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HomeMy WebLinkAbout03/09/2004 - Study SessionCITY OF NEWPORT BEACH City Council Minutes Study Session March 9, 2004 - 4:00 p.m. ROLL CALL Present: Heffernan [arrived at 4:15 p.m.], Rosansky, Adams, Bromberg, Webb, Nichols, Mayor Ridgeway Absent: None CURRENT BUSINESS 1. CLARIFICATION OF ITEMS ON THE CONSENT CALENDAR — None 2. DISCUSSION OF BUSINESS LICENSE REQUIREMENTS/ PROCEDURES. Mayor Ridgeway explained that he received a request for a new license from the Revenue Division today, which he opposes, on an LLC that has property in northern California and the only thing that is generated from his office is a tax return. He requested an opinion from the City Attorney on whether he could weigh in on this issue or if it would present a conflict. City Attorney Burnham explained that since this is only a discussion item and no action will be taken, he can participate in the discussion. Revenue Manager Everroad explained that the notices weren't sent out in anticipation of this presentation. Mr. Everroad explained that at the EDC meeting they presented evidence from the original business license tax register dated 1906 which indicated that the City began licensing businesses just shortly after incorporation. The amounts paid in 1906 would be similar to what is being paid today if they're adjusted for inflation. The authority under which the City imposes business license taxes is pursuant to the Charter. The City Council adopted Chapter 5.04, the business tax ordinance, which requires business licenses for revenue purposes only. It is very specific that it is for revenue only and not for regulation — it is a tax assessment. It is also not related to the costs to process business licenses (new applications, renewals, the cost of enforcement, discovery costs, etc.). The City does regulate many businesses by different ordinances such as massage, vacation rentals, pawnbrokers, taxis, etc. The charges associated with those licenses are regulatory in nature and the City recovers just the cost of processing those applications and issuing the permits. The City collects a lot of information about businesses and provides that information to a variety of individuals and entities. The City also receives a lot of calls from the public about particular businesses to determine if the business is licensed. Other entities that the information is provided to are law enforcement, other City departments, courts, tax agencies (Franchise Tax Board (FTB), Internal Revenue Service (IRS), and the Board of Equalization (BOE)), as well as regulatory agencies. The business license tax generated about $2.6 million in revenue in the last calendar year and the rates were last set in 1993. He explained the breakdown of the current rate structure as imposed by the Volume 56 - Page 730 INDEX (100 -2004) City of Newport Beach Study Session Minutes March 9, 2004 INDEX City's ordinance. Referring to a chart listing the licenses by category he noted that 29% of the businesses are based in commercial locations without sales tax I and there are about 14% of the businesses in commercial locations that do produce sales tax. There are 29% based out of town and another 29% at residential locations within the City. He explained that each year approximately 25% of the businesses are new, which are new businesses to the community — about 25% of that inventory is being replaced. About 50% of the businesses renew their licenses on an annual basis, about 11% cancel and last year there was about a 15% non - renewal rate. The 15% will either eventually fall into either the cancelled license category or become an enforcement effort for the field inspectors and will eventually probably fall back into the renewed license category. He noted that the City issues about 4500 new business licenses every year. Mr. Everroad stated that the NBMC defines "business" as arts, professions, trades and occupations in all and every kind of calling, whether or not carried on for profit. The definition went around through communities in the 1960s and it hasn't evolved much since that time. He noted that this is an issue they struggle with all the time and provided an example of homeowners who pull sellers permits from the BOE in order to access the wholesale houses for purchases for their homes. He explained that state law would require the person to be actually actively involved in business to hold the seller's permit, however thousands of people annually pull these permits and therefore hundreds are contacted by the Revenue Division regarding business license permits. The City law also requires that a separate license be obtained for three types of situations: 1) every separate location; 2) each separate type of business; and 3) each separate business entity. He further explained how the City interprets this provision of the law and the way the City determines who fits into each of these situations. Mr. Everroad explained that two years ago the legislature clarified for local tax purposes what is within the City's purview to license. State law, Business & Professions Code Section 16300, effective 2002, says that a city or county may not impose a business license on an employee. He noted that making this determination used to be a rigorous exercise because they had a 32- question standard that was applied by the IRS to determine whether the individual performed services as an employee or as an independent contractor. If performed as an employee then they're not subject to the tax. If they are an independent contractor and not an employee they are subject to local