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HomeMy WebLinkAbout11/17/1998, C-7 - TOT RECORDS REVIEW PROGRAM REVISIONS council °°°� 1¢m Num6u J J j acEn6a Repont c -? CITY O F SAN LUIS O B I S P O FROM: Bill Statler,Director of Finance Prepared By: Linda Asprion,Revenue Manager SUBJECT: TOT RECORDS REVIEW PROGRAM REVISIONS CAO RECOMN ENDATION Approve implementing a modified version of the transient occupancy tax (TOT) records review program based on Chamber of Commerce suggestions after meetings with the hotel/motel operators. DISCUSSION Background On July 21, 1998, the Council approved a pro-active approach to implementing a TOT records review program as presented by the staff with one change. Rather than reviewing the TOT records of all 37 operators during 1998-99 as originally proposed, the Council modified the program to performing a review of one-third of the operators annually (or about twelve each year). Prior to bringing the original proposal to the Council, staff had discussed the program with the Promotional Coordinating Committee (PCC), the Tourism Council and the Chamber of Commerce. The PCC voted to support the TOT records review and the Tourism Council recommended the Chamber of Commerce endorse the program. However, the Chamber of Commerce opposed the program indicating they did not agree with the blanket review. After hearing of several concerns expressed by the hotel operators, staff volunteered to meet with them to ensure everyone was receiving accurate information regarding the review process. This meeting occurred on August 19, 1998, with Chamber staff also in attendance. Based upon discussion at this meeting, the Chamber of Commerce prepared a letter (see attached) proposing modifications to the review program. Specifically,these requested modifications are as follows: • Perform reviews on fewer than 10 hotels per year with those properties selected at random. • Discontinue conducting the program after three years unless a cost benefit analysis proves the reviews to be favorable. • Design the actual review procedures in consultation with at least three Chamber representatives from the hotel industry. Council Agenda Report–TOT Records Review Program Revisions Page 2 Review of Proposal Revisions The City Administrative Officer, the Assistant City Administrative Officer, the Director of Finance and the Revenue Manager met internally to discuss the proposed revisions to the TOT records review program suggested by the Chamber. After a great deal of thought and discussion, we recommend that Council accept the modifications suggested by the Chamber to the TOT records review program,subject to important clarifications as discussed below. Overall, staff believes the Chamber's approach, while less comprehensive than the one approved by the Council on July 21, 1998, meets our primary goal of establishing a structured, pro-active program for managing the General Fund's third most important revenue source. However, there are some details regarding the modifications which staff wants to clarify to ensure everyone has the same understanding. The three areas requiring clarification are as follows: • Random Review. Staff concurs with performing a random review of nine hotels per year during the next three years. However, if during a review a hotel is found to have insufficient records or in is non-compliance with the TOT ordinance in any manner, staff reserves the right to perform additional reviews on that hotel on a schedule we feel is appropriate to ensure that deficiency is corrected. Additionally, any supplemental reviews performed due to a deficiency will not count towards the original random nine reviews per year. • Benefit Analysis. The Chamber recommends performing a cost benefit analysis after three years, and then discontinuing the program unless the analysis is favorable. Staff agrees that a benefit analysis should be performed, and this analysis will be on-going throughout the program. However, our definition of"benefit" goes well beyond the question of"how much extra money did this program produce?" The City is not implementing this program with the specific intent of gaining additional revenue: we are implementing it to ensure equity among hotel operators, and to exercise appropriate stewardship over a key community resource— something that is insufficiently being done at present. Accordingly, "benefit" in our eyes is much broader than merely an analysis of direct costs and revenues. In short, there are a number of aspects of the program staff will analyze. However, should we conclude that the program is not effective in achieving our goals, we will recommend changes–including the option of discontinuing the program altogether if warranted. • Review Program. Staff looks forward to working with three Chamber representatives from the hotel/motel industry to develop review procedures that will be used in this program. We genuinely welcome any advice that industry representatives have to offer us that will result in a better program for everyone. Hopefully, our receptivity to Chamber suggestions so far demonstrates our willingness to genuinely listen and make changes. Ultimately, however, City staff is responsible for