EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: June 20, 2023
TO: Honorable Mayor and Members of the City Council
VIA: Melvin E. Gaines, City Manager
BY: Tomohito Oku, Finance Director
Greg Henry, Senior Management Analyst
SUBJECT: Status of Business Discovery and Amnesty Program Related to Business Licenses
Recommendation
Direct staff on the next steps in the Business Discovery and Compliance program.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Ensure Our Financial and Organizational Health
Background
On June 2, 2022, the City Council awarded HdL Companies (HdL) a contract to administer the City’s business license program for businesses operating within East Palo Alto city limits, including compliance auditing, education, and outreach concerning the City’s business license tax regime.
Historically, the City has not had a consistent method of auditing the level of business license compliance. As part of the 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 has a significant business license fee compliance issue.
On February 7, 2023, the City Council approved Resolution 13-2023 directing HdL’s Discovery and Compliance Team to assist the City with actively pursuing businesses out of compliance with the City’s Code. The Council directed that there be an initial ninety-day amnesty program.
The amnesty program was designed to provide time for and to facilitate businesses to timely compliance. The grant of amnesty waived all penalties and interest until 04/02/2023. From 04/03/2023 through 05/17/2023, half of all penalties and interest were waived. For businesses which remain non-compliant at the end of the amnesty period, all unpaid taxes, fees, penalties and interest will be owed.
The amnesty program only waived penalties that accrued on the fees and taxes. That is, a business which came into compliance during the amnesty period still owed the underlying fees and taxes.
As of May 23, 2023, through HdL’s and staff’s outreach efforts, the City has collected $484,103.96. An additional $117,243 has been invoiced but is unpaid.
Table 1 - Discovery and Compliance Activity Summary
Customer Service Concerns
Some business operators have reached out to the City expressing concerns about the customer service of HdL’s Discovery and Compliance Team. On balance, HdL has delivered high-quality service and addressed customer concerns promptly and effectively. HdL’s statistics, on average, customer wait times over the phone and over email meet the City’s standard.
Table 2 - Customer Service stats and Summary
Category Statistic
Admin Average Call Wait Time 0:02:20
Compliance Team Average Call Wait Time 0:02:45
Admin Average Email Wait Time 9:28:10
Compliance Team Average Email Wait Time 11:51:53
Total Admin Calls 577
Total Compliance Team Calls 1,176
Total Admin Emails 623
Total Compliance Team Emails 1,079
Contacts by
Phone
1,176
Contact by
E-mail
1,079
Payments
Received
548
Disc. & Comp.
Notices Sent
3,079
Invoices
Unpaid
73 Still, there have been instances where HdL has fallen short of meeting the City’s expectations.
In these cases, HdL has taken customer feedback seriously and conducted reviews to identify areas of improvement. When they determined that they were at fault or responsible for any customer dissatisfaction, HdL accepted responsibility for their actions.
Upon accepting responsibility, HdL took the necessary steps to rectify the situation and ensure customer satisfaction. This may involve offering apologies, providing solutions to the issues at hand, or, with the approval of staff, adjusting penalties. HdL has used these situations as valuable opportunities to improve their processes, train their staff, and enhance their overall customer service experience.
There are fewer than five businesses where staff remain in communication with HdL with specific concerns. Staff anticipate that these will be resolved over the next two weeks.
Staff seeks Council direction on how the City should proceed in efforts to collect unpaid invoices. Staff also would like to hear from the Council regarding issues that they may have heard from the community regarding this process and how it needs to be improved.
Analysis
Potential Next Steps
As noted above in Table 1, there remain 73 businesses who have contacted HdL but haven’t paid their taxes. Additionally, there are currently 406 potential businesses who have not responded to any of HdL’s letters or contacts. HdL believes these businesses are composed of:
· 378 Residential Rental Properties
· 28 General Businesses
All such businesses are believed to be currently active.