tax for business tax purposes. He stated that the law also clarified that when there is a dispute between a city and a taxpayer the manner in which the taxpayer reports income to the FTB or IRS creates a presumption for local tax purposes. He added that the NBMC exempts certain types of businesses and there are federal exemptions and state exemptions. The local exemptions are limited to anything the federal or state governments exempt and minors who generate less than $800 annually, artists who generate less than $1000 in gross annually and residential rentals if there are less than three residential dwelling units. In response to issues raised by Mayor Ridgeway and Council Member Heffernan, he explained how the City determines who they target for noticing purposes. In response to Council Member Heffernan, Mr. Everroad explained that the City does not impose a fee on business so there is no correlation between the level of services provided to that business and the amount of business tax imposed. He noted that a lot of cities impose a processing fee for enforcement, processing of renewals, etc., however Newport Beach does not. He reiterated that the City's charge is a business tax and there is no relationship between the amount of services that a particular business receives and the Volume 56 - Page 731 City of Newport Beach Study Session Minutes March 9, 2004 15. amount of tax they pay. Mr. Everroad noted that about one -third of the business license revenue comes from the staffs efforts in discovering and applying the municipal code requirements for businesses. He explained that there are two inspectors that perform the work and their jobs are generally discovery, notification and enforcement. He indicated that they receive information from a wide variety of sources: citizen complaints and queries, Employment Development Department, State Board of Equalization, Orange County Health Department, fire inspection records and from the Franchise Tax Board. The bill (AB63) that authorized the City to receive this information on tax filers was a sister bill to the bill that limited the cities ability to tax employees and when there are disputes to use how the taxpayers filed as the presumption on whether or not the taxpayer is a business or an employee. He explained that based on the type of return filed the FTB determines whether it is a business entity and then communicates that information to the City. The City then adds that information to all the other sources and starts targeting the businesses based on the greater number of indicators that a business might have. In response to Mayor Ridgeway he indicated that the taxpayer receives a letter notifying them of what the City believes the tax liability is for the business and also communicates to the business greetings and welcomes them to the community. He explained that they try to communicate to the business entity the tax obligations of the City and ask them to communicate with the City if they have some issues associated with the notice. He stated that they produce approximately 6000 notices annually to the various entities through the various sources of discovery. He stated that they get business "white" listings of entities who have represented to the phone company that they are a business and want to be listed as a business. He said the information isn't a very reliable source of nexus for the City in terms of business conduct; however the FTB and IRS information is a far more reliable source of discovery and a far greater indicator of business conduct. He noted, however, that they realize that those businesses are not necessarily located in Newport Beach. He indicated that they provide a website, a phone number, and contact information for the taxpayer to communicate their particular situation with the City. He explained that the first notice is a request and the City administratively waives the penalties and knows from the information from the FTB that the business has been in existence since at least 2001, however doesn't know if it has been in Newport Beach all that time. He said the business license tax ordinance also provides for penalties for not registering with the City in a timely fashion. If no response is received the second notice is a little more forceful and explains the implications of non - compliance. He further explained that their enforcement efforts are to respond to taxpayers telephonically, and by mail they identify and contact non- responders, issue administrative citations or court citations depending on the situation. Mr. Everroad pointed out that since the early 1960s the ordinance has provided that anyone aggrieved by the business tax ordinance and the decision by the Finance Director to impose a business license tax can be appealed to the City Council. He noted that he's been in business licensing since 1986 and has never brought a business tax issue to City Council on appeal. He said they don't get anywhere close to noticing even half of the number of businesses that information is received about each year. The noticing of businesses is prioritized based on those that have the largest number of indicators of business conduct and the most reliable source of indicators of business conduct. He noted that unfortunately the taxpayers are contacting council members before taking advantage of the invitation to contact staff about their issues and reiterated that Volume 56 - Page 732 City of Newport Beach Study Session Minutes March 9, 2004 lid 1 a/ the City is not interested in taxing ownership entities with no physical presence in the community beyond a tax filing