Loading...
HomeMy WebLinkAbout11/4/2015 - STAFF REPORTS - 2.M. PALM SA c V N � �'bowm`'S ' c4l1FORNNp CITY COUNCIL STAFF REPORT DATE: NOVEMBER 4, 2015 CONSENT CALENDAR SUBJECT: APPROVAL OF AN AMENDMENT TO AGREEMENT NO. A5482 FOR SALES TAX AUDITING SERVICES WITH MUNISERVICES, LLC FROM: David H. Ready, City Manager BY: Finance Department SUMMARY The City Council will consider an Amendment to the Agreement with MuniServices, LLC for City Sales Tax Auditing Services to lower the existing compensation schedule of 25% of additional revenue collected to 15% of additional revenue collected, and remove the compensation cap on tax recovery fees. RECOMMENDATION: 1. Approve Amendment No. 1 to Agreement No. A5482 with MuniServices, LLC to provide the City Sales Tax Auditing Services, lowering the compensation schedule to 15% of additional revenue collected, for a three (3) year term ending June 30, 2017. 2. Authorize the City Manager to execute all necessary documents, subject to final approval by the City Attorney. STAFF ANALYSIS: The regular Bradley-Burns sales tax and the Measure J sales and use tax generates approximately $25 million per year to the City's General Fund revenue. The non- standard and complex nature of the State sales can lead to numerous administrative errors and omissions by retailers. Combined with general tax allocation errors, these issues have resulted in instances of underreporting of tax revenues by retailers and other inconsistencies. The City routinely uses outside qualified local government tax specialists and auditors to ensure compliance with State and City rules and regulations for the proper compliance and remittance of taxes. For the past eighteen years, the City has had an agreement with MuniServices to search for businesses that are non-compliant or under-compliant with the State of California's rules for the payment of sales and use taxes, and in recent years the add-on Measure J sales tax, and to provide a quarterly report that features a general analysis !TFM NO. WV City Council Staff Report November 4, 2015— Page 2 Sales Tax Auditing Agreement with MuniServices regarding statewide trends that may affect the City's sales tax, plus a specific analysis of the City's sales tax composition, changes and performance. The fee for the reporting service is $5,200 per year ($15,600 over the 3-year contract term). In addition to their base fee for their reporting service, MuniServices charges a contingency fee which will be lowered from 25% to 15% of any revenue recovered. Due to the fact that the City will retain 85% of all recovered revenues, there is no overall compensation cap for this contract amendment. The City still retains overall direction on which accounts to pursue for collection to ensure the overall compensation for recovery remains in budget. The City is adding language indicating that either the City or MuniServices may terminate the agreement for any reason by providing 30-days written notice to the other party. The current agreement has been very successful and has resulted in the payment of $1,622,098 to the City of Palm Springs for under-reported sales and use taxes and $448,418 for under-reported Measure J taxes, and providing regular reports on compliance efforts, changes in business activity, and projections of current and future years' revenues. City staff recommends the City Council approve an amendment to the agreement to lower the fee from 25% to 15% of all recovered revenues, and to remove the compensation cap for the next three-year term. All other terms remain the same as in the original agreement. FISCAL IMPACT: Adequate funds are budgeted in account 001-1300-43256 in FY 2015-16. Geoffref 9. Klehl, mes Thompson, Director of Finance and Treasurer hief of Staff/ City Clerk T David H. Ready, City M nager Attachments: Amendment No. 1 to Agreement No. A5482 for Sales, Transactions and Use Tax Audit (SUTA) Services 02 AMENDMENT NO. 1 TO CONSULTING SERVICES AGREEMENT FOR SALES,TRANSACIONS AND USE TAX AUDIT (SUTA) SERVICES AND PROPERTY TAX COMPLIANCE SERVICES (Agreement No. A5482) THIS FIRST AMENDMENT to the Consulting Services Agreement No. A5482 for Sales, Transactions and Use Tax Audit (SUTA) Services is made and entered into to be effective on the date that the City Manager executes this Amendment by and between the City of Palm Springs, a California charter city and municipal corporation (hereinafter referred to as the City), and MuniServices,LLC,a Delaware limited liability company, its subsidiaries and affiliates(hereinafter referred to as the Consultant) (collectively, the "Parties"). RECITALS A. City