The URL can be used to link to this page

Home My WebLink About0482.000r:t .- !'1 ~ ! , "'!l' , , - September 6~ 1990 THE HONORABLE CITY COUNCIL Palo Alto, California Attention: Finance and Pu~lic Works Committee THE SUBJECT OF TH~REPORT ISA COUNCIL PRIORITY < , ECONOMIC OUTLOOK COXXYTTEE XEETI5G 07 AUGUST 10, 1990 Members of the council: This is an informational report; no council action is necessary. Purpo.o atat ... n\ A:t:t.e.ched are :minut.es of the lat.est. EConolDic outlook Committee lEOC) meeting. The meetings are held quarterly as part of the City's economic outreach efforts. The item for the August meeting was a sales tax presentation by Murlicipal Resource Consultants, the firm wbich provides palo Alto with sales tax a.nalysis reports. The discussion covered a basic review of sales taxes~ and an evaluation of Palo Alto's sales ta:! reven,ues by specific business cateqory. Minutes from each EOC meeting are transllIitted to council as infor1Dation~ The minutes were prepared by Libby Dame... Senior Financial Analyst. ct!ully submitted, 0!R:482:0 • < • . '.:'. ." -,., )~. .. <- : ~i ., l r -i ! -, .-', - o BCOMOXIC OUTLOOK COKKIYTEB XINUTES AllCJUst 10. 1990 Attendees: Rosemary McAndrews, stanford Shopping Center; A.TJdy Do'ty. Stanford University; Ray Sly" Varian; David Hopkins, Stanford Hospital; Jennifer Wagstaff-Hinton, Hewlett-Packard; Murray Dey, MidPeninsula Bank; James Baer, Ware and Freidenrichi Gail stypula, Chamber of Commerce; Allen Charkola' and John Austin.. Municipal Resource Consultants; Palo Alto City councilmembers Gail Woolley and Jean McGown; city of Palo Alto staff members Emily Harrison" Richard young. Tracy Xwok, Georqe Zimmerman, Libby Dame and Miki caldwell. Sale. fax Pre'lntatioa by HuDieipal R.source Cop8ulta.ts Emily Harrison introduced the topiC of sales t~xes by explaining "that sales taxes represent approximately twenty-five percent of the City's direct revenues. Increases and decreases in sales taxes critically affect the City's budget. In the 1989-90 fiscal year, sales tax revenues for Palo Alto were up by about thirteen percent. The exact reasons for the increase are still being researcbed, and Finance is in the process of trying to determine if the current level will be sustainable. She then introd·uced Allen Charkow and John Austin, partners with Municipal Resource Consultants, a firm which provides sales tax auditinq for the City Auditor 8 and sales tax analysis and consulting :for Finance. MUnicipal Resource Consultants had prepared a sales tax presentation for the Commit tee. copies of the handouts are attached to these minutes. Hr. Charkov gave some background on sales tax revenue in general .. explaining that it has risen to prominence following PropoSition 13. Previously... propert.y tax vas the major revenue source for local qovernments. The taxes were. stable and predictable, and ooul~ be regulated by the cities. Now sales tax is the primary revenue. This revenue ~rce is extremely volatile and unpredict able.. sUbject to the whims of businesses as they determine their business plans and decide wbere to locate.. as well as to the qeneral economic climate. The uncertaintIes behind this major revenue source make econollic for-ecastiIl9 very difficult for cities. The money collected by businesses as sales tax is collected by the state. The State then allocates the local portion (for cities.. 1 percent) ot the sales tax to the various local qovernment entities based on the "point of sale-for the taxed items. After 1981 .. cities started to look for misallocations of sales ta~~ to see if another city was given part of their deserved revenues. The state does not always have a clear policy on bow to classify different businesses or how to define. the ·point of sale-; therefore .. the allocation of the tax amonq dIfferent oosiness cateqories is somewhat open to interpretation. 1 • • > " , \ .\ \ \ ,> \ • •• • . , , 1. - • ... '-. \ ~ ~ __ "i.:_. _~-=---.:: __ ;-.i"._,, __ ~_, .......... _ -_____ .:. ..:._"_ :.. _~ .... _ .... c~..; ... ::-:f ... '4"i_~":i_~. ~"'~ ___ ::iiisz&J& 2M .. W o '.1 •• ,.. fa ra19 Alto Mr. Charkow then reviewed several charts documentinq the perfor mance of aales tax specifically tor Pale Alto, broken down by different business category. The data utilized by his firm to develop their charts comes from the st_te of California's Board of Equali2.at.lon, based on data provided by the businesses. MUnicipal Resource Consultants (MRC) then ·cleans up· the data by correctinq fo.r any .is-categorizations er misallocations ot revenue. The major findinqs revealed by the Palo Alto charts include: o o o When a business IlOvas its point of sale trO!l a city .. that city can feel a siqnificant impact in terms of overall sales tax revenue. Palo Alto's current efforts to communicate with and retain local businesses are impor tant. Sales for automobile dealarships peaked in 198. and were low in 1981 (sales in Palo Alto followed trends similar to other cities). The last t'Wo years have continued to be slow for automobile dealers. An apparent increase in t.he performance--of local dealers in recent years is actually due to the city"s recovering back taxes due from a. dealer who ais-reportedl, as discovered by the Auditor's oftI=. Business-to-business sales are key for Palo increasing in 1989 to a per capita level almost that of tbe average for Santa Clara county .. increase in business-to-business sales explains Alto's increased sales tax revenue last year. Alto, tvlce This Palo o Business-to-business sales and department store sales account for the majority of retail sales in the City. o An evaluation of -retail sales leakage-(where the city is below the average per capita level of other cities in santa clara and. San Mateo Counties) ~ points to drug stores 6 liquor stores 6 and building materials outlets. o SOllIe of the big sales tax producers from building Ilaterials are suppliers of Wholesale building products to cOIlt.ractors. The contractor pays sales tax to these suppliers. o A breakdown of different c.ateqories of business-to business sales shoW's a: large increase in electronic equipment and in light ind·ustry. The Ol'lly decrease in that area 'Was in heavy i.ndustry ~ which 'Was due to a decrease in a single company. 