City Council Memorandum
TO: HONORABLE MAYOR AND CITY COUNCIL DATE: MAY 7, 2024
FROM: FINANCE DEPA RTMENT WARDS: ALL
SUBJECT: BUSINESS TAX DISCOVERY PROGRAM UPDATE AND ORDINANCE
AMENDMENTS
ISSUE:
Receive an update on the City’s Business Tax Discovery Program and adopt amendments to Riverside Municipal Code Section 5.04 Taxes, Licenses and Regulations.
RECOMMENDATIONS:
That the City Council:
1. Receive an update on the stat us and financial impact of the City’s Business Tax Discovery program; and
2. Introduce, and subsequently ad opt, an Ordinance amending specific sections of Riverside Municipal Code Section 5.04 Taxes, Licenses and Regulations.
COMMITTEE RECOMMENDATION:
The Finance Committee met on March 13, 2024, with Chair Hemenway and Vice Chair Cervantes present, to receive an update on the City’s Bu siness Tax Discovery Program and consider amendments to Riverside Municipa l Code Section 5.04 Taxes, Lic enses and Regulations. After discussion the Committee unanimously voted, with Member Fierro absent, to recommend that the City Council adopt an Ordinance to amend specific sections of Riverside Municipal Code Section
5.04 Taxes, Licenses and Regulations.
LEGISLATIVE HISTORY:
Chapter 5.04 of the Riverside Municipal Code (RMC) outlines t he purpose and guidelines for assessing business tax. Specifically, Chapter 5. 04.040, titled “Business tax payment required” establishes the foundation for the Business Tax Discovery Program:
“It is unlawful for any person to transact and carry on any business, trade, profession, calling or occupation in the City without first having proc ured a business tax certif icate from the City and Business Tax Discovery Program Update and Ordinance Review ● Page 2 paying the tax hereinafter prescribed or without complying with any and all applicable provisions of this chapter.”
For businesses that become de linquent in paying their business license tax, RMC Chapter
5.04.220 prescribes penalties of 30 percent of the business tax 60 days after the due date; 50 percent 90 days after the due date; and 75 percent 120 days after the due date.
BACKGROUND:
The Business Tax Division is responsible for ensuring that all entities conducting business in the City of Riverside obtain a business tax certificate. One of the methods by which the Business Tax Division ensures compliance with the RMC is by performing discovery, i.e., identification of entities subject to licensure/taxation that are not curr ently registered or are otherwise non-compliant. A Business Tax Inspector
receives information from City departments and staff that a business may be operating within the City limits but requires an in-person contact for verification. The Inspector, through a series of letters and ultimately in-pers on contact, verifies the entity’s compliance with the RMC and assists the business in applying for a business tax certificate.
The City contracts with Hinderliter de Llamas & Associates (HdL) to assist with various tax administrative services. As part of the Business Tax Compliance Services, HdL will assist the City with discovery services. The Business Tax Discovery Program was recommended by staff as a Priority Based Budgeting Insight during the development of the FY 2022-2024 Biennial Budget as a potential source of new revenue that may help fund critical unfunded needs of the General Fund.
Subsequently, Finance staff cont acted HdL to research options for a Discovery Program and quantify potential new revenue generation.
In the Fall of 2022, HdL conducted a search fo r non-compliant businesses utilizing business registration data from the California Secretary of State and business tax filings with the Franchise Tax Board. HdL separated the data into two main discovery categories:
1. General Businesses : This category is comprised of various business types such as software companies, realtors, home businesses, retail, service, contractors, etc. HdL obtained data from the Secr etary of State reflecting approximately 19,000 Riverside businesses that registered within the preceding year (Fall 2021 to Fall 2022) but have not registered their business with the City.
2. Property Rentals: HdL identified a total of 14,508 property rentals via the City’s property tax records and the County’s data of single-family homes registered as “absentee”. These properties are considered poten tial discovery accounts and are comprised of 12,638 residential and 1,870 commercial property rentals.
Residential Rentals: In June 2016, the City’s Internal Audit Division presented to the Governmental Affairs Committee reco mmendations stemming from an audit of the City’s Business Tax Division. The Finance Department worked in close collaboration with t he Chambers of Commerce to develop a plan to enhance the City’s Business Tax Administration Progr am. On August 2, 2017, the Finance Department presented the jointly developed action plan to the Governmental Affairs Committee, and it was recommended that the City Council review and approve recommended enhancements to th e City’s Business Tax Administration Program and a six-month Amnesty Program. One of the approved action items was to update the RMC to remove the requirement to register one residential rental unit by omitting Business Tax Discovery Program Update and Ordinance Review ● Page 3 the following from Section 5.04.010, “any person claiming to have only one single- family residential rental unit shall declare such on a form provided by the Collector and shall obtain a tax-free certificate”.