and Consultant entered into a Consulting Services Agreement("Agreement")for Sales, Transactions and Use Tax Audit(SUTA) Services to detect and document misallocations of Local District Tax (also known as Transactions & Use Tax), Bradley-Burns sales tax and local use tax activity, and Property Tax Compliance Services which consists of Audit and Recovery Services,within the statute of limitations on recoverability on May 16, 2007 in an amount not to exceed$175,000 for a three-year term,with automatically renewing three-year terns. The original $175,000 has recently been fully expended. B. City and Consultant desire to lower the existing compensation schedule of 25%of additional revenue collected down to 15% of additional revenue collected, and remove the not-to- exceed (NTE) cap on fees. C. Consultant shall be compensated and reimbursed for the services rendered under this Agreement in accordance with the Schedule of Fees as set forth in Exhibit "A". NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein,the Parties agree as follows: AGREEMENT 1. Addendum Section"SUTA Compensation",of the Agreement is hereby amended to read as follows: "MuniServices' compensation for Sales and Use Tax Audit Service is a 15% contingency fee. This fee applies to revenue received for six quarters beginning with the quarter in which the Date of Correction falls and all eligible prior quarters back to and including the three quarters prior to the Date of Knowledge quarter..." References to `not-to-exceed (NTE) amounts payable' for the Services to be performed shall be removed. 2. Section 5.1 of the agreement shall be amended to read: "This agreement shall be effective for three (3) years, commencing on July 1, 2015 and ending on June 30, 2017, and may be terminated by either party with 30-days notice. 3. Section 5.2 and Section 5.3 of the agreement are deleted. 03 IN WITNESS WHEREOF, the Parties have executed and entered into this Amendment as of the date first written above. "CITY" CITY OF PALM SPRINGS, ATTEST: a California charter city and municipal corporation By: By: James Thompson, City Clerk David H. Ready, City Manager Date APPROVED AS TO FORM: By: Douglas H. Holland, City Attorney "CONSULTANT" MUNISERVICES, LLC, a Delaware limited liability company By: Doug Jensen, SVP Client Services CONSULTANT: Check one: Individual_Partnership_Corporation X LLC 04 EXHIBIT A Sales,Transactions and Use Tax Audit Services(SUTA) Services Article 1-Objectives and Methods MuniServices' Sales and/or Transactions and Use Tax Audit Service is designed to maximize the City's income—and minimize the cost of lost revenue—by detecting and documenting misallocations of Local District Tax (also known as Transactions & Use Tax),Bradley-Burns sales tax and local use tax activity within the statute of limitations on recoverability. Article 2-Scope of Work In performing the sales,transactions and use tax audit program MuniServices shall: 1. Identify and correct the sales/transactions/use tax reporting errors of businesses that, based on the nexus of their activities,are not properly registered with the City. 2. Identify and correct the reporting of businesses that are improperly reporting tax to state and county pools (i.e. classifying sales tax as use tax)and thereby depriving the City of sales tax revenue. 3. Detect, document and correct sales/transactions/use tax reporting errors/omissions and thereby generate new, previously unrealized revenue for the City. 4. Ensure through comprehensive audit measures that the revenue information used for ongoing economic analysis includes all sales/transactions/use tax generators. 5. Assist the City with strategies to preserve and even enhance sales and use tax revenue generated by existing businesses within the City. MuniServices'proposed sales/transactions/use tax allocation audit services for the City includes five distinct types of audits: o Taxable Nexus Field audits o Permitization audits o Deficiency assessment audits O Accounts payable audits O Quarterly Distribution Report audits Taxable Nexus Field Audits MuniServices' initial and periodic taxable nexus field audits include a physical canvassing and evaluation of sales/transactions/use tax generating businesses located in the City. In the absence of this undertaking, significant misallocations will remain undetected. MuniServices'field audits focus on those businesses located in the City from which the City has not been receiving sales/transactions/use tax revenue. Permitization Audits Wholesalers, contractors, processors, manufacturers and other non-retail businesses will frequently not