Purpose

The purpose of this report is to provide information and a recommendation concerning the development and implementation of a business tax amnesty program for the City of Burbank.

Background

The Burbank Business Tax is a revenue generating mechanism for the collection of monies levied in the form of taxes which are collected from businesses.  Most of these businesses are physically located in Burbank, but many are located outside of Burbank.  Those businesses which are located outside of Burbank, and are responsible for paying the Burbank Business Tax, are businesses that temporarily come to Burbank to conduct their business.  Examples of such out-of-town businesses which are subject to the Burbank Business Tax are: contractors; soils engineers; tree trimmers; security services; janitorial services; vending machine operators; businesses operating from a Burbank mail drop or post office box; and, numerous other types of mobile businesses.

Relative to State laws, the Burbank Business Tax is not a �special tax� and as such, monies collected from the tax are deposited into the General Fund for uses associated with General Fund expenditures.   It is common for the words �business tax� to be thought of as synonymous with �business license�.  Whereas a �business tax� is strictly a mechanism to collect revenue from businesses, a �business license� is a mechanism established solely for the purpose of regulating and/or controlling business activities or business practices.  Some examples of regulatory business licensing would be the regulation and processes involved in controlling: adult-type businesses; door-to-door solicitation and peddling; escort bureaus; the use of sound vehicles; tow truck services; pool rooms; the taxicab industry; and, over seventy other types of businesses.  It is not uncommon for a business to be registered for both the Burbank Business Tax, and a Burbank Regulatory Business License.

The City of Burbank first adopted an ordinance for the administration of a business tax in 1973.  In 1981 a study committee was formed by the Burbank City Council to review the overall framework of the business tax to assure that the tax was fair to both the City of Burbank, and Burbank�s business community. Initially, the methodology and basis of business tax assessment was principally a flat rate business tax.  However, in 1982 at the recommendation of the study committee, the City Council changed the primary tax calculation to be a flat rate business tax, plus a per-employee assessment, capping at no more than 3,000 employees.  There are, however, a few categories of businesses which have a different business tax calculation.  For example, for commercial building landlords, the tax calculation is based  on square footage.  For hotels, motels, and apartments, the calculation is based on the number of rooms or units.   Overall, the majority of businesses in Burbank are taxed on the flat rate basis with an additional per-employee levy.

Depending on the month sampled, there is generally between 12,000 to 14,000 businesses registered for the Burbank Business Tax.  In addition, per the Burbank Municipal Code, the Burbank Business Tax is annually reviewed and is subject to either being raised, lowered, or remaining the same depending on certain indices provided by the Federal Bureau of Labor Statistics�, Producers Price Index (PPI).  The program currently generates between $1.2 to $1.4 million in revenue.  Excluding the very large businesses in Burbank and sole proprietorships with no employees, the average annual business tax paid by Burbank businesses is within the $150 to $200 range.

Currently, Burbank remains competitively attractive for businesses which consider locating within the greater Los Angeles metropolitan area.  The proposed Business Tax Amnesty Program will not change any of the tax rates themselves and thus would not negatively impact the attractiveness of businesses locating or remaining in Burbank.  In 1981 the Burbank City Council chose to avoid business tax calculations based on the gross receipts of a business.   From a local government perspective, gross receipt business taxes have the greatest potential for maximizing this type of revenue.  However, from the business community perspective, gross receipts-based business taxes are considered onerous and unfair to businesses.  

Analysis

What is a Business Tax Amnesty Program?

A Business Tax Amnesty Program is a program whereby temporarily, for a specified �window� period of time, certain elements of a business tax ordinance will not be applied.  Traditionally, those elements are any one, or combination of: monetary penalties; monetary interest; and, criminal prosecution. 

The primary logic of a business tax amnesty program is the fact that there are unknown numbers of existing businesses within the community that have either knowingly, or unknowingly, avoided registering for and paying required business taxes in Burbank.   For the businesses which have knowingly evaded registering for and paying the business tax, it can be concluded that these businesses are also aware that they will be exposed to monetary penalties and possible criminal prosecution if they are discovered conducting a business without a proper business tax registration.   

In other cities, such as the City of Los Angeles, by offering certain incentives, business tax amnesty programs have been successful in coaxing unregistered businesses into coming forward and registering their business.  These incentives generally �excuse� any combination of penalties, interest, and criminal prosecution.  Incentives are limited to being offered for a specified �window� of time which is usually a designated three (3) month period.   Not included as an incentive are the back-taxes owed.   Back taxes, up to three (3) years plus the current year, are the maximum number of tax years that may be collected by law.  Another incentive which can be offered through the Business Tax Amnesty Program is an installment payment plan to assist alleviating too great of a tax burden on a small business.

Why Conduct a Business Tax Amnesty Program?

The principle reason for conducting a business tax amnesty program is to increase General Fund revenue.  It is staff�s opinion that there is an unknown, yet substantial, number of unregistered businesses in Burbank which will come forward to voluntarily register if a business tax amnesty program is offered and marketed properly.   Other communities have experienced such an increase.

