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File#: Agenda Date
Version: 1 Item #:
_____________________________________________________________________________ Report regarding a Study Session on updating the Business License Tax structure. (Greg Henry, Financial Services Manager)
RECOMMENDATION
Staff recommends that City Council receive a Study Session on updating the Business License Tax Structure and provide direction on next steps on proposed changes.
BACKGROUND/DISCUSSION
In South San Francisco, all businesses operating within the city limits are mandated to secure a business license. These licenses, managed by the City’s Finance Department, require annual renewal by January 31st each year, serving as a means to generate revenue for municipal needs.
This requirement has been in place since 1976, encompassing all business activities within the city, including home-based enterprises. South San Francisco Municipal Code (SSFMC) Title 6 outlines business license tax, which is charged by the type of business conducted, and was last updated in 2008 and has not been modified since then, other than to increase the tax rates and the annual tax maximum based upon the annual consumer price index factor (CPI-W).
However, the current model fails to adapt to the evolving business landscape, particularly with the emergence of the gig economy, rendering the current per-employee assessment of taxes outdated.
Moreover, significant shifts have occurred in South San Francisco's economy, marked by the proliferation of biotech and construction firms, necessitating a reassessment of the existing tax structure.
In recognition of these challenges, the City initiated a request for proposal in December 2020 to engage a consultant for modernizing the business license approach. Matrix Consulting Group was subsequently enlisted in January 2021 to conduct a comprehensive study on business license taxes.
Matrix Consulting has since updated that analysis, which is provided in Attachment 1.
Current Taxing Structure
South San Francisco is primarily a per employee-based fee. However, there are 21 general categories of business with separate methods of business license tax calculation. Additionally, in 2008, the City placed a maximum “cap” on the business license tax, which has increased only City of South San Francisco
Legislation Text
P.O. Box 711
(City Hall, 400 Grand Avenue)
South San Francisco, CA
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based upon the annual consumer price index factor (CPI-W). The business license tax cap for 2024 is $150,866.50.
In 2023, the City collected $2.5 million in business taxes from 3,503 registered businesses.
However, 95% of business license tax revenue comes from the top 3 categories, as shown in the table below.
Business type Revenue % of
Rev.
# of
Businesses Description of Business License Tax
Professional $1,342,996 54% 477 $226 per associate
General Business 754,917 30% 1,637 per employee rate, currently $113.50 base tax + $23 per employee/owner
Contractor 281,537 11% 1,300 flat rate of 226.25 for contractors, $188.25 for subcontractors
% Gross Receipts 64,453 2.6% 13 % of Gross Receipts
Other 66,257 2.6% 76 Various
Total $2,510,160 100
% 3,503
Revenue totals include both a $4 State Disability Access Education Fee pursuant to Senate Bill 1186 and 2% Database fee.
DISCUSSION
If the Council would like to move forward with an update to the business license tax, which requires that a measure be placed on the ballot, is fast approaching. Staff are proposing that following this study session, should Council wish to move ahead, staff would return June 26 with proposed ballot language. This would be the final opportunity for the Council to have the City attempt an update to the Business License Tax this election cycle. There must be two readings of the proposed ordinance for the proposed tax measure prior to August to meet the County’s deadline to appear on the November ballot. That means that the ballot measure language needs to be finalized prior to July (so that the two meetings in July can serve as the two readings). With one of the meetings in July canceled, there will only be one more opportunity to finalize the ballot measure language, which places this process on an expedited basis. This is in part why this item was not first brought before the standing budget committee.
Therefore, the principal element that requires direction from the Council is whether the City should move forward with a form of a Business License Tax Update for the Election Cycle in 2024.
Comparative Survey
The following tables compare the estimated business license tax on different businesses to other municipalities in the surrounding area.
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Based upon the jurisdictions surveyed, South San Francisco’s business license revenue is lower than nearly most of the cities included in the comparison analysis, particularly for larger businesses.
Method of Taxation
There are several possible business tax rate methodologies to consider:
• Flat rate-based fees are assessed based on the businesstype regardless of its size / revenue.
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• Per-employee based fees are assessed based on the business’ number of employees. • Gross receipts-based fees are based on a percentage amount of the business’ gross receipts for the year assessed.
• Per-unit based fees are assessed based on the number of units or vehicles owned by a business, or their square footage or total rooms.
Greater detail regarding these methods, including nearby cities who use them can be found in Section 4 of Attachment 1.