with the FTB. Council Member Bromberg stated that he is also peppered with questions about this and on one occasion he referred the Balboa Island Art Walk to Mr. Everroad and he resolved the issue with them. He voiced concerns with vendors that come into the City for an event and give their wares away and the City makes them buy a business license. Mr. Everroad explained that it depends on the amount of business presence in the City and noted that staffs interest is on those businesses that are conducting business. He said it is not the City's practice to apply business licenses to someone giving away free product at a special event. Council Member Bromberg indicated that he is working with the organizer for the Newport Beach Triathlon, which this year will be solely in Newport Beach, and was told that every year their vendors giving away products are taxed. He also indicated that he was told that the two Tall Ships that came into Newport Harbor were charged $1800 in business license taxes and they are non -profit and 100% educational. Mr. Everroad explained that the City imposes a Marine Charter passenger tax and a charter permit fee for charter vessels. He said he believed that the two vessels identified inquired with the Nautical Museum about what the requirements are related to running charters out of that particular location. The director made contact with staff about permit requirements, business license requirements and charter tax requirements. In sum, they may have gotten to $1800 based on the number of passengers, and the number of charter operations that they proposed to conduct, etc. Council Member Bromberg noted that 80% of the passengers were kids, it was an educational event and they were being charged per student. Mr. Everroad explained that the charter tax is based on the per ticket charge for access to the charter vessel and if the charge is less than $26 per passenger, there is no tax applied. He indicated that he isn't aware if they even applied for permits, however he stated that he would look at the charges. Council Member Bromberg said that if the City is interested in making itself more business friendly, then the City should do everything possible to make it so. He noted that one way to do that would be to re- evaluate the City's position regarding one -day events, make special dispensation for educational functions, and also look at non -profit and possibly give them a sliding scale fee. As far as the LLCs, he said if something takes business away from Newport Beach, whether the City gets income from the business or not, in his mind that isn't the primary requirement. In response to Council Member Nichols' questions about corporations, Mr. Everroad explained how the City determines who should be noticed and stated that the City doesn't know what the level of business presence in the community the LLC or corporation might have until they contact the City. He stated that the largest target is the businesses with the greatest amount of indicators. Mayor Ridgeway read the letter he received from the City and indicated that he doesn't feel it is unfriendly, however he does feel it is intimidating. He noted that the letter doesn't invite him to call the City unless he is licensed in Newport Beach, but pushes him off onto the FTB. He stated that the letter doesn't address appeal rights and basically just says fill out the form and send in the money. Mr. Everroad responded and pointed out that the letter does guide the party receiving the letter to the City's website, provides a phone number and the inspector's name if they need more information. He further explained that state Volume 56 - Page 733 City of Newport Beach Study Session Minutes March 9, 2004 INDEX law prohibits the City from dealing with `net' business conduct and only allows the City to deal with `gross' business conduct. He stated that based on their prior experience they try to answer as many questions as possible in the initial contact with the taxpayer. Mayor Pro Tem Adams stated that he feels the letter is okay and said he feels the City is doing exactly what it should be doing based on the code. He questioned whether it would make sense to hire additional staff and whether there would be a rate of return if the City invested in another employee. He stated that he feels it is unfair to the people that are paying business license taxes if there is half a million dollars worth of business license tax that isn't being collected. As it relates to staffing, Mr. Everroad reported that the City has historically spent so much time on processing the thousands of leads that staff recently automated that process and in the last year have gone from about 3000 notices to more than 6000 notices. Automating the process creates efficiencies that enable the inspectors to be more effective in the enforcement efforts and spend less time on the discovery and cross - referencing efforts. He suggested that he feels the City is getting where it needs to be in terms of the application of the ordinance and contacting those that are subject to the tax. Council Member Heffernan stated that if he has all these LLCs, he'll broadcast a warning in his update to the residents that they may not want to do business in the City because they could be hit with a $400 tax for each one. He stated that there is no nexus in what he does in the City for owning a piece of real estate out of state and is just the fiduciary. He said he feels it's a fair assessment for people to know they're going to be hit for this tax. Mayor Pro Tern Adams cautioned him about broadcasting such information when