the final design of the program, and the review process that we will use. C7--L Council Agenda Report—TOT Records Review Program Revisions Page 3 We intend to schedule a meeting with the Chamber and representatives of the hotel industry to discuss the TOT records review program during the first week of January, 1999. The actual review of the nine hotels should then occur during February and March of 1999. FISCAL IMPACT Compliance, equity and education remain the reasons for implementing the TOT records review. As stated previously, there is no indication that any hotel operator is not in compliance with collecting and remitting the correct amount of TOT. Accordingly, if the TOT tax revenue does increase,it will be a by-product of this process,but not the reason for implementing it. ALTERNATIVES • Retain the original TOT records review program adopted on July 21, 1998. The Chamber and hotel operators have provided the City with sincere suggestions on how they would like the program modified. One of the original goals of the program was to establish rapport with the hotel operators so they would have a positive contact in City Hall. By showing that we are willing to work within the modified program, yet retaining the details clarified above, we are hopeful that we can still meet this goal. Accordingly, we do not recommend this alternative. • Do not implement a TOT records review program. Council adopted this program on July 21, 1998, recognizing transient occupancy tax is the third largest revenue source for the General Fund, for which no prior review has been performed. Because of its financial significance, we believe some form of review is needed to ensure equity and meet our fiduciary responsibilities. Attachments Chamber of Commerce letter dated August 25, 1998 Original TOT records program approved by the Council on July 21, 1998 (on file in Council office) C7- San Luis Obispo Chamber of Commerce `I1 1039 Chorro Street • San Luis Obispo, California 93401-3278 (805) 781-2777 • FAX (805) 543-1255 e-mail: slochamber@slochamber.org David E. Garth, President/CEO August 25,1998 Bill Statler,Finance Director City of San Luis Obispo 990 Palm Street San Luis Obispo,CA 93401 Re: TOT Records Review Program Dear Bill: On behalf of the San Luis Obispo Chamber of Commerce, I wanted to provide you with feedback from recent informal meetings of local hotel/motel owners,as well as our Tourism Council,at which the Transient Occupancy Tax(TOT)records review program was discussed. The general consensus in the local lodging industry is that the program must be re-worked. Like any business owner,or private citizen,San Luis Obispo's hotel/motel owners would prefer not to be audited. However,they are cognizant of the City's ability to audit without their permission and without their input as to how you audit. Since you are amenable to input and suggestions about the proposed program,the Chamber would like to reiterate our original recommendations,as outlined in the Chamber's letter of July 17,1998 to Mayor Settle. The Chamber opposes a blanket review of all hotels/motels for TOT compliance. The Chamber believes that random audits of hotels/motels to ensure TOT compliance are acceptable. Additionally,we think audits would be appropriate in cases where there are indicators of non- compliance. More specifically,the Chamber defines random audits as fewer than 10 properties per year with the properties audited selected from a random drawing of all hotels/motels,i.e.names pulled from a hat. During the second and third years of the program, 10 additional hotels/motels would be selected each year,with those hotels/motels previously audited ineligible for review. After conducting the random audit program for three years,we believe-the program should be discontinued unless a detailed cost/benefit analysis of it proves to be favorable. TEN YEARS ACCREDITED 67 - Page 2 TOT Records Review August 25,1998 In addition to these specific suggestions,we request that at least three Chamber representatives from the hotel/motel industry work with you to develop the actual auditing procedure that will be used in this program. Many hotel/motel owners have expressed concerns about privacy issues and local business customs that your auditors may not now be aware of. These individuals are prepared to participate in developing this process with you so that additional problems can be avoided. Bill,we appreciate your listening to our concerns and look forward to the modifications to the program. Sincerely, IT; David E. Garth President/CEO cc: Mayor Allen Settle Bill Roalman Dave Romero Kathy Smith Dodie Williams CITY OF SAN LUIS OBISPO PROPOSAL FOR TRANSIENT OCCUPANCY TAX RECORDS REVIEW Prepared By: Linda Asprion, Revenue Manager 1'Y } v� II , I r PROPOSAL FOR TRANSIENT OCCUPANCY TAX RECORDS REVIEW OBJECTIVE To perform a records review of the hotel operators within San Luis Obispo to assure compliance with the transient occupancy tax ordinance and to establish an informal rapport and an information sharing process with the business owners so that they have a contact in City Hall. DISCUSSION Background The transient occupancy tax (TOT) in the City of San Luis Obispo was originally implemented