the Blue Ribbon Taskforce was to also become involved in
the City’s expense considerations.
Council Member Barton stated this was not the intention of the Motion to
have the taskforce involved in the City’s expenditures. The Blue Ribbon
Taskforce was more specifically proposed to look at revenues while also
looking at potential savings through how businesses work, overall. The Blue
Ribbon Taskforce was there for discussion with the business community and
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the community on the whole in looking for ways and areas of potential
revenue gains as well as potential savings.
Council Member Klein noted he did not understand the potential savings.
Council Member Barton gave the example that if it took six months to get a
building permit, and a way was found to do it in three months for the same
fee, this was a savings to the City while still providing revenue.
Council Member Klein reiterated he did not understand how that worked
without the taskforce becoming more involved in the City’s budget
negotiations.
Council Member Barton stated certain budgetary components existed in any
possible discussions. However, he did not see it as a problem for the
taskforce, the business community and the community on the whole
participating in discussions looking at revenue enhancements and potential
cost savings as they relate to the business community.
Council Member Burt clarified the primary beneficiary of any efficiency gains
was the business community and not the City from a cost savings or revenue
standpoint. He noted permit streamlining, as the given example, was
something that the City needed to work on, but he felt this confused the
matter they were currently discussing. He did not feel it was accurate to
characterize this as a cost savings to the City if this process were
streamlined. It was more accurate to characterize it as a potential cost
savings to the businesses involved in the permit process. It was not
appropriate to include this type of discussion in the taskforce’s activities.
INCORPORATED INTO THE MOTION WITH THE CONSENT OF THE
MAKER AND SECONDER to remove from the Motion “and savings.”
Vice Mayor Morton asked a technical question with regard to the State and
Federal taxation process which cannot be retroactive. A vote in July of 2012
to implement the task did not mean collection was retroactive to the first six
months of that same year when the law was not in place. He stated this lent
to an 18-month delay versus a one-year delay, or may actually be two years
upon further consideration.
Ms. Silver stated it was helpful for Staff to have more time to research the
implementation of the BLT based on when it was voted in. However, one
way to implement the tax was to have the payment of the tax based on the
prospective earnings of a business by gross receipts and/or based on current
earnings.
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MOTION FAILED: 3-5 Barton, Espinosa, Yeh yes, Schmid absent
MOTION: Vice Mayor Morton moved to have a hybrid Business License Tax
that includes: 1) The Gross Receipts model for professional entities, and 2)
For all other businesses to use an employee headcount.
MOTION FAILED FOR LACK OF SECOND
Council Member Barton made the following Motion with clarifications and
additions noted by the Mayor as well as a noted inclusion of commercial
property taxation and square footage made by the City Attorney.
MOTION: Council Member Barton moved, seconded by Council Member
Klein, to proceed with the Business License Tax based upon an employee
FTE count with Staff recommendation that: 1) Implementation date of July
1, 2010, 2) Include nonprofits with 100 or more employees, 3) Exempt
rentals of 3 units or less, and 4) Commercial property would be taxed at
$0.3 per square foot.
Mr. Keene clarified that, because they were using the same targeted yield,
the inclusion of the nonprofits resulted in a reduction of the fee charged to
the different categories. Benefit existed, then, for a number of businesses in
that regard.
Mr. Perez stressed the inclusion of multi-unit rentals and commercial
property. Discussions with the Finance Committee included directions for
Staff to return with these per-unit and square-footage components.
Council Member Barton stated his intention was towards Staff’s
recommendation for an exemption for three units or less.
Mr. Perez clarified there was a three units or less exemption included in
Staff’s proposal.
Council Member XXXXX asked for clarity on which option existed in the
Motion, the per-employee, unit-based or square-footage option.
Mr. Keene stated Staff’s recommendation was in connection with the per-
employee basis but there was an obvious and slightly different methodology
for the multi-units and the commercial properties.
Council Member Barton noted his understanding was that Staff had
recommended exemption of multi-unit rentals of three units or less. He
Formatted: Highlight
Deleted: ,
Deleted: seconded by Council Member ???,
Deleted: headcount
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asked then, what question remained in clarification of the Motion on the
floor.
Council Member Burt stated clarification was needed on the balance of
Staff’s recommendation in that multi-rental units above three were at $25
per unit while commercial property was at 3 cents per square foot.
Mr. Keene noted this was correct and was worded as such in the Staff
report.
Council Member Barton agreed to include this in the Motion. It was noted by
the Mayor that the seconder to the Motion had also accepted this.
Council Member Kishimoto suggested inclusion of some language regarding
the overlap which may occur in the occupancy tax. She asked for Staff’s
clarification of this issue prior to their return in July, or would they rather
this be made as a recommendation for Staff to include this in their return in
order to eliminate any duplications.
Mr. Perez stated that it could be done without a Motion and they would
definitely look at this. The question remained on what the impact was to the
Occupancy Fee schedule, if they moved forward on the BLT. Staff stated
they would look at combining efforts with possible reduction of the fee or the
potential elimination of the fee. They would look at all these issues and
respond to Council by the next meeting in July.
Council Member Kishimoto asked for clarification on the home-based
business issue. She asked how this affected, artists by example, who only
sold a few items of their work per year.
Ms. Silver recommended the importance of inclusion of some language which
clarified the exclusion of hobby- and art-type home-based businesses from
the Business License Tax.
INCORPORATED INTO MOTION WITH THE CONSENT OF THE MAKER
AND SECONDER to exclude hobby level businesses.