Taking into consideration the RMC update to remove the registration requirement for owners with only one single-family resident ial rental, the number of identified non-compliant property rentals decreased from 12,638 to 1,024.
Commercial Rentals: HdL identified 1,870 non-compliant commercial rentals.
Per HdL, the industry standard and statute of limitations in the California Code of Civil Procedure Sec. 338(a) is to charge three years’ back taxes plus penalties to all businesses identified as non- compliant plus the current year’s tax. Although the RMC is silent on this subject, past City practice has been to charge three years’ back taxes plus the current tax due, plus penalties as described in RMC Chapter 5.04.220.
On September 6, 2022, the City Council approved staff’s recommendation to initiate a Citywide Discovery Program. The City Council’s selected approach, referred to as Option 3, involves HdL collecting three years of back taxes and waiving penalties owed via a 3-month amnesty program targeting each discovery category. This option provides businesses with an opportunity to pay their back taxes while creating a foundation of compliance moving forward. The City Council also approved staff’s recommendation that, following the initial amnesty program, all new discoveries be equitably and fairly assessed at the statewide industry standard of charging three years back taxes plus the current year’s tax, plus penalties set forth in RMC Chapt er 5.04.220 Delinquent taxes - Penalties.
DISCUSSION:
Discovery program:
In collaboration between HdL and the City’s Business Tax Division, the City initiated the Discovery Program on November 1, 2022, with a focus on property rentals. HdL's Discovery and Compliance Team actively assisted the City of Riverside in pursuing businesses non-compliant with the City’s Code. Using diverse data sources, HdL identified and pursued compliance for 2,894 commercial and residential property rentals lacking business licenses. Employing correspondence and direct contact, HdL has successfully brought approximatel y 745 accounts into compliance, resulting in approximately $683,000 in new revenue to date. Subsequently, in response to inquiries regarding the interpretation and enforcement of the RMC, the City’s Business Tax Division temporarily paused the Discovery Program in March 2023 to conduct a comprehensive review of the municipal code and strategize enforcement moving forward.
Ordinance Review:
During the amnesty program, H dL inquired about the City’s inte rpretation and enforcement of specific sections of the Riverside Municipal Code (RMC), specifically Chapter 5.04, pertaining to business licenses and taxes. Inconsistencies we re identified, leading to suboptimal revenue collection compared to RMC allowances. Consequently, the Discovery Program was temporarily halted in March 2023 to conduct a thorough review of the municipal c ode and formulate an enhanced enforcement strategy moving forward.
Business Tax Discovery Program Update and Ordinance Review ● Page 4 Per the existing contract terms, HdL promptly initiated a comp rehensive review of the City's ordinance in March 2023. This review involv ed benchmarking against industry standards, resulting in HdL presenting an init ial draft of findings and recomme ndations to City staff in June 2023. Over the subsequent months, the Business Ta x team collaborated with HdL to thoroughly review and refine the draft, seeking additional analyses in specific areas. City management has diligently examined HdL's findings and recomm endations, seeking gui dance from the City Attorney’s Office on specific items.
Proposed changes to the Riverside Municipal Code (RMC) are desig ned to provide clarity to business owners and staff regarding business ta x practices. These changes include updating language to align with current business practices, modernizing pronoun usage, introducing clear definitions, improving clarity, and incorporating language to reference state law, where applicable.
The recommended updates are as follows:
RMC CODE RECOMMENDED CHANGE
5.04.010 - Definitions (C)(1)
“One or more business rental units on the same
parcel or adjoining parcels shall be considered a
separate place of business and a tax certificate must
be obtained for each separate place of business."
Interpretation: For example, in an office building, a
business tax certificate is required for each rental
suite.
Update the RMC to reflect current practice, which
is to require one business tax certificate per
assessor's parcel number (APN) for business
rental units. This practice provides a streamlined
and business-friendly approach to the taxation of
business rental units, reducing the administrative
burden for both the City and businesses.
There is no fiscal impact to amending the code to
reflect current practice; however, the current
code allows for a base tax of $151.50 for each
rental unit. As a result, there is a lost opportunity
for enhanced revenues.
