HomeMy WebLinkAbout11/17/1998, C-7 - TOT RECORDS REVIEW PROGRAM REVISIONS council °°°�
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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
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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¬ 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.