Features of the Proposed Burbank Business Tax Amnesty Program

Staff is proposing the following features for a Burbank Business Tax Amnesty Program:

1. Amend the Burbank Municipal Code to temporarily provide for a Business Tax Amnesty Program.

2. Provide a �window� period of time for the amnesty program to be conducted some time between June 1, 2005 and October 30, 2005.

3. Create a special �Amnesty� application which tracks amnesty applicants from non-amnesty applicants in order to measure the success of the program.

4. Waive the following provisions of the Burbank Municipal Code relative to a Business Tax Amnesty Program:

�        Monetary penalties

�        Monetary interest  

�        Criminal prosecution

�        (NOTE � Zoning violations and other types of codes which are violated are not waived in conjunction with a business tax amnesty program.  In addition, the current year and up to a maximum three (3) years back business taxes could be owed.)

5. Establish a payment schedule for amnesty related business taxes owed in excess of $1,000

6. Establish a marketing plan with a budget of $5,000 to efficiently and effectively promote the Burbank Business Tax Amnesty Program.

7. Establish realistic inspector �follow-up� enforcement policies at the conclusion of the amnesty period in order to conduct street surveys, electronic surveys, and account audits.

8. Set standards for measuring the success of the program.

 (1) Amending the Burbank Municipal Code

The Burbank Business Tax is conducted in accordance with Article 8, Chapter 14, of the Burbank Municipal Code.  As such, all matters relating to the administration of the Burbank Business Tax are determined by the provisions found in this chapter.  Consequently, a Business Tax Amnesty Program, which is a program that waives certain code provisions, will require code amendments with �sunset� clauses that will provide a return to the original ordinance at the conclusion of the program. 

(2) Provide an Appropriate �Window� Period

Business Tax Amnesty Programs are temporary.  Therefore, the timing for implementation and conclusion is an important feature when establishing the parameters of the program.  Staff recommends a three (3) month �window� period of time beginning and ending the program sometime between June 1, 2005 and October 30, 2005.  If the program is approved to be conducted within this timeframe, then immediately there should be an appropriate non-cost advance marketing effort beginning with press releases and web site information.   

(3) Create A Special Business Tax Amnesty Application

In order to accurately measure revenue generation from this program, staff needs to be able to separate business tax amnesty program revenues from other incoming business tax revenue sources.  The easiest and best way to accomplish this is through a special business tax amnesty application with an attached declaration affidavit.  The affidavit is completed by the applicants and it is the document which officially qualifies these businesses for the special exemptions offered through the business tax amnesty program. 

(4) What Incentives Are To Be Offered

Staff is recommending the following incentives be offered in a Burbank Business Tax Amnesty Program:

• Waive Monetary Penalties:   Current penalties are 10% to 25%.

• Waive Interest:  Current interest is 1% per month, up to 12% per year.

• Waive Criminal Prosecution:  Current misdemeanor penalties are up to $1,000 per day fine and/or maximum 6 months in jail; or, as an Infraction Citation up to $100 for the first offense, $200 for the second offense, and $500 for the third offense with the potential of court assessment costs up to $1,700.

(5) Establishing A Payment Schedule

Staff is not recommending waiving back-taxes owed as an incentive for registering and paying the Burbank Business Tax.  Therefore, it is not unlikely that some businesses could owe in excess of a $1,000 current and back business taxes.  In such circumstances, staff recommends allowing business tax payments to be spread over a three month period of time for amounts owed in excess of $1,000.  Establishing a reasonable payment schedule is an ancillary incentive and will benefit those businesses which take advantage of the business tax amnesty program.

(6) Create Marketing Plan & Budget For The Business Tax Amnesty Program

An important element for conducting a successful business tax amnesty program is making the public aware that such a program exists.  In order to take advantage of a business tax amnesty program, unregistered businesses need to be made aware that this opportunity is available.  Advertising the availability of the program can be accomplished without spending large sums of money.  For instance, the following twelve (12) point marketing plan is an example of affordable marketing methods and a budget, which in total, would cost no more than $5,000:

1. Installing street intersection banners at two (2) primary designated street intersections (approximately $1,000 in permit fees and cost of banner).

2. Create a video production to be aired on the public access channel (City employee costs for video production is less than $1,000).

3. Create a scroll message to be played on the public access channel.

4. Monthly press releases and accompanying amnesty program newspaper advertisements ($3,000 in newspaper advertisements).

5. Posting announcements at all City of Burbank public counters.

6. Create a phone information �Hot Line� with a �We Tip� feature. 

7. Utilize the Chamber of Commerce as a mechanism to help promote the program.  The Chamber Executive Director has already expressed an interest in doing this.

8. Advertise on the City of Burbank web homepage, the License and Code Services� website, and advertise on City FAX cover sheets.

9. Advertise in �Burbank Today� publication; Downtown Newsletter; and, Magnolia Park and Burbank Blvd. Merchant�s newsletters.

10. Council meeting announcements.

11.  Free radio public service announcements.

12.  Advertise in the City Employee paycheck �Hot Line� publication.

In addition to the above marketing plan, staff may also conduct a direct letter writing and/or emailing notification to businesses the State of California informs us are located in Burbank.  For a price, the State Franchise Tax Board, through AB 63, will provide a list of tax filings for businesses in every city in the state.