5.04.010 - Definitions (I)
“Convalescent hospital” is referenced in 5.04.300
Business tax (A)(1) but is not defined.
5.04.010 Definitions (Q) provides the definition
for Professional services. The definition states
“…such professions to include but not be limited
to… audiologist, chiropractor,
family and child
counselor, mortician, optician, optometrist,
osteopath, physician (all types), podiatrist,
psychologist, registered nurse, speech
pathologist…”
Some of these professions may also be
employed at a Convalescent hospital, which,
under this chapter, is taxed on a different basis
than professional services. To provide clarity,
add the definition of Convalescent hospital, to
include alignment with the State of California’s
definition by specifying that:
“A convalescent hospital must be licensed by the
State as such.”
Business Tax Discovery Program Update and Ordinance Review ● Page 5
RMC CODE RECOMMENDED CHANGE
5.04.010 - Definitions (R)
1. Two or more single-family residential rental units
and multiple-residential rental units of two or
three units shall be taxed as one business using
the property owner's physical address as the
business address.
2. Four or more residential rental units on the same
parcel or adjoining parcels shall be considered a
separate place of business and a tax certificate
must be obtained for each separate place of
business.
Update the RMC to reflect current practice, which
is to require one business tax certificate per APN
for residential rental units. This practice provides
a streamlined and resident-friendly approach to
the taxation of residential rental units, reducing
the administrative burden for both the City and
residents.
There is no fiscal impact to amending the code to
reflect current practice; however, the current
code allows for a base tax of $151.50 for each
rental unit. As a result, there is a lost opportunity
for enhanced revenues.
5.04.080 - Exemptions Add: "If the exemptions under this chapter conflict with state law, the state law shall
govern."
5.04.130 - Statements and records
“All persons subject to the provisions of this chapter
shall keep complete records of business
transactions, including sales, receipts, purchases,
and other expenditures, and shall retain all such
records of examination by the Collector. Such
records shall be maintained for a period of at least
three years.”
Extend the record retention requirement to four
years to align with the City’s right to audit and
collect taxes for the current year plus the
previous three years.
5.04.170 - Extension of time and waiver of
penalty
“For owners of a newly registered Residential
Rental business, the Collector shall have the power,
for good cause shown, to waive any past due tax
assessed for prior years that would otherwise have
accrued, provided that the business owner has less
than four residential rental properties containing two
or fewer residential rental units.”
Remove sentence. This provision, specific to a
select group, is unnecessary; the final sentence
in the same section applies to all persons and
businesses subject to the business license
requirement:
“The Collector shall also have the authority, for
good cause shown, to waive any penalty
imposed, charge demanded, or any past due tax
assessed for prior years that would otherwise
have accrued.”
5.04.180 - Business tax certificate
nontransferable - changed location and
ownership
This section outlines the nontransferable nature of
business tax certificates, with provisions for transfer in the event of a changed location or ownership.
To align with current City practice, remove
provisions allowing the transfer of business tax
certificates. A new business tax certificate is not
required for a changed location or ownership.
This change will reduce the related
administrative burden.
5.04.190 - Duplicate business tax registration
notice and/or certificate
This section stipulates a fee of $10.00 for providing
copies of a business tax certificate.
Update this section to specify that the fee applies
to “physical” copies of the business tax
certificate.
Business Tax Discovery Program Update and Ordinance Review ● Page 6
RMC CODE RECOMMENDED CHANGE
5.04.200 - Posting and keeping business tax
certificate
B. "Any certificate holder transacting and carrying
on business but not operating at a fixed placed
of business in the City shall keep the certificate
upon his person at all times while transacting
and carrying on the business for which it is
issued.”
HdL states that requiring that all businesses
entering the City to carry a copy of their business
certificate is unusual, but it is a common practice
to require solicitors and peddlers to do so.
Update this provision to restrict it to solicitors and
peddlers. To facilitate this change, definitions for
Solicitor and Peddler were added to RMC
Section 5.04.010 - Definitions. Additionally, the
definition of Peddling was moved from 5.04.300
Business tax (B)(5)(i) to Section 5.04.010 -
Definitions.
5.04.250 Enforcement
“The Collector in the exercise of the duties imposed
upon him hereunder, and acting through his
deputies or duly authorized assistants, shall
examine or cause to be examined all places of
business in the City to ascertain whether the
provisions of this chapter have been complied with."