it is still uncertain whether these people will be liable for business tax until they contact the City to find out if it meets all the legitimate requirements. He noted that the whole premise of business tax is that there is not a nexus between them and what service they are provided. City Attorney Burnham reiterated that the business license ordinance has been in effect since the City's incorporation, the current version was adopted in 1977 and has been updated on a regular basis. He stated that it has been updated largely because Mr. Everroad is one of the recognized experts on business license taxes in the state and goes to Sacramento to testify and is very much involved in the whole enforcement process, as well as other areas. He pointed out that what Mr. Everroad is doing is enforcing an ordinance the City Council adopted. If the City Council believes that there may be areas of the ordinance that require some modification, then staff would look into those. He said staff would not want to make amendments that emasculate the ordinance or create the potential for litigation on the basis of equal protection concerns. As far as the letter, he said he thinks maybe it can focus on the need for or the desirability of the person that receives that notice to contact the Business License Division and clarify the situation. He stated that his experience with referring people to Mr. Everroad is that he handles them extremely well and in a very business - friendly way. He is enforcing the ordinance as he is charged to do. He noted that the letter can be modified slightly so it still conveys the essence of the information that should be conveyed so everyone understands what the issues are and encourages them to contact the Business License Division to resolve the issues. Volume 56 - Page 734 City of Newport Beach Study Session Minutes March 9, 2004 Council Member Heffernan stated that as a business planner he would probably set up a post office box in another City so he wouldn't get any notices and have more hurdles to deal with. Mayor Pro Tem Adams pointed out that the law applies to all cities and he would still receive a letter even if the address were a P.O. box. Mayor Ridgeway stated that he agrees with some of Council Member Bromberg's comments, however stated that he feels there is abuse by some of the 501(c)(3)'s, but there is a potential for changes for one -day events. Mr. Everroad pointed out that the City's ordinance does currently exempt 501(c)(3)'s from the business license tax, so if the Tall Ships are operating as a non -profit organization they would not be subject to the tax. He reiterated that staff is only applying the current existing provisions of the ordinance. He noted that there may be an opportunity to improve on those and staff is happy to follow Council's direction. He reported that the City generally licenses 50% of the businesses on the first notice they receive. He further pointed out that those that aren't subject to the business license tax and have contacted the City, in subsequent tax filings, they won't receive additional notices. The account is coded to identify that the taxpayer has been communicated with and staff does not believe they are subject to the business license tax. Mayor Ridgeway requested that staff follow - up with a memo to all of Council answering the questions and concerns raised by Council Member Bromberg. Council Member Nichols reported that he hires sub - contractors in his engineering business and they are paid as such and some of the work is done in his office and some in their own offices. He questioned how they would be treated and would they be required to have a business license in Newport Beach. Mr. Everroad reported that if their home office is located in Newport Beach and the City is aware of it, they will be approached by the Business License Division. If they go to his home office and conducted some measure of business at that home office, the City would rely on the source of discovery to determine the tax liability. Mr. Everroad reported that the last time this issue was before Council was in 1993 for a rate adjustment. He introduced his two inspectors — Casey Cooper and Monique Navarrete. 3. SPECIAL EVENT PERMIT PROCESS REVISIONS. Recreation and Senior Services Director Knight stated that staff is here today to get some direction from Council on some items dealing with the special event permit process — revisions to the code and proposed fee revisions. Using a PowerPoint presentation, Ms. Knight explained that prior to 1995 the permits were processed in the Revenue Division. Since the Recreation Department took over the processing in 1995 the permits have increased in complexity and the number of permits applied for. In 2001 the department hired a Special Event Coordinator who oversees all the permits, the processing of the permits and works with all the departments involved. In 2001 a committee was formed to address changes in the process. She explained the process that was used prior to the hiring of the coordinator. The committee is comprised of different department representatives that oversee or enforce or have some sort of regulatory oversight in the process. Over the last couple of years the committee Volume 56 - Page 735 INDEX (100 -2004) City of Newport Beach Study Session Minutes March 9, 2004 INDEX has been working to add more definition to the process, streamline it so it's easier for the applicant and to have a more coordinated process between the different departments. A consultant was also hired to look at the current ordinance and to help staff re -write it so