EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: February 7, 2023
TO: Honorable Mayor and Members of the City Council
VIA: Melvin Gaines, City Manager
BY: Melvin Gaines, City Manager
Tomohito Oku, Finance Director
Greg Henry, Senior Management Analyst
SUBJECT: Approval of Business Discovery Program for Business Licenses Recommendation
Adopt a resolution approving the recommended Business Discovery Program for the collection of Business License Fees.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 2: Enhance Economic Vitality
Priority No. 5: Improve Communication and Enhance Community Engagement Background
The City Council on June 2, 2022, awarded HdL Companies (HdL) the contract to administer the City’s business license program for businesses operating within East Palo Alto city limits.
Beginning January 1, 2023, the City initiated its first annual renewal period and 500 business have renewed through the new process, which includes website processing.
For the vast majority of businesses, the following tax table applies:
Annual Gross
Receipts
Annual License Tax
$0 - $1,000 $ 50
$1,001 - $ 100,000 $125
$100,001 - $250,000 $250
$ 250,001 - $500,000 $500
$500,001 -10,000,000 $1 for each $1,000 of gross receipts $ 10,000,001 and up $10,000 plus $.50 cents for each $1,000 of gross receipts above $10,000,001
The City has not had a consistent method to audit the level of business license compliance. As part of the new agreement, the City requested HdL do an initial review of the compliance level of businesses related to payment of the business license tax. This initial discovery analysis concluded that the City had a significant compliance issue with its business license fee.
The new agreement also includes a compliance component which has not yet been initiated.
Staff is requesting that the City Council provide direction and approve the beginning the compliance phase.
Analysis
HdL’s Initial Analysis of Noncompliance
HdL’s initial analysis has concluded that approximately 74% of eligible businesses (approximately 2,500 businesses) were delinquent or completely noncompliant with the business license fee (61% non-compliant and 13% delinquent). In particular, for the noncompliant businesses, 1,840 of those are rental properties. HdL will be making a particular effort to bring those businesses into compliance to prepare for the Measure L revenue changes, the collection of which begins in January of 2024. HdL’s compliance goal is to register the business in the City’s database and have current and back taxes, with penalties, collected.
For rental properties, East Palo Alto is similar to many California cities in that their business license tax applies to rental properties, but the data shows limited compliance. Generally, HdL finds that this may be more of an issue of education rather than active avoidance.
The details of HdL’s discovery process are propriety. Broadly, HdL utilizes public data such as County property tax data, County sales tax reports, and California Secretary of State tax data.
HdL also utilizes some private data sources such as Yelp, Facebook, and Google.
Proposed Business Discovery Program
In consultation with HdL, staff is proposing that the Council approve the Business Discovery Program, discussed below. The overarching objective of the Business Discovery Program is to identify delinquent accounts and facilitate the City’s collection efforts.
One notable aspect of the Business Discovery Program is that staff is recommending that Council approve a 90-day phase of amnesty and education. The 90-day phase would serve two critical public purposes: 1. provide a period within which to educate taxpayers of the City’s compliance efforts; 2. improve collection by providing more time for taxpayers to come into compliance.
1. Communicate with noncompliant businesses. HdL will send out communication to non-compliant business through all available means. As these businesses are not yet in the City’s system, not all forms of communication are available. At a minimum, all business will receive a monthly letter (template included as Exhibit 1 to the attached resolution). Further, City staff will use social media platforms to notify the public about the amnesty period and in particular that rental properties are subject to the City’s Business License Tax. Information will also be posted on the City website. This process is designed to provide a path forward allowing the business to become compliant and current on all fees.
2. Amnesty and Education Phase (90 Days). If the business becomes compliant within the first 90 days of HdL’s communication campaign (90-day educationamnesty period), the underlying tax itself will still be due but the late penalties and interest will be waived. During this 90-day amnesty and education phase, businesses must pay all owed business taxes to become compliant. All eligible penalties would be waived for businesses that become compliant during this phase.
For those businesses that remain noncompliant after the 90-day education-amnesty period, the penalties would snap back and must be paid in order to bring the business into compliance.
The vast majority of non-compliant businesses are in the second tier of the business license tax table, resulting in an annual tax of $125. Section 5.04.180 of the Municipal Code sets the penalty for nonpayment.
Every annual license renewal which is not paid on or before February 1st of each year, or within thirty (30) days after commencing business for a newly established business, is declared delinquent, and the finance department shall thereupon add to such license and collect a penalty of ten percent per month in the unpaid delinquent balance up to one hundred (100) percent of the total tax originally due and payable.
The interest would be charged at one percent on the total amount outstanding.
Therefore, for the majority of non-compliant businesses, with a current plus threeyear tax liability, the following table shows an average expected bill with amnesty ($500) and without ($1,075).
Business
License Tax
Owed
Penalty
Owed
Interest
Owed
Total
Current - 2022 $ 125.00 $ 12.50 $ 1.38 $ 138.88
2021 125.00 125.00 25.59 275.59
2020 125.00 125.00 60.55 310.55
2019 125.00 125.00 99.93 349.93
Total $ 500.00 $ 387.50 $ 187.45 $ 1,074.95
3. Enforcement-Collection Phase. Eventually, once the 90-day educationamnesty expires, the City will need to proceed with its enforcement and collection efforts.
HdL will consult staff to determine an appropriate strategy to bring businesses into compliance. This could include site visits to certain businesses. Such in-person visits would be specifically for business where the owner or operator is onsite. HdL has additional outreach that may occur for rental properties where the owner may not be in state.
During this phase, staff will exercise its discretion to avail itself of all remedies available to the City, including, administrative citations, real property liens, civil collection actions, and criminal enforcement, and any other means provided for under applicable law. Staff understand the import of these additional compliance methods, but also understand the importance of equity under the tax code. Before these additional compliance actions would occur, staff would return to the Council with an update on the status and number of non-compliant business and a more specific enforcement plan.
Fiscal Impact
Due to the number of non-compliant businesses within the City, the revenue estimate may vary depending on the number of businesses that are still “collectable”, meaning the business entity is still active. That said, HdL has significant experience in this arena and believes net of fees (HdL charges 25% of delinquent collections and 35% of new non-compliant collections) the City should collect is approximately $445,000 in increased initial revenue. In the first year, HdL collects back taxes which by California law the City collects on the current year and back 3- years.
This estimate is based on 2,146 unlicensed businesses, and a tax floor of $125 per business, and the penalty cap of equal to 100 percent of the tax (for an annual amount of $250). Further, HdL assumes that not every business will owe for the full years of back taxes (some are newer businesses), and not for all possible business will HdL be able to collect.
Going forward, not including the Measure L update and depending on the type of businesses that will renew, the City could recognize a revenue increase of about $185,000 per year.
Public Notice
The public was provided notice of this agenda item by posting the City Council agenda on the City’s official bulletin board outside City Hall and making the agenda and report available at the City’s website and at the San Mateo Co. Library located at 2415 University Avenue, East Palo Alto.
Environmental
The proposed action is exempt from the California Environmental Quality Act (CEQA) because it is not a “project” pursuant to 15378(b)(4) because it is a fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant impact on the environment.
Attachments
1. Resolution Business License Tax Compliance Program