Vice Mayor Morton stated they may want to rethink this inclusion. He noted
the first question the IRS asks an artist during an audit is whether or not
they have a business license. This is the first criterion; if they do not have
this licensing they have a harder time proving they are a valid business. For
the $75 fee, he suggested everyone be included, which gives them a
defense since most artists and musicians, for example, have negative
income for multiple years. In order to defend this during an IRS audit they
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have to prove that they are doing business as an artist or musician by this
same example.
Council Member Kishimoto stated if they wanted to claim themselves as a
business via the IRS they also had the option to include themselves in the
business registry and by paying the BLT. If not, they had the choice of
going with the fact that they were excluded from the tax.
Council Member Yeh asked was it possible to incorporate in the Motion a way
to identify additional data within the business registry that may better help
the City discover ways to further help the business community.
Ms. Silver stated that a business registry component does not need to be
voted on by the voters; however, if that type of language is put into the
ballot measure, then Council could not change this without a vote of the
people.
Council Member Yeh stated it was not his intent that this be included in the
ballot measure language, but that it be part of the Motion.
INCORPORATED INTO THE MOTION WITH CONSENT OF THE MAKER
AND SECONDER to include a Business Registry to extract data to assist the
City with supporting the business community.
Council Member Burt reiterated that the five weeks they had left was ample
time for Staff to reach out to the community as well as gathering additional
information as to the where the community stood on the BLT issues. He felt
there was hesitation in the community towards the BLT and perhaps an
inclination to support a Real Estate Transfer Tax. However, without further
study of this, Council stood to make an uninformed decision on a very
important topic.
Vice Mayor Morton did not believe adequate calculations had been done thus
far on the impacts of the BLT, which he felt likely stood to hit smaller
businesses harder than the larger revenue business community. He did not
believe agreements would materialize with the Unions to adjust contractual
guaranteed increases unless it was proven that the community was also
willing to help in closing the Budget gap. He noted the BLT was not perfect,
but it stood to bring needed revenue for the City to move on with many
community services from youth to the senior level as well as art and
recreation.
Council Member Yeh stated in the City Manager’s Report there was also an
opening for Council’s discretion to delay implementation and this must be
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codified in the ordinance and approved by the voters. In follow-up of
Council Member’s Burt’s statements on the appropriateness of timing, he
noted the hope was that the economy would rebound by July 2010, with the
actual collection schedule of January 2011. He stated if the BLT were put
into place without any consideration as to where the economy stood in
January 2011 when collections were scheduled to occur, was there any
existing mechanism for Council to state this was detrimental to businesses
at that point.
Vice Mayor Morton asked if they had included this delay element within the
Motion since the money was needed now and not in two or three years. If
this delay element existed he would then vote against the BLT on that basis.
Mr. Perez stated the Motion included Staff’s recommendation on the
implementation date effective July 1, 2010, with collection in the spring of
2011.
Council Member Kishimoto reiterated the importance of streamlining
implementation and enforcement of the BLT for both the business
community and the taxpayers on the whole. She noted regret over the fact
that BLT revenues cannot be directed toward the City’s infrastructure,
specifically.
MOTION PASSED: MOTION PASSED: 6-2 Burt, Espinosa no, Schmid
absent
MOTION: Vice Mayor Morton moved, seconded by Mayor Drekmeier, that
contractors be considered employees for the Business License Tax.
Vice Mayor Morton noted most small businesses with employee contractors
have the Worker’s Compensation requirement of identifying these
contractors as employees particularly when the contractors are on-site. This
and other records provides an easy way for auditing in the rare instance
where this may be necessary.
Council Member Kishimoto asked if this was assumed, then, for contractors
who worked over 1,000 hours per year.
Vice Mayor Morton stated the contractor will generally have a billing rate
which is very easily calculated out to the number of hours.
Council Member Kishimoto asked if he was talking in terms of gardeners and
the like.
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Vice Mayor Morton noted gardeners and the like were personal services and
were not consultants. Homes were not businesses, which meant anyone
working in the home as a medical assistant, housekeeper or gardeners
would not be included.
He stated the homeowner was technically required to pay taxes on this but
he was not commenting on the number in national figures of people who do
not report this. He stated that even if you pay a person for work of this
type, you may be an employer of this person, but you are still not a
business.
Mayor Drekmeier reiterated this was on the basis of a FTE or a fraction
thereof.
Vice Mayor Morton agreed this was the case, otherwise there were too many
exemptions at all different levels.
Council Member Barton asked for clarification on the consultant status.
Ms. Silver clarified the proposed language included the distinction between
contractors/consultants working on the premises versus those doing discrete
activities off-site.
Council Member Barton reiterated this lent to looking at the 1099 employees
versus any reimbursable expenses.
Vice Mayor Morton noted that most dentists and other medical professions,
for retirement benefit purposes, had no true employees on site but made
use of contractors and subcontractors, which under the BLT per employee
headcount purposes would be considered as employees.
MOTION PASSED: 8-0 Schmid absent
Announcements
Council Member Yeh thanked the Human Relations Commissioner for
spearheading the World Music Day event which took place the weekend
prior. He asked Staff for an update on a utilities issue which had come to his
attention in the recent past.
Mr. Keene stated the issue had been resolved. Press releases and other
public information were pending as well as a written update to Council on
the problem and its conclusion.
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Mayor Drekmeier reiterated World Music Day was a great success for the
business community. He reminded colleagues of their UAC interviews the
following day at 6:00 p.m.
Council Member Klein noted a demonstration the weekend prior with regard
to current concerns in Iran. He voiced his support.
ADJOURNMENT: The meeting adjourned at 11:32 p.m.