in 1968 at a five percent rate. Three rate increases have occurred since then: in 1976 the TOT rate increased by one percent to 6%; in 1991,the TOT rate was increased by three percent to 9%; and on October 1, 1993 the rate was increased an additional one percent to the current rate of ten percent. Transient occupancy taxes are levied on all individuals occupying their dwelling for 30 days or less. This is generally most applicable to room rentals at motels and hotels,although it is also applicable to other types of short term rentals. The TOT rate is 10% of the room rental rate. Although the tax is collected for the City by the operators,it is a tax on the occupant,not the hotel or motel. TOT is the third highest tax revenue source for the General Fund, increasing between 6% and 8% annually as shown below. Transient occupancy Tax Revenue History %=Revenue Increase 1994-95 $2,462,000 6 Over Prior Year 1995-96 $2,641,500 8 1996-97 $2,845,300 6 Projected $3,016,000 6 1997-98 Projected $3,136,600 4, 1998-99 $O $500,000 $1,000,000$1,500,000$2,000,000$2,500,000$3,000,000$3,500,000 Projected revenue for 1997-98 is based on current trending from actual TOT revenue received during the current year. The 1998-99 projected revenue is based on a 4%increase from the projected 1997-98 revenue. Why A Records Review of TOT? During the past few years there have been suggestions from business organizations, such as the Chamber of Commerce, the Business Improvement Association, and lodging owners, that the City perform a records review on the transient occupancy tax reported by the hotels and motels. While the City has performed a cursory review by comparing the tax amount reported on the TOT reports with the gross receipts reported by the hotels and motels for calculating their business tax,no specific review work has been completed. The City has no indication that TOT is being reported incorrectly by any hotel or motel, but there are two issues which are the impetus for a records review: • Compliance with the TOT ordinance Compliance examples would be the retention of records and the manner in which the 30 day exemption rule is applied by the hotel/motel operators. • Equity among the businesses paying TOT. Businesses charging the customer and remitting convect payment to the City want to be assured that their competition is doing likewise. Survey Results As a part of the feasibility study for performing a records review of the hotels and motels,we wanted to find out the experiences of other cities. Accordingly,we contacted every city within San Luis Obispo County, as well as the County itself,along with the other twelve cities we typically use for comparison purposes. Since the cities used in our comparison group are mostly tourist destinations and often with college facilities,their experience in TOT reviews provides excellent insight. Below are the results of this survey. CITY Any TOT Who Performs Review Results. Review Review? Review Procedure Ongoing? Used Arroyo Grande No Atascadero No Camarillo Yes. 4 years David M. Griffith Reviewed all Received add'l revenue Clarified ago (DMG)on operators but spent on attorney fees ordinance and contingency basis defending ordinance will perform requirements reviews again in about two years CITY Any TOT Who Performs Review Results Review Review? Review Procedure Ongoing? Used County of San Performed Internal audit Reviewed Received about$20,000 Starting review Luis Obispo reviews in staff sample of total from prior 3 years of again in 1998 1994, 1995, operators review. Only problem is & 1996. based on determining TOT on input from package deals. tax collector Davis No Grover Beach No Monterey Ongoing Internal audit Performs Continually find TOT is largest staff review on all compliance issues with revenue source operators bi- exemptions-but no $10M. Will annually revenue continue to perform reviews. Morro Bay Review is Municipal Plan to N/A Will depend on currently in Resource perform findings preliminary Consultants review on all stage. (MRC-on operators contingency basis Napa Did have Currently Review only MRC review very little Continue MRC performed by problem revenue-not really reviews of perform internal audit staff operators worthwhile problem review a few operators only years ago. Now only review when there is a problem. Palm Springs Ongoing Internal audit All operators Find variances in about Plan to continue staff and MRC on reviewed one-half of the reviews. with current contingency basis once every Revenue recovery more program three years than pays for staff time but could not provide any $'s. CITY Any TOT Who Performs Review Results Review Review? Review Procedure Ongoing? Used Paso Robles Yes, DMG on flat rate All operators Add'1 revenue of$39,000 Revising TOT completed in per operator as reviewed with most problems over ordinance to Fall of 1997 was less than 30 day exemption remove contingency ambiguities . Haven't decided about another review. Petaluma Yes, first By external 8 motels in No add'l revenue&no Will continue review in auditors paid a city,firm changes to TOT for 3 years until 1997 flat fee per will review ordinance all operators operator two per year reviewed . Pismo Beach Yes,in 1989 By