have a sales tax permit properly registered to the City in which they are located because their business operations do not include a point-of- sale qualifying activity. However,these companies will often generate local sales/transactions/use tax from the State Board of Equalization(SBE)audit deficiency assessments, occasional sales (i.e.,mergers and acquisitions),and self-accrual of use tax on purchases. MuniServices' field audits facilitate the identification and correction of improperly registered permits for companies having point-of-sale operations in the City. Deficiency Assessment Audits When the California SBE audits taxpayers for sales/transactions/use tax compliance, it is not uncommon for the taxpayer to receive a substantial deficiency assessment due to underpayments and/or under-collections. In many cases, the local allocation portion of the deficiency assessment is distributed in error to the State pool, county pools, or other jurisdictions. Accordingly,MuniServices has developed proprietary criteria and techniques to detect and correct SBE deficiency assessment misallocations and thus expand the benefits produced by MuniServices'allocation audit service. Accounts Payable Audits When California taxpayers purchase tangible personal property for which title passes out-of-state, the transactions are subject to use tax (rather than sales tax) which is collected by the vendor who in turn remits it to the SBE, with the local allocation typically distributed statewide or countywide through the pools. �5 Palm Springs,CA-SUTA 102215 1 ®MuaSemr�s Under certain conditions,the seller may allocate the local tax by situs or the City may elect to self-accrue the use tax and remit it directly to the SBE,in which case the local portion will come back to the City in the same manner as sales tax. MuniServices' accounts payable audit will include a review of the City's purchases to identify opportunities for the City to capture the 1% local allocation on purchases subject to use tax and the local district tax where applicable. In this regard, MuniServices will prepare the documentation to facilitate the election, including assistance in preparing and filing the tax returns. Quarterly Distribution Report Audits Every three months, the City and MuniServices receive a Quarterly Distribution Report (QDR) from the SBE with the local allocation amount reflected by permit number. MuniServices' QDR audits detect and correct taxpayer-reporting errors and thereby generate new, previously unrealized sales/transactions/use tax revenue for the City. MuniServices' QDR audits focus on those accounts where MuniServices observes a substantial decline in the sales/ transactions/use tax revenue allocation for a particular business entity in a given quarter. In most cases, accounts showing zero balances have either relocated or simply reported late, in which case the payments will not be reflected until the next quarter's QDR. Therefore, six months must lapse before the QDRs indicate whether a zero balance account can be attributed to a late payment or a misallocation. Cities and counties may only recover misallocated Bradley-Burns sales tax revenue for three quarters prior to the SBE being notified of the reporting error and misallocated District tax revenues for between three quarters and three years. Therefore QDR audits must be conducted in a timely manner in order to preserve the opportunity for the City to recover misallocated revenue. MuniServices shall conduct the QDR audit each and every quarter to minimize the potential of lost revenue to the City. Confidentiality Provisions MuniServices is authorized by this Agreement to examine transaction tax,sales tax, and use tax records of the SBE provided to City pursuant to contract under the Bradley-Burns Uniform Sales and Use Tax Law and California Revenue & Taxation Code applicable to transactions and use taxes. If the City adopts a new transaction tax or taxes after the effective date of this Agreement the parties intend for the work under this agreement to include that tax or taxes. MuniServices is required to disclose information contained in, or derived from, those sales, transaction, and use tax records only to an officer or employee of the City who is authorized by resolution to examine the information. MuniServices is prohibited from performing consulting services for a retailer during the term of this Agreement. MuniServices is prohibited from retaining the information contained in,or derived from,those sales,transaction,and use tax records,after this Agreement has expired. This Agreement, and MuniServices' and City's obligations with respect to confidentiality of taxpayer data pursuant to the Bradley Burns Revenue and Taxation Code,shall continue until final payment for all services rendered hereunder. Article 3-Deliverables SUTA Detection and Documentation MuniServices shall represent the City for purposes of examining SBE records pertaining to sales and use tax to identify errors and omissions. MuniServices'procedures for detecting and documenting misallocations are as follows: 1. Review applicable provisions of the City's municipal code and ordinance adopted by the City to determine applicability. 