it is more defined and there are more enforcement areas. She explained the current application process. Through this process, she explained that the committee has come up with some revisions as outlined in the staff report. One of the recommendations is to revise the code to provide greater detail, descriptions and definitions. Also through this process she stated they have identified two types of permits, the review procedures have been enhanced, the appeal process has been expanded, clean -up deposits has been added, and damage reimbursements has been addressed. She stated that in the new code staff is proposing two types of special event permits. The first would be for a one -time event which is a good percentage of the requests that are received. The second type of permit, a Bundled Type Permit, will address an area that has been increasing in the past couple of years. These permits will be for multiple events that are similar in nature at one location in one year. Using weddings as an example, she stated that the venue would pay for one fee for up to 20 similar events in a year and once they have used those 20 events, they would come back for renewal. Those events would still be tracked, however the paperwork and processing for staff would be cut down and the processing for the applicant is more streamlined. Ms. Knight explained that part of what the committee has done is streamlined the levels of the special event permits from four to three, making it easier to determine the proper category and level for each event. The levels determine what level of monitoring is needed, what level of City staff support is needed, and the fees involved. Another area that the committee looked at was the cost recovery. Currently the code sets the recovery at 36% of the staff costs. The committee is proposing that the fees be increased for resident special event permit applications to 50% of the total staff costs and for a non - resident permit application 100% of the total cost to process, monitor and enforce the permit. Ms. Knight reported that the estimated cost to process a special event permit depending on the level is based on staff time to review and route the permits. Referring to the chart she pointed out what the current fees are for each of the three levels, as well as the proposed fees, and noted that currently there is a differential for residents and non - residents. Mr. Burnham stated that the City is allowed to charge different fees for residents and non- residents. For the bundled permits she said the fee for up to 20 events would be up to $2000. She noted that this process will take less staff time, less time for the applicant and the fees will be reduced because of the staff time that is saved. Based on the number of permits issued in 2003 and what is anticipated with the proposed system, Ms. Knight noted that staff will be processing less permits because she anticipates bundling about seven permits for certain venues such as the Dunes, Hyatt, Orange County Museum of Art, etc. Under the old fee system the City raised $52,400 and under the new proposed fee structure it would generate $71,000. She indicated that staff is looking for direction on the proposed changes to the ordinance, the cost recovery percentages and the proposed fees. Mayor Ridgeway questioned whether any exceptions have been created for 501(c)(3)s or appeal rights. Ms. Knight reported that exceptions have not been created for them and currently there is no process in place for someone to ask for the fees to be waived. She noted that the proposed ordinance would give the City Manager discretion, based on certain circumstances, to waive a fee. She Volume 56 - Page 736 City of Newport Beach Study Session Minutes March 9, 2004 said there isn't anything in the process to allow the City to waive the fee for one activity that another activity would be charged for. Council Member Webb confirmed that events such as the Race for Life, Spirit Run and Harbor Heritage Run are charged fees even though they are charitable events. He noted that a lot of staff time goes into reviewing and issuing the permits and stated that the City has to be really careful when consideration is given to waiving these fees. Mayor Pro Tem Adams concurred with Council Member Webb about waiving fees. In differentiating between residents and non - residents Ms. Knight explained that staff has become more diligent in asking for proof of residency (utility bills, etc.). As far as entities the new ordinance states that if you are a business and are applying as the business for a special event permit and the business is in Newport Beach, then it is a resident rate. She noted that last year at Level 1 there were 245 resident permits and 16 non - resident permits issued and overall there were 272 resident and 27 non- resident permits issued. Ms. Knight reported that last year the fees were increased slightly because in some areas less than 36% was being charged and prior to that the fees were increased in the early 1990s. Staff was directed to bring this item back to a Regular meeting for Council consideration. PUBLIC COMMENTS - None Mayor Ridgeway identified the real property described in CS -4 of the Closed Session agenda (1971 Mesa Drive and 20401 Acacia Street) as a topic to be discussed in Closed Session. ADJOURNMENT - at 5:32 pan. The agenda for the Study Session was posted on March 3, 2004, at 2:45 p.m. on the City Hall Bulletin Board located outside of the City of Newport Beach Administration Building. Recording Secretary ti o, Mayor V511 I' ONO I �jv' MANZ A, TZ 002611=.� U/ Volume 56 - Page 737 INDEX