Additionally, regardless of changes to the business license tax structure, there is additional business license tax revenue uncollected due to non-compliant businesses. For example, Matrix also estimates an additional $370,000 in revenue should the City be more aggressive in collecting from businesses operating in the City but not currently paying the tax.
Further, all rental properties should be paying the City’s business license tax. Currently for property owners with fewer than 5 units, the business license tax calculation falls into the “General Business” category, meaning that they should be paying based on number of employees.
While this category of businesses does not currently collect significant revenue, there are potentially thousands of non-compliant businesses, given that an estimated 40% of the 22,000 families that live in South San Fransico are renters.
ANALYSIS
The Matrix Consulting Group presented the general results of their study to the City Council on November 21, 2023, as part of the proposed revenue enhancements staff report. The proposed methodology was generally consistent with the City’s current taxing methodology, with the majority of businesses being charged based on their number of employees.
As part of the discussion with Council, staff were directed to consider a broader gross revenue tax option in addition to updating Matrix model. To that end, staff engaged HdL Companies to provide a gross receipts model.
Both methods are presented in this report, with the second primary element requiring direction from the Council of whether the City should maintain the current taxing methodology or transition all businesses to the gross receipts model.
The following table provides some high-level pros and cons for per employee against gross receipts specifically.
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Measure Advantages Disadvantages
Per
Employee
(current)
• Reflects various business sizes.
• Maybe less volatile than gross
receipts
• Places a higher burden on
businesses with more labor inputs
(like restaurants).
• Doesn’t capture productivity gains
from technology.
Gross
Receipts
• Reflects various business sizes.
• With a floor of operating
expenses, ensures businesses
designed to have operating losses
pay a fair share.
• Perhaps does not accurately reflect
businesses like startups/research
with large footprint but small
revenues.
• Potential volatile.
Business License Update | Maintain Current Per Employee Basis Following the meeting in November, Matrix met with City staff to evaluate the business license tax data, revise understanding of the existing methodologies, and update the information with the 2023 data.
For each of the five categories, professional, general, contractor, gross receipts and other, the following updates are proposed.
Professional
Matrix has recommended an update to the per associate fee, increasing from $226 to $275. This change will increase the business tax revenue by $812,268. This follows the general increase for all business types.
General Business
The General Business category in South San Francisco is the broad category that contains all businesses not specifically named in SSFMC Title 6. Businesses that fall into the General Business category pay a Business License Tax based upon the number of employees.
It is here that Matrix is proposed the changes to the per employee charge that the City currently collects. The first change is to remove the current cap on taxes, which would increase revenue by approximately $50,000 itself. Three options are proposed for updating the taxation methodology:
Method Increase In Revenue
Progressive tax starting at base of $100 plus $25 - $100 per employee. $988,864
Progressive tax starting at base of $150 plus $30 - $150 per employee. $1,690,005
Base of $113.50 plus $45 per employee. $446,670
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The details regarding the proposed progressive breaks are shown in Section 2.2 Alternatives Modeled in Attachment 1.
Having a progressive tax promotes fairness for small labor-intensive businesses (such as restaurants). For the median business with 3 employees, the impact of these changes are:
• Current – $182.50
• Base $100 – Decrease to $175.00
• Base $150 – Increase to $240.00
• Base $113.50 ($45 per employee) – Increase to $248.50 For the progressive employee taxes, nearly all of the increase in revenue will come from the very large businesses.
Contractors
Another important consideration revolves around the way that the City handles contractors and subcontractors. Contractors and subcontractors accounted for 1,300 businesses, which was an increase of 40% from 2021, representing 11% of all revenue in 2023. Currently, there is a flat rate of 226.25 for contractors and $188.25 for subcontractors. Additionally, if the business is based in South San Francisco, the business also pays the general business per employee charge.
Approximately 97% of general contractors and subcontractors paid less than $300. In consideration for potential future business license tax structures, different base rates have been used to illustrate the impacts this might have.
The City received approximately $281,537 in revenue from contractors and subcontractors. Since the City recorded about $862 million in work value for permitted projects over the last fiscal year, this equates to 0.03% of work value.
Matrix is proposing the following options for updating the taxation methodology:
Method Increase In Revenue
Set a flat fee of $1,000 for a contractor (including
subcontractors). $1,023,663
Collect 0.18 percent of valuation of work done in the City* $1,270,241 *The 0.18% will put City of South San Francisco in line with Berkeley, Menlo Park, and Oakland.
Gross Receipt Businesses
There are currently 4 business categories that pay on gross receipts:
1. Coin Operated Machines
2. Commercial Parking Facilities
3. Junk Collector/Recycler
4. Cannabis related businesses
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Matrix is not recommending any changes to these business category taxations.