2. Procure a computer tape of sales/transactions/use tax permit records from the SBE. 3. Analyze sales tax distribution reports provided by the SBE for five or more of the most recent consecutive quarters. 4. Clean-up, standardize and computerize data from City's quarterly sales tax distribution reports provided by SBE for previous quarters,current quarter and each future quarter service is provided. S. Prepare an aggregated list of business entities on electronic media;this list is derived from multiple private and public sources (hard copy and electronic),including specialized business listings and directories,the City's sales and use tax payment files,and an electronic copy of the City's Business License Tax registry,updated no less than twice per year. 6. Clean,standardize and integrate,in address-order, each entity's business name,address and payment file information, to eliminate redundancies,using MuniServices'proprietary software. 06 Palm Springs,CA-SUTA 102215 2 4MUNISEM ZS 7. Physically canvas commercial/industrial area within the City's borders. B. Develop a target list of potential point of sale/use reporting errors/omissions based on: a. An electronic comparison of MuniServices'comprehensive inventory against the SBE's quarterly distributions for the City,and b. An analysis of each potentially misallocated account based on proprietary guidelines established by MuniServices. 9. Meet with designated City official(s) to review service objectives and scope, MuniServices workplan schedule, public relations and logistical matters. 10. Contact personnel in sales,operations and/or tax accounting at each target business to determine whether a point-of- sale/use reporting error exists. (Note: this is accomplished with the highest regard to discretion and professional conduct. MuniServices' allocation audits are predicated on a non-controversial, constructive public relations approach which emphasizes the importance of each business to the City and the mutual benefits of correcting reporting errors.) 11. Provide to the City and SBE reports addressing each taxpayer reporting error individually, including the business name,address,telephone number,California sales tax permit number,individuals contacted,date(s) of contact,nature of business, reason(s) for error, recommended corrective procedure and, if available, estimated sales/transactions/use tax revenue which should be forthcoming to the City. 12. MuniServices may also provide suggested language for letters to be sent to the taxpayers and/or SBE from the City (or from MuniServices on behalf of the City) urging cooperation in promptly correcting the distribution error. 13. Respond to negative findings by SBE with timely reconfirmation documentation in order to preserve the City's original dates of knowledge. 14. Receive and process registration control record information monthly. 15. Receive and process sales tax distribution reports quarterly. 16. Coordinate with the taxpayer and SBE to make the necessary corrections and collect eligible back quarter's amounts. 17. Monitor and analyze the quarterly distribution reports with an audit focus on the following: a. Accounts with previously reported point-of-sale/use distribution errors to ensure that the corrections are made for current quarters and all eligible back quarters. b. Major accounts comprising 90% or more of the City's total sales tax revenue to identify any irregularities or unusual deviations from the normal pattern (e.g. negative fund transfers, significant decreases, unusual increases,etc.)and ensure that the City is not receiving less revenue than it is entitled to. c. Those accounts receiving deficiency assessments to ensure that the City receives its local allocation 18. Identify opportunities for the City to recover local allocation on purchase transactions subject to use tax. Prepare the necessary documentation to facilitate recovery,including assistance in preparing and filing the returns. SUTA Detection Timing Considerations For each