City Council
Staff Report
From: City Attorney
Report Type: CONSENT CALENDAR
Lead Department: City Attorney
Meeting Date: December 4, 2023
Report #:2311-2271
TITLE
Adoption of an Ordinance Amending Chapter 2.30 (Contracts and Purchasing Procedures) and Chapter 2.37 (Business Tax) of the Palo Alto Municipal Code to Correct Clerical Errors and Clarify Procedures for Administering the Business Tax. CEQA Status -- Not a project.
RECOMMENDATION
Adopt the attached ordinance amending Chapter 2.30 (Contracts and Purchasing Procedures) and Chapter 2.37 (Business Tax) of the Palo Alto Municipal Code to correct clerical errors and clarify procedures for administering the Business Tax.
BACKGROUND
In November 2022, Palo Alto voters approved Measure K, adopting a general tax on businesses operating in the City of Palo Alto. The business tax is codified at Chapter 2.37 of the Palo Alto Municipal Code.
The business tax is based on square footage occupied by a business. The tax accrues as of January 1, 2023, but the first payment is not due until January 1, 2024. On January 1, 2024, tax for the period January 1, 2023 through December 31, 2023, will be due. Thereafter, tax is due quarterly, on the first day after the end of the quarter. In other words, tax for the period January 1, 2023 through March 31, 2023, will be due on April 1, 2023, and so on.
To administer the tax, staff has developed a portal where tax returns can be submitted and tax paid each quarter. For the April 1 filing, businesses will also be directed to complete their business registry filing and, if applicable, pay their Downtown Business Improvement District assessment. In addition to the portal, staff has established a webpage1 where businesses can find helpful tools, including Business Tax Administrative Regulations and FAQs, and can schedule an appointment to speak with staff.
1 www.cityofpaloalto.org/businesstax
In preparing for submission of tax returns and payments in 2024, staff discovered several clerical errors in Chapter 2.37, and a few areas where additional clarity or specificity would be beneficial. Under Section 2.37.270(a)2 of Chapter 2.37, Council may amend Chapter 2.37 without the approval of the electorate provided that the amendment does not increase the amount of tax that any business would pay.
DISCUSSION
The attached ordinance amends the Municipal Code to correct two clerical errors and make the following administrative clarifications to the business tax ordinance, none of which will increase the amount of tax any business will pay:
1. Clarify that businesses who believe they are exempt from business tax must still file an application for exemption and respond to requests for confirming documentation, if needed. Exempt businesses include those that are exempted by state or federal law (e.g. banks, non-profits, certain daycare providers), grocery stores, businesses under 10,000 square feet, and transitory businesses.
2. Clarify that the cap on the total amount of tax that will be paid by a business for the period from January 1, 2023 through June 30, 2023, will be $250,000. This is necessary because Chapter 2.37 caps the total amount of tax paid by a business at $500,000 per fiscal year (July 1 through June 30). Because the tax began to accrue on January 1, 2023—in the middle of a fiscal year—a clarification is needed regarding how the cap will be applied for the partial fiscal year.
3.Authorize the City Manager to enter into agreements with businesses seeking offsets from business tax. Offsets are available for (a) transient occupancy tax (hotel tax or TOT), (b) vacant space immediately available for lease or sub-lease, and (c) a portion of sales or use tax paid under circumstances where the business exercises discretion to allocate sales or use tax to Palo Alto. In some cases, the City and businesses may find it useful to administer offsets using a contract that contains additional details. The ordinance would allow the City Manager to execute those contracts beyond the three- year time period when a contract would otherwise need to be approved by Council.
4. With respect to offsets for discretionary sales or use tax, clarify that if the sales or use tax relied on to establish an offset were later reallocated to another jurisdiction, the business would be required to reimburse the City for the amount of the offset.
5. Clarify that a claim for constitutional apportionment must be brought within one year.
2 https://codelibrary.amlegal.com/codes/paloalto/latest/paloalto_ca/0-0-0-92256
FISCAL/RESOURCE IMPACT
Adoption of the proposed ordinance will confirm and support efficient administration of the Business Tax, an important ongoing source of City revenues. Implementation of this ordinance will not require any additional resources.
STAKEHOLDER ENGAGEMENT
Staff have conducted four workshops (three focus groups and one informational session) to gather feedback from businesses on tax administration issues and answer questions. These clarifications are consistent with the discussions and feedback received.
ENVIRONMENTAL REVIEW
The adoption of this ordinance is an administrative activity of government that will not result in direct or indirect physical changes to the environment and therefore does not constitute a project under the California Environmental Quality Act. CEQA Guidelines section 15378(b)(5).
ATTACHMENTS
Attachment A: Ordinance Amending Chapters 2.30 Contracts and Purchasing Procedures 2.37 Business Tax
APPROVED BY:
Molly Stump, City Attorney