Other
For the remaining businesses, Matrix is proposing that the City change to include these businesses (keeping utilities at a flat rate), in the per employee calculation. This will simplify the City’s business license tax and with an anticipated increase of between $45,000 and $80,000 in annual revenue, depending on the per employee method the City adopts.
If the Council wish to move forward using this methodology, the third primary element requiring direction from the Council is to determine which options the City should use in developing the proposed ballot measure for Professional, General and Contractors and whether the City should follow the recommendation to move most “other” businesses to the per employee model.
Business License Update | Gross Receipts Method
The gross receipts model is simpler, because all businesses pay off the same methodology. HdL presented two general structures, flat rates or classification based. A flat gross receipts rate where all businesses would pay the same percentage rate, and a classification-based structure where different business types would pay different gross receipts rates. The details of these four proposed rates are detailed in Attachment 2.
For all four proposed rates, HdL assumes a minimum rate of $25 which “covers” the first $25,000 of gross receipts. For example:
1. If the business has $20,000 in gross receipts, they would pay $25.
2. If the business has $30,000 in gross receipts, they would pay $25 plus the tax rate on $5,000 in gross receipts ($30,000 - $25,000).
3. If the business has $250,000 in gross receipts, they would pay $25 plus the tax rate on $225,000 in gross receipts ($225,000 - $25,000).
Structure Increase In Revenue
Flat Rate of 0.11% $3,845,861
Flat Rate of 0.075% $1,859,099
Classification Based:
• Contractor 0.2%
• General 0.1%
• Rental 0.3%
• Professional 0.2%
$7,475,773
Classification Based:
• Contractor 0.1%
• General 0.05%
• Rental 0.125%
$1,933,198
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• Professional 0.075%
For all of these methods, HdL anticipates a shift to a great percentage of income for larger businesses being collected in taxes and a corresponding reduction, as a percentage of income, for smaller businesses.
If the Council wish to move forward using this methodology, the primary element requiring direction from the Council is which structure and rate the City should use in developing the proposed ballot measure.
RECOMENDATION
If the City Council’s direction is to move forward with a business license tax ballot measure, staff recommends that the Council direct staff to develop a proposed ballot measure to update the City’s business license tax following one of the proposed methodologies presented in this report.
In all versions of the proposed methodologies, more tax collection will be pushed onto the larger businesses, allowing the City to fund more programs without putting unbearable pressure on smaller local businesses.
FISCAL IMPACT
Increase Enforcement $370,000
Structure – Per Employee Increase In
Revenue
Professional Change
Increase associate rate from $226 to $275 per associate $812,268 General Business Change
Remove Cap on Annual Tax
Progressive tax starting at base of $100 plus $25 - $100 per employee.
Progressive tax starting at base of $150 plus $30 - $150 per employee.
Base of $113.50 plus $45 per employee.
$50,000
$988,864
$1,690,005
$446,670
Contractor Change
Set a flat fee of $1,000 for a contractor (including subcontractors).
Collect 0.18 percent of valuation of work done in the City. $1,023,663
$1,270,241
Current Flat and Unit Rate Businesses
Convert nearly all to the per employee rate.
$40,000 -
$80,000
Structure – Gross Receipts Increase In
Revenue
Flat Rate of 0.11% $3,845,861
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Flat Rate of 0.075% $1,859,099
Classification Based:
• Contractor 0.2%
• General 0.1%
• Rental 0.3%
• Professional 0.2%
$7,475,773
Classification Based:
• Contractor 0.1%
• General 0.05%
• Rental 0.125%
• Professional 0.075%
$1,933,198
RELATIONSHIP TO STRATEGIC PLAN
The City’s business license tax program revenue supports Priority Area 3, Financial Stability.
CONCLUSION
Staff is asking for direction from City Council on the options presented in the attached report. If Council would like to move forward with an update to the business license tax, staff would need to do outreach immediately following the meeting. Staff would need to come back to Council with outreach results and proposed ordinance language on June 12 meeting. Subsequently, on June 26, and July 24, we need to have the first and second reading of the ordinance to allow staff to submit to the registrar to meet the early August deadline. This aggressive timeline is required to allow the ballot measure to go to the voters in November 2024. The measure will need a simple majority to pass.
Attachments:
1. Business license Tax Presentation – City Staff
2. Business license Tax Program Presentation – by Matrix Companies
3. Business license Tax Gross Receipts Presentation – by HdL Companies
4. Business license Tax Program Assessment – report by Matrix Consulting Group