Update the language to shift from a mandatory
responsibility to an authorized privilege to convey
that the Collector has the authority, but not the
obligation, to examine places of business in the
City to ensure compliance with the provisions of
the chapter.
“The Collector shall have the right, and acting
through his deputies or duly authorized
assistants…”
All other recommended updates to RMC Chapter 5.04 Taxes, Lic enses and Regulations are nonsubstantial, relating to modernizing the code to be gender neutral.
Discovery Program Projections
The Discovery Program initially focused on the property rental sector, including both residential and commercial properties. Before expanding to include the general business category, a temporary pause was inst ituted to conduct a thor ough examination of the municipal code and offer precise guidance to HdL in addressing businesses that were not in compliance. The following summary presents the current financial status of the Discovery Program to date.
Out of the total funds collected, approximately $683,000, HdL is entitled to a contingency fee of 25% for collection accounts and 35% for discovery accounts, explicitly referred to as the "Cost of Collection" in the accompanying chart, totaling $206,292.
Business Tax Discovery Program Update and Ordinance Review ● Page 7
The City of Riverside, in collaboration wi th HdL, remains committed to enhancing overall compliance within the City with a projected revenue of $6.1 million based on the ability to collect three years of back taxes and associated penalties. The attainment of this goal is contingent upon the City's commitment to enforcing the RMC as written.
Next Steps
Following Council adoption of the ordinance am endments, staff will coll aborate with HdL to resume the Business Tax Discovery program, initially focusing on completing the rental properties category, followed by the General Business category.
STRATEGIC PLAN ALIGNMENT:
The topics included in the report support Strategic Priority 5 – High Performing Government, and Goal 5.4: Achieve and maintain financial health by addressing gaps between revenues and expenditures and aligning resources with strategic priorities to yield the greatest impact.
This action aligns with each of the five Cross-Cutting threads as follows:
1. Community Trust – Community trust will be enhanced within the business community through consistent and equitable application of the City’s business tax code and administration of the business tax discovery program, as well as a dherence to the City’s municipal code.
2. Equity – The business tax discovery program s eeks to ensure fairness and treatment, recognition of rights, and equitable applicat ion of the City’s business tax code and administration of the business tax discovery program.
3. Fiscal Responsibility – RMC 5.04.020 states “This chapter is enacted solely to raise revenue for municipal purposes…” The City is committed to ensuring all businesses subject to the business tax requirements as set forth in the Riverside Municipal Code are compliant
Business Tax Discovery Program Update and Ordinance Review ● Page 8 and to raise revenue for municipal purposes and the General Fund, which may in turn enable the City to expand services and fund critical needs.
4. Innovation – The City contracts with HdL which has access to sales and property tax data from various sources. Utilizing the most cu rrent resources, HdL implements the business tax discovery program with zero additional cost to the City utilizing the latest technologies and strategies to ensure compliance.
5. Sustainability & Resiliency – Since the initial amnesty portion of the discovery program, there has been a continued effort to ensure compliance to the municipal code. Best practices will be reviewed and implemented to ensure the highest level of compliance to City laws and regulations.
FISCAL IMPACT:
There is no fiscal impact related to receiving th is report. To date, the discovery program has generated approximately $683,000 in new revenue, with an optim istic outlook for projected one- time total revenue of $6.1 million based on thr ee years of back taxes and penalties as the City aims to increase the overall compliance rate . HdL based the $6.1 million estimate on 2,894 unregistered property rentals and approximately 19,000 Riverside bus inesses identified in the general businesses category that have registered with the California Secretary of State but have not registered their business with the City. HdL also based the estimate on strict application of the RMC, regardless of current practice. As a result, the actual amount collected may be affected by the findings and recommendations of the ordinance review. As businesses are brought into compliance, ongoing revenue may reach $1,500,000 annually.
Prepared by: Daniel Sanchez, Business Tax Supervisor
Approved by: Kristie Thomas, Finance Director/Assistant Chief Financial Officer Certified as to
availability of funds: Kristie Thomas, Finance Directo r/Assistant Chief Financial Officer Approved by: Edward Enriquez, Assistant City Manager/Chief Financial Officer/City Treasurer
Approved as to form: Phaedra A. Norton, City Attorney
Concurs with;
___________________________
Steve Hemenway, Chair
Finance Committee
Attachments:
1. RMC Section 5.04 Taxes, Licenses and Regulations
2. Redlined Business Tax Ordinance
3. Presentation