This list can be cross-referenced with the current Burbank Business Tax registrants.  An exception report generated from this cross-referencing will provide us with a list of businesses that would be potential candidates for the amnesty program.  We would review this list and appropriately follow through by notifying these businesses of the opportunity to register during the amnesty period.  This same information will again be used as part of a vigorous follow-up as described below in item number (7).

(7) Implement Vigorous Follow-Up Inspections When Amnesty Program Ends

Follow-up enforcement at the end of a business tax amnesty program is a vital feature for making the program successful.  If unregistered businesses know that there will be follow-up inspections, they will be more apt to voluntarily register their business than risk being caught after amnesty expires.

Methods Used for Finding Unregistered Businesses

The �vigorous follow-up inspections� mentioned above will be utilizing the following methods and techniques for finding unregistered businesses:

1. On-line information and crossover data exception reports provided by  the State Board of Equalization and the State Franchise Tax Board.  The State Board of Equalization information does not have an associated purchase cost, but the State Franchise Tax Board information does.  The State Franchise Tax Board information is offered through a program provided by AB 63.  Cities can enroll in this program for a fee.  The fee is unknown at this time because the State�s lump sum cost of the program is divided amongst the number of California cities which enroll in the program. 

2. Follow through Fictitious Name filings.  Numerous businesses file a fictitious name with the County of Los Angeles.  These business names and addresses are available from the county.

3. Door-to-door canvassing (field observations). 

4. City of Burbank utility billing information.

5. Chamber of Commerce information.

6. Phone directory information.

7. �We Tip Hotline� and citizen complaints.

8. Newspaper and trade magazines advertising.

9. City of Burbank Purchase Order invoicing.

10. Information provided on new applications.

In the past, there was not adequate staffing which would allow dedicated staff time for vigorous amnesty program follow-up investigations.  However, due to a reorganization of the License and Code Services Division, staffing is now sufficient to support the necessary follow-up which would assure a successful business tax amnesty program.    

The License and Code Services reorganization was the result of a Senior Inspector retiring. By not filling this position, 3.5 (three and one half) lesser inspector positions were upgraded to inspector levels which are now able to perform business tax and business license functions they previously were unable to conduct.  As a result, all License and Code Services Inspectors are now able to perform the full responsibilities of the License and Code Services Division. 

As such, this includes conducting a temporary Business Tax Amnesty program follow-up. The reorganization not only strengthened the division�s ability to meet workload demands, but the inspector upgrading also generated a slight salary savings.   Overall, this means the License and Code Services staff has greater latitude and capabilities in performing the functions associated with business taxing and business licensing.  Therefore, the full force of the License and Code Services inspector staff will be available to participate in surveys conducted after the Burbank Business Tax Amnesty Program concludes.

Also included in License and Code Services reorganization were recommendations concerning technology upgrading.  This technology upgrading is primarily a migration from the City�s mainframe computer system to an advanced software program with greater capabilities.  The new program will provide staff with electronic survey capabilities previously not available.  Combined, the placement of a full complement of inspectors into the field, in conjunction with available electronic information sharing and data matching of selected data bases such as the State Board of Equalization and State Franchise Tax Board (AB 63), will assure a solid follow-up at the conclusion of the Burbank Business Tax Amnesty Program.

(8) Measuring Business Tax Amnesty Program Success

The success of a business tax amnesty program is measured by:

• The amount of increased business tax revenue received relative to the amount of resources put forth in that effort.

• Maintaining the current level of positive public relations within the local business community.

• Maintaining business tax rates such that they remain competitively attractive for businesses to remain in, or consider relocating to the City of Burbank.

Staff estimates that the proposed amnesty program should initially generate over $40,000 in revenues, at a cost of approximately $5,000.  However, theoretically once a business is registered through the promotion of the amnesty program they will remain on the business tax rolls and thereby continue to contribute to General Fund revenues into the future.  Consequently, the ratio of �dollar return to program costs� will become more favorable with time.

The existing Burbank Business Tax Program, as it is currently enforced, is perceived positively by the business public.  This perception is primarily due to two reasons:  the City of Burbank Business Tax rates are reasonable; and, enforcement policies are sensitive to the public perceptions and reactions to tax collections, yet these same policies can be firmly applied when necessary.   

Conclusion

The City of Burbank will benefit from a business tax amnesty program because this program will generate increased General Fund revenues for many years.  This program will be relatively inexpensive for the dollar return it will provide when compared to the cost of the program.  Since the program is intended to be in existence for 3 (three) months, it will not be detrimental to the long standing regard for positive public relations between the City of Burbank and the business community.  

Recommendation

It is recommended that Council direct staff to return with an ordinance amending Chapter 14, Article 8 of the Burbank Municipal Code to conduct a Burbank Business Tax Amnesty Program.  It is further recommended that at the appropriate time of the FY 2005/06 budget hearing process, Council approve a proposed budget of $5,000 for FY 2005/06 and appropriate such funding to conduct the Burbank Business Tax Amnesty Program.

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