February 1, 2022
Finance Department
DATE: February 1, 2022
TO: Mayor Butt and Members of the City Council
FROM:
Anil Comelo, Interim Deputy City Manager
Belinda Brown, Director of Finance
Antonio Banuelos, Accounting Manager
Thomas Omolo, Management Analyst II
Subject:
Gross Receipts Business Tax Measure U Fiscal Impact
Estimates
FINANCIAL IMPACT: No General Fund impact in receiving this update.
PREVIOUS COUNCIL
ACTION:
(List all dates items were heard or
council action took place)
At the December 21, 2021, Council meeting, the
proposed action on the Measure U agenda item included
approval of a resolution allowing landlords with four or less residential units to credit their paid Rent Board fees against their gross receipts tax obligation and for City Council to receive an update on Measure U Fiscal
Estimates. The resolution was approved and the section
to receive information was postponed to a subsequent
Council meeting.
STATEMENT OF THE
ISSUE:
This report provides important information regarding the potential fiscal impact of Measure U.
AGENDA
REPORT
February 1, 2022
RECOMMENDED ACTION:
RECEIVE an update on Measure U Fiscal Estimates –
Finance Department (Anil Comelo 510-620-6600/Belinda
Brown 510-620-6740/Antonio Banuelos 510-620-6741).
DISCUSSION:
City Council placed a measure on the November 3, 2020, ballot that was approved by the voters, which changed the Business Tax calculation methodology to be based on gross receipts instead of the prior method based upon the number of employees employed by a business.
Fiscal Impact
Measure U Business Tax revenues, as approved by voters, was projected to result in additional revenue growth of about $6 million per year, $9.5 million total assuming full implementation. The City's estimates include revenues anticipated from residential properties and commercial businesses operating in Richmond. The City estimated approximately $3.4 million in Business Tax revenues from commercial businesses and $6.1 million from residential properties. These Business Tax revenue estimates were incorporated into the City's long-range fiscal model presented to the City Council during the adoption of the FY 2021-2022 budget in June 2021.
On December 21, 2021, the Council adopted a resolution allowing landlords with four or fewer residential units to credit their paid Rent Board fees against their gross receipts tax obligation. Based on current Rent Board rates, approximately $1.6 million in Rent Board Fees paid by owners of small residential properties could be applied as a credit to the business tax obligation, thus reducing the Business Tax collected. Additionally, staff and consultants believe there will be a one-time delay of Business Tax revenues received during the first year of implementation that could total up to $2 million.
Business Tax revenues in the first year could be as low as $5.9 million, and not the $9.5 million originally projected. Ongoing Business Tax Revenue after the first year, though, is projected to be $7.9 million per year.
Business Community Input
As part of the Measure U community engagement efforts, the West Contra Costa County Council of Business and Industries (COBI) provided an estimate of Business Tax revenues under Measure U that focused exclusively on the commercial business sector. The calculation was based on data from the City regarding the number of
February 1, 2022
businesses operating in Richmond and a separate calculation methodology from publicly available data. The COBI calculation estimated that the City would generate Business Tax revenues of over $12 million per year. COBI's calculations excluded rental properties.
The two different calculation methodologies can be found below.
A summary of the two calculation methodologies is provided in Table 1.
Table 1. Comparison of Methodologies for Business Tax Estimates City of Richmond Council of Business and Industries
Calculation methodology Gross receipts estimate based on 2020 sales tax data; business
categories based on known sales
tax business codes
Gross receipts estimate based on national
and regional data, localized based on
Richmond businesses and using per-
employee revenue generation assumptions
Data sources 1Q 2020 sales tax data from City's
tax consultant, Avenu Insights &
Analytics
Small business revenue statistics (2020):
Annual sales and earnings, published by
Fundera
City's business license data (companies,
categories, and employee counts)
US Census data on number of firms,
establishments, employment, annual
payroll, and preliminary receipts by
enterprise employment size for the US, all
industries (2017)
Number of Richmond-
based businesses used in
calculation
1,037 2,273
Methodology limitations Assumes gross receipts only
from sales tax revenue sources
Ignores gross receipts from non-
sales tax-paying sources (e.g.,
wholesalers, personal service
industries, groceries, etc.)
Number of businesses included
in model nearly 70% lower than
current BUSINESS TAX database
(actual in 2021 database is
3,505*)
National statistics and industry
composition that may not be reflective of
Richmond-based businesses
US Census data not available after 2017
Number of businesses included in model
nearly 35% lower than current BUSINESS
TAX database (actual in 2021 database is
3,505*)
Estimated Revenues
based on Measure U
approved rates and
calculation methodology
$3,438,000 $12,050,000
*Staff reported the increase in business licenses is a result of pandemic-related assistance programs that require businesses to comply with local regulations.
February 1, 2022
Management Partners reviewed both the City's and COBI's calculations. As described above, several unknown factors could impact the estimates including: the anticipated gross receipts that will be reported by Measure U Tax Revenue Analysis of commercial businesses, the categories under which they will be classified when applying for their business licenses, and the resulting tax revenues that will be received.
Customer Service Update
In October 2021, staff mailed approximately 9,000 datasheets to all city businesses including rental property owners, as the first step implementation. These datasheets helped set up business’ tax accounts with the information needed to estimate the taxes due based on gross receipts. The datasheet confirmed current business license data, including business address, tax identification number, email address, and telephone number, and asked for new information, including projected gross receipts and business classification number. The City of Richmond received over 1,500 responses, which helped populate renewal notices with amounts due and provided businesses access to the online portal, which would allow businesses to pay their taxes online.
A subsequent prefilled or blank renewal notice was sent on Friday, January 21, 2022, to businesses who completed the datasheet and non-responsive businesses, respectively.
Businesses that do not receive a notice by February 14, 2022, are encouraged to reach out to the Finance department by calling 510-620-5555 or emailing [email protected]. After receiving three renewal notices and after June 30, 2022, businesses with unpaid taxes may receive a penalty due to non- compliance with Measure U (see Section 7.04.370 of the Municipal Code).
In addition to distributing Renewal Notices to businesses with expired licenses, City staff members distributed over 4,000 postcards to all active businesses and businesses whose licenses have expired since July 2018. The postcard included Spanish translations and informed businesses of the newly updated and streamlined website for Measure U https://www.ci.richmond.ca.us/measureU and how to sign up for a One- on-One meeting with Finance staff to discuss the Measure U Business Tax Certificate program and support businesses with completing the renewal process. The newly designed website includes:
1. Business Tax Calculator – Use to calculate your curren t and proposed tax rate under Measure U
2. One-on-One session with Finance Department – Schedule a 15 -minute call with Finance staff to answer your questions and/or support your business complete the renewal process
3. Business Activity Code and Measure U Business Class – Determine your businesses' class under Measure-U to determine your businesses tax rate ba sed on Gross Receipts
4. Frequently Asked Question
February 1, 2022
Next Steps
During the next few weeks, staff will continue to provide information and support to the business community and continue the implementation phase. The implementation phase includes the testing and installation of a new business tax system by the Information Technology and Finance departments providing augmented business tax services to the Richmond business community.
The community is welcome to direct questions for staff to the business tax hotline at 510-620-5555 or email to [email protected].
DOCUMENTS ATTACHED:
Attachment 1 – Presentation
Attachment 2 – Measure U Outreach Flyer
Attachment 3 – Renewal Notice
Attachment 4 – Renewal Datasheet