external Performed No add'1 revenue&no No or 1990 auditors paid a review of changes to TOT flat fee per sample of ordinance operator operators San Juan Yes,but only By external Have 2 No add'l revenue&no Only when there Capistrano when there is auditors paid a motels in changes to TOT is a problem a problem flat fee per city ordinance operator Santa Barbara Yes through Internal audit Sample of Received small amounts Continuing to IRS tax staff operators of add'1 revenue,no request tax returns& changes to TOT information SBOE ordinance reports Santa Cruz Yes,since Internal audit Every Only find add'l revenue Continue to 1988 staff operator when new hoteUmotel review for reviewed on opens or changes compliance 3 year cycle ownership issues Santa Maria Yes,over Internal staff Every No add'1 revenue from Plan to continue last 3 years hotel/motel review but overall as time permits reviewed on revenue increased once 3 year cycle word was out about reviews. CITY Any TOT Who Performs. Review Results Review Review? Review Procedure Ongoing? Used Ventura Yes, 3 years Hired a Reviewed all No significant revenue Currently ago consultant operators from review but did find establishing an 1 motel that was not on audit office who their records&not will begin this paying TOT work Visalia Yes,started Hired MRC on a Reviews all Major offense was MRC continues in 1996 contingency operators exempting all to perform when City basis. every two government employees. audits as part of owned years. Add'l revenue of revenue services Radisson $100,000 but forgave all offered. Hotel. operators so paid MRC out of City funds.. As reflected above, most sites perform some type of review. However, significant increases in revenue are rarely the result,whether the review is performed by in-house staff or outside consultants. THE RECORDS REVIEW Planning There are two aspects in the planning process: ■ Preparing a professional pamphlet containing the complete transient occupancy tax ordinance and explaining a variety of compliance issues. ■ Meeting with a variety of organizations to explain the who's, why's and how's of the records review process. These organization will include but not be limited to the Chamber of Commerce, the San Luis Obispo Downtown Association (formerly the Business Improvement Association), and the Hotel/Motel Association(if this organization remains active). A draft of the pamphlet will be provided to the organizations at the meetings for their review and comment regarding content. The completed pamphlet will also be provided to the hotel operators as a basis for discussion and answering questions. By presenting the records review as a compliance issue as well as ensuring that all hotel operators are collecting and remitting their fair share of transient occupancy tax,we are hopeful that the records review will be endorsed by these organizations. Executing Scheduling The records review should be scheduled during the non-peak tourist season for the convenience of the hotel operators. Accordingly, the reviews will be scheduled during the months of November, 1998 through February, 1999. Since the City has 40 hotels, the reviews will average approximately 10 hotels per month. Letters will be sent to the business owners approximately two months prior to the review. The letter will indicate the documents requested for review and offer two or three choices of days and times for the actual review. The name and phone number of the contact person will be included so that the business owner can call and schedule their preference of date and time. Follow-up contact will be made with the business owner to help ensure a smooth review process. All reasonable accommodations will be made to work with the business owner to complete a successful records review. Performing the Review While the main focus of the records review is to assure compliance with the transient occupancy tax ordinance, it is also a time to share information regarding exemptions, remittance, or a variety of other issues surrounding the processing of transient occupancy tax. The actual review of the records will begin with the registration cards,matching those to the cash receipts ledger or cash log, the housekeeping report, and the remittance of the tax to the City. The period of review will initially be the most recent records beginning in January, 1998, however, if discrepancies are found the ordinance allows us to go back three years. Not every single transaction will be reviewed. Typically a sample will be chosen. Depending on the size of the hotel, the sample could consist of a one month period or specific days of activity. If discrepancies are found in the initial sample the scope of the review will be expanded to determine the extent of the discrepancies. Recognition for Hotel Operators If the records review indicates the hotel is processing and remitting transient occupancy tax in a manner complying with the ordinance,we may want to provide some form of recognition. This could be a plaque or a certificate in frame (ready for hanging) from the City indicating the hotel's successful completion of the records review. Additionally, a listing of hotels successfully completing the records review might