2 '. • .' ~ , -~,-. '\ , \ " \ l ~ 'r f ~ r: f , . - r o ~. Charkov explained the difference between a sales tax and a use tax. A sales tax is charqed for an itea purchased and delivered trOll. California... and is the responsibility of the seller to collect.. The basic sales tax in California is 6 percent.,. one percent Qf which goes to the city in 'Which the poi:ftt of sale occurred.. Palo Alto therefore benefits by increased sales coming trOD local companies.. and by baying a company's sales office located in Palo Alto.. Hr. Charkow pointed out that, if there is no local sales office. the point of sale for an item could be either an order desk in California. or & California warehouse ~hich the co.pany usea. He also distinguished between a ·salesperson-(who actually takes orders) and a representative 'Who solicits business tor a company, but bas the client call the order in to an order desk. The point of sale in the first case is the office of the salesperson. In the latter example~ the point of sale ~ould be the order desk. It Is important that the City be aware of points-of-sale located in Palo Alto~ to ensure that taxes are appropriately allocated4 Anotber example of this is for a business that may have a local branch sales office, but is beadquartered elsewhere. If sales are made from the local branch~ then the taxes for that branch should not be considered as coming from the headquarter's location. A ~se tax should be paid for items that are purcbased from out-of- 6tate~ and. if not cbarged by the seller, is the responsibility o£ the buyer to pay and r~port. A use tax is paid for items delivered in Santa clara County frca out-of-state locations. The tax can be processed by two different methods. The nocmal procedure for us~ tax is to aggregate the one percent local tax into a pool for each county. Palo Alto would then get a certain percentage of Santa Clara countyrs pool (or a fraction of the one percent).. An alternative method would be for a company paying a use tax to self accrue these taxes on its own sellers permit~ which results in the full one percent qoinq to the city in which it resides. Encourag ing: local businesses to self-accrue use taxes could increase revenue to Palo Alto. Tbe question arose as to what types of businesses should consider self-accrual of their use tax. Mr. Charkow saw a benefit in cases of: large manufacturing companies (Who purchase a lot of equip .ent); hospitals (who purchase expensive equipment, mucb of which comes froll out-o.f-state); and. sem.i-conductor industries {who utilize Ilany cheJIicals that are expended in the manufacture of their product). He noted that a Ilaterial is exempt from sales tax at the time of purchase if it becomes part of the final product. Several ~ember$ of the committee indicated that they may be in a poSition to increase the use taxes self-accrued by their busi nesses. Mr .. Charkow stated that MRC would be willing to assist the 3 • I I I , I La: "v",", , .......... -.~. - - ,2 ' .-.'- / _~ ____ : ____ :..: __ -,_~,l,. ~=,_-___ . : _____ I o businesses and: the City In 'Wor'k..1nq toqether to set up a legal .eth06 Of self-accruing use taxes so as to increase revenue to the city. MS. HarrIson indicated that she 'Would be very interested in pu.:rBulng this revenue source and 'Would set up meetinqs ,.,ith the related businessea. Ms. Harrison stated that she was aware of the impact that local buaineases could bave 0''1 the City's major revenue source. The political sensit.ivity Br.l'.!'ounding this issue is the impetus behind & .ajor project that (.he City has embarked on in the Stanford Research Parle. The Finance and Planning Departments have initiated an outreach program to interview local companies to discern ,.,hat i.sues are Impacting those businesses, their decisions reqarding location of sales offices. and what t.he city could do to encourage them to locate and remain in palo Alto. The first of those interviews is scheduled for the end of August. Mr. Charkow also emphasized 'the. fact that business-to-business sales were critical t~ Palo Alto's sales ta~ revenue$~ even though they were not as visible as retail outlets. He noted that those busInesses are typIcally quite mobile and could come or go at any point in tIme. rt Is critical for the ~ity to bave 9¢Od communica t.ion aM rapport. ,.ith the businesses active in business-to-business sales. hZ' ••• tipg Tbe topic for next quarter's JrIeeting viII Z>e recyclinq. The C01Dittee will discuss t.he City~s Recycled Products Proc'tlrelllent Policies, the status of AB939 (the Governor"s waste reduction bill), and. the Downtown Recycling Program. c \ , • • .. C~.J: .' '~" -",,', ' .' \ \ , , . , . ~~ \' • I ~J;j