For the non-responsive businesses, HdL has sent each of these potential businesses a final amnesty notice. With penalties and interest, HdL estimates an average amount of $1,000 is owed by the 406 businesses. Given that some of the 406 potential businesses may not be businesses, the collectable cap of $406,000 could be significantly lower. Once businesses are compliant, there is an expectation that they will continue to pay the Business License Tax each year that they are active. Given the Measure L change to Business License Tax approved by voters last November, the Business License Tax for residential rental properties will increase.
Thus, the ongoing revenue represented by the 378 nonresponsive rental properties could represent as much as $340,000 in annual tax revenue, again with the caveat that it could be significantly lower as not all are rental properties.
The Business License Tax penalty amnesty period ended May 17, 2023. Staff recommends that the Council continue to authorize HdL’s outreach process and send letters on a monthly basis.
HdL has heard from some businesses that they do not currently have the funds to pay. It is possible that, with time, the remaining businesses will come into compliance. This process primarily relies on HdL staff and does not have an impact on City staff. For businesses who have not come into compliance, penalties for this years tax continue to accumulate at 10% per month until the penalty equals the underlying tax due.
In addition to continued HdL outreach, staff seeks Council direction to determine the appropriate method to manage businesses who have been unresponsive. For these businesses, letters and increasing penalties may not be sufficient to bring them into compliance. Potential steps the City could take to increase compliance through enhance enforcement include:
Enhancement 1: Initiate collection efforts internally.
Under this option, the City Attorney would explore all enforcement options permitted by applicable law, including initiating collections actions (small claims or unlimited civil lawsuits).
Bringing civil actions could be resource intensive, however. For example, some lawsuits would be small claims actions if the amount in controversy is below $10,000. Small claims lawsuits cannot have an attorney present, although the City Attorney would train staff on how to file and prosecute them.
If the Council would like to pursue this option, the City Attorney would return with concrete enforcement options for the Council’s consideration.
Enhancement 2: Delegate collection efforts to a contractor.
Under this option, staff would issue an RFP for a collections agency to take over the collections efforts. Typically, if litigation is required, the collections percentage can be as low as 50%.
Enhancement 3: Criminal enforcement.
Violations of the City’s business license tax requirements is a misdemeanor, which can be punishable by fines, probation, community service or imprisonment. The seriousness of the charge could increase compliance, but could lead to community concerns over enforcement.
This approach is also resource intensive and would require use of outside counsel.
Summary
Either Enhancement 1 or 3 will require a significant commitment of City staff resources, particularly for the City Attorney. While HdL can provide guidance through the process, the actual enforcement would require use of City staff time.
HdL’s recommendation to staff is to wait to begin enhanced enforcement for another review period. Should the City Council choose to allow for an additional review period, staff recommend a three-month period before selecting any additional enforcement options.
At this time, staff would like direction from the Council as to which enhancement options the Council would like to consider and if there are any which staff should discard in future discussions.
Fiscal Impact
On February 7, 2023, HdL estimated that the City would be able to collect between $290,000 and $450,000 in additional revenue. The difference, whether the City included an amnesty period. Given Council’s direction for the amnesty period (though with a period of “half” amnesty), HdL revised their estimate closer to $290,000.
As noted above, as of May 23, 2023, HdL had recovered $484,103.96. Net of their charges, this is $297,289.28 in additional revenue to the City, already slightly above the revenue estimate with amnesty. Given that there is $117,243 in taxes invoiced, but as yet uncollected, there is significant additional tax revenue pending.
As noted on February 7, many of the non-compliant businesses were renters of dwellings with fewer than five units. Given Measure L, approved by the citizens of East Palo Alto last November, HdL anticipates from the current 546 discovered businesses the ongoing annual revenue of $405,000 from the newly discovered and registered businesses.
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 does not constitute a “project” with the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines sections 15378(b)(4) and (5) in that it is a governmental fiscal, organizational or administrative activity that will not result in direct or indirect changes in the environment.