be published in the Chamber of Commerce and/or Downtown Association newsletter. This could be an item for discussion when we have our planning meetings with the organizations. Findings For those hotels where discrepancies are found an educational process is recommended. Time will be spent with these operators so that they can understand the ordinance requirements. Additionally,they will be required to pay the back taxes owing, if collected from the occupant, but no interest or late penalties will be assessed. If the documentation indicates no tax was collected from the occupants, the operator will be required to immediately institute tax collection in this area and a follow-up review will be scheduled to ensure compliance. Follow-up Reviews Once the initial reviews are completed, we will have a better feel for how many hotels will require additional follow-up activities. This follow-up activity will be dictated by the requirements of each hotel, but some sort of follow-up should occur at least every three years. In other words,this process will be on- going but to a lesser extent after the initial records review. ALTERNATIVES ■ Do nothing. Transient occupancy tax is the City's third largest tax revenue source for the General Fund, increasing between 6%and 8%. Because of its financial significance, we believe some form of review is desirable. ■ Have the records review performed by a consultant. Several firms (HdL, MRC, DMG, etc.) perform transient occupancy tax reviews either on a contingency or fixed fee basis. The downside of this alternative is the lack of City staff involvement Information sharing and training of hotel operators will not be a high priority for a consultant. Additionally, after the consultant leaves, the business owner will not have a person to contact with any additional questions. As such, this alternative is not recommended. ■ Have City staff perform the records review. Implementing the record reviews as a special assignment for staff is the recommended alternative. While assuring compliance with the transient occupancy tax ordinance, staff can establish an informal rapport and an information sharing process with the business owners so that they have a contact in City Hall. Fortunately, the City has staff capable of performing this type of review. Prior to working for the City of San Luis Obispo, the Revenue Manager performed internal audits on hotel operations ranging from small La Quinta and Holiday Inn motels to major resort properties such as the Hilton Hawaiian Village and Embarcadero Hyatt Regency in San Francisco. Because these internal audits were performed on contractors as well as joint partners, there was an emphasis on education and information sharing along with the technical financial accountability. Based on the time frame proposed for the reviews, the Revenue Manager will be able to manage this project: business tax renewal will be largely completed; 1999-01 Financial Plan preparation will not be seriously underway; and implementation of the new financial management system for revenue applications will not yet be underway. In summary, if this work is to be performed by City staff, then the proposed"November to February"time frame is the best opportunity to do so. FISCAL EWPACT The record reviews will be performed as a special assignment by the Revenue Manager. There will be some minimal costs for the printing of the pamphlets and supplies required to perform the reviews. While some additional revenue may be generated from the reviews, there is no indication at this time that any hotel operator is not in compliance with collecting and remitting the correct amount of transient occupancy tax. Again, compliance and fairness are the real issues for implementing the record reviews; increased tax revenue,if any,will be a by-product. SCHEDULE If this proposal is approved by the City Administrative Officer, we will present this item to the City Council and begin implementing the following schedule. Process to Complete Time Period for Completion Present proposal to the Promotional June 10, 1998 Coordinating Committee Present proposal to the San Luis Obispo June 23, 1998 Chamber of Commerce Tourism Council Present records review for City Council July 21, 1998 approval Prepare draft pamphlet for staff review August, 1998 Present records review process and draft September, 1998 pamphlet to community groups Send notification letter to hotel operators and September and October, 1998 schedule record reviews Complete record reviews November 1998 through February 1999 Report results to the City Council April, 1999 Continue information sharing and records On-going review as required with individual hotel operators SUMMARY We believe that a transient occupancy tax records review can produce very positive results in assuring that all operators are familiar with the City's requirements and that all TOT collectors are treated equally. While additional revenue collections may be a by-product of this effort, it is not the main purpose of this review. To best achieve our goals, we recommend that the review be performed by City staff rather than by a consultant,where the emphasis may be more on revenue collection than education.