City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Administrative Services
Meeting Date: October 20, 2025
Report #:2507-4964
TITLE
Approval of Contract Amendment No. 1 to Contract No. C23187298C with Hinderliter, de Llamas, and Associates (HdL) for Business Tax and Business Registry Certificate Fee Administration Services in the Amount of $750,000 for Additional Administrative and Operational Services and $2,120,000 Contingent Fees for a Revised Total Not-To-Exceed Amount of $2,870,000, to Extend the Term by Two Years to June 30, 2028, and Approve a Budget Amendment in the General Fund (Requires 2/3 vote); CEQA Status – Not a Project
RECOMMENDATION
Staff recommends that the City Council:
1. Approve and authorize the City Manager or their designee to execute Amendment No. 1 to Contract No. C23187298C with Hinderliter, de Llamas, and Associates (HdL) (Attachment A) for business tax and business registry certificate fee administration services in the amount of $750,000 for Additional Administrative and Operational Services and $2,120,000 Contingent Fees for a revised not-to-exceed amount of $2,870,000, and extend the term by two years, through June 30, 2028; and
2. Amend the Fiscal Year 2026 Budget Appropriation Ordinance in the General Fund by:
a. Increasing estimate for Business Tax revenue by $250,000; and, b. Increasing Administrative Services Department contract expense appropriation by $250,000.
EXECUTIVE SUMMARY
Hinderliter, de Llamas, and Associates (HdL) provides tax and fee administration services for the City’s Business Tax and Business Registry Certificate programs, including annual registration and renewal, compliance, payment processing, and reporting.
Since launching in 2023, the Business Tax has generated $5 million to $6 million annually as rates have increased from 3.75 cents to the full 7.5 cents per square foot. FY 2026 will be the first fiscal year with fully phased-in tax rates. Consultant costs to administer the program have remained less than 10% of total revenue, keeping most program dollars focused on voter-
approved priorities for transportation, affordable housing, and public safety. The Business Registry Program continues to generate approximately $150,000 per year.
The proposed amendment increases the not-to-exceed amount by $2.0 million and extends the contract term by two years, from June 2026 to June 2028 for a total term of five years. Almost 90% of this increase represents contingency-based compliance costs, meaning such fees would only be incurred if compliance collections are necessary and successful. This includes prior year discovery and collections that recovered previously unpaid revenue, as well as future compliance phases such as targeted audits. About 10% of the contract increase represents flat- rate administrative services, including new and recurring registrations, expanded outreach to register a broader group of exempt businesses, and enhanced reporting.
Key Changes
Increase not-to-exceed by $2.0 million to reflect early implementation work and future phases, especially compliance and audit
Extend contract two years to ensure service continuity and support program stabilization
No added fixed costs; compliance services are funded by recovered revenue
BACKGROUND
In November 2022, voters approved a Business Tax on office space, with revenues designated for transportation, affordable housing, and public safety1. The tax applies to businesses occupying office space in the City and is assessed based on square footage. The Business Registry Certificate (BRC) program has been in place since 2015 and requires all businesses operating in the City to register annually2.
In early 2023, the City issued a Request for Proposals for tax and fee administration services and received two bids. Following operational challenges with the initially selected vendor, the City entered into a new agreement with HdL in August 20233. The contract includes fee administration, compliance, payment processing, and reporting for both the Business Tax and the existing BRC programs. HdL uses a mix of fixed-fee billing for operations and revenue-based billing for compliance. While HdL provides day-to-day support for both programs and ensures compliance with the Palo Alto Municipal Code, the City retains oversight and guides key decisions on program implementation, interpretation, and policies.
Their scope of work includes:
Administration and Operations: Maintaining the business database, processing new registrations and renewals, generating notices, and managing access to an online 1 The Business Tax is codified in Chapter 2.37 of the Palo Alto Municipal Code 2 The Business Registry is codified in Chapter 4.60 of the Palo Alto Municipal Code 3 City Council, February 5, 2024, Staff Report#: 2401-2481 taxpayer portal. Billed as a flat rate of $17.00 per account, adjusted annually based on the Bay Area CPI.
Contingent Fee for Compliance: Discovery of unregistered businesses, collections, resolving incomplete or unpaid filings, and audit services. Billed as a percentage of revenue collected (25-35%).
Additional Services and Contingency: Handling of credit/echeck payments, other reimbursable expenses for travel, and additional contingency services billed at flat rates.
The Business Tax portal opened in October 2023 to support businesses in filing for calendar year 2023, marking the start of the City’s business tax program. Businesses submitted their first filings in early 2024, and quarterly payments will continue as part of the program (currently authorized through December 31, 2057).
For more information about the Business Tax and Business Registry programs, visit:
https://www.paloalto.gov/Business/Business-Registry-and-Tax
ANALYSIS
HdL provides comprehensive support for the City’s Business Tax and Business Registry programs, including account registration, payment processing, quarterly filings, compliance activities (such as discovery and collections), and customer service. The Business Registry Certificate program continues under the same contract, with HdL maintaining account renewals.
Since launching in 2023, the Business Tax has generated between $5 million and $6 million annually as rates have phased in from 3.75 cents to 7.5 cents per square foot. In FY 2025, revenues totaled $5.7 million, reflecting higher program compliance by businesses and a partial year at the fully phased-in rate.
Collections began in January 2024 at 50% of the voter-approved rates as part of a phased implementation, with full rates taking effect on January 1, 2025. FY 2026 will be the full fiscal year in which all revenues reflect the fully phased-in rates. The Business Registry program remains consistent, generating approximately $150,000 annually.
In the first two years of the Business Tax program, much of the work focused on establishing core operations, registering active businesses, and resolving outstanding accounts to bring them into compliance. The proposed amendment increases the not-to-exceed amount by $2.0 million and extends the contract term by two years, from June 2026 to June 2028. Most of this increase is tied to contingency-based compliance costs. This includes prior-year discovery and collections that successfully recovered previously unpaid revenue, as well as continued compliance efforts and upcoming phases, such as targeted audits. A smaller share of funds supports administrative services, including new and recurring registrations, expanded outreach to a broader base of exempt businesses, and enhanced reporting.
Table # 1: Proposed Changes to Contract Scope by Task
Incurred
Costs FY24-25
Current
Agreement
Amendment
No. 1
Net
Change
Scope of Services
1) Administrative and Operational
Services
$170,000 $424,320 $640,000 $215,680
2) Contingent Fee for Compliance
Services*
$760,000 $352,275 $2,120,000 $1,767,725
3) Additional Services and
Contingency
$- $83,960 $110,000 $26,040
Total Scope of Service NTE $930,000 $860,555 $2,870,000 $2,009,445
Term of Service 3 Years 5 Years 2 Years
Expiration Date June 30, 2026 June 30, 2028
*Compliance Services include discovery and collections as well as planned audits for later phases. Costs are incurred only when revenue is recovered.
1) Administrative and Operational Services
Administrative services fees are billed at a flat rate per account for annual registrations and renewals. To date, routine filings have remained under the not-to-exceed limit and represent a smaller share of the overall contract cost. The proposed increase in this category supports ongoing annual registration work, renewals, and expanded outreach to exempt businesses. In the initial years, work centered on registering businesses that were required to pay the tax, with some outreach to exempt businesses. In future years, a greater share of activity will shift toward registering exempt businesses to ensure comprehensive participation.
Staff and HdL are also working to enhance internal reporting capabilities, including geo-tagging business locations, tracking square footage, and monitoring exemption status and filing trends.
These enhancements will provide better data to assess business activity, compliance trends, and inform future planning and policy decisions.
2) Contingent Fee for Compliance Services
Compliance services, which account for a majority of the proposed $2.0 million increase, are billed on a contingent fee basis, meaning costs are incurred only if revenue is successfully recovered. This increase reflects time consuming discovery and collections work that successfully recovered unpaid revenue during program launch, as well as anticipated future activities such as planned audits and continued account resolution. This structure enables compliance-related expenses to scale directly with activity rather than adding ongoing fixed costs.
Since program launch, discovery and collection services have generated approximately $2.5 million in additional revenue as part of efforts to establish the program and bring accounts current. The majority of this revenue reflects the base tax payments, while penalties and interest represent a small and declining share as on-time filing and payment continue to improve.
Near-term activity remains focused on continued discovery and collections, which include identifying unregistered businesses, conducting outreach, resolving accounts, and collecting unpaid tax from both the current and prior years. This outreach can be time consuming requiring multiple attempts and discussions to on board unregistered and past due business. In FY 2025, these compliance costs were approximately $510,000, or less than 10% of total Business Tax revenue. Overall, these efforts have generated a return of nearly $4.00 in previously unpaid taxes for every $1.00 spent. As the program matures, the volume of discovery and collections is expected to decline as unregistered businesses are on boarded, and compliance resources will shift toward audit services, which are more targeted and typically lower in overall cost. This evolution is expected to gradually reduce ongoing compliance expenses while maintaining a strong level of revenue recovery. 3) Additional Services or Contingency
There are no significant changes in this category from the original agreement. Costs remain minimal and primarily reflect payment processing support, reimbursable travel expenses, and other contingency services, which are incurred only when needed.
Outlook and Next Steps
The Business Tax program is still in its early stages and will continue to evolve as rates are fully phased in and participation stabilizes. Staff will continue to monitor filing patterns, compliance activity, and overall program performance, and will provide updated analysis and recommendations in future financial updates as more data becomes available.
FISCAL/RESOURCE IMPACT
Funding for administration of the Business Tax and Business Registry Programs is included in the FY 2026 Adopted Operating Budget and offset by a portion of the collected business tax revenues. Staff recommends increasing both revenues and expenditures by $250,000 to align budget authority with projected activity levels. With this adjustment, the FY 2026 budget for administrative services for the Business Tax and Business Registry Programs will be increased to approximately $600,000, inclusive of the estimated contingent fees for compliance services.
This amount reflects a period of elevated activity as the program prepares to transition from its initial implementation phase to a steady operating level. Costs are expected to decline in future years as on-time filing continues to improve, and compliance work shifts from discovery and collections towards more targeted audits. The business tax revenue in FY 2026 is estimated to be $6,700,000 after this adjustment and the balance after administrative costs will be used to support City priorities for transportation, affordable housing, and public safety services.
STAKEHOLDER ENGAGEMENT
The City, in partnership with HdL, has taken a proactive approach to outreach, providing FAQs, information sessions, dedicated City webpages7, and the ability to schedule one-on-one consultations. These efforts have continued through the quarterly renewal process, where staff and HdL actively engage with businesses, provide guidance on filing requirements, and offer support to facilitate timely filings and ongoing compliance.
ENVIRONMENTAL REVIEW
This activity is not a project under California Environmental Quality Act (CEQA) as defined in CEQA Guidelines, section 15378(b)(4) (government fiscal activities which do not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment).
ATTACHMENTS
Attachment A: HdL Contract, C23187298C Amendment No.1
APPROVED BY:
Lauren Lai, Administrative Services Director
7 1) City of Palo Alto Business Tax Implementation
https://www.paloalto.gov/Business/Business-Registry-and-Tax/Business-Tax-Implementation-2023 2) City of Palo Alto Business Registry and Tax Program
https://www.paloalto.gov/Business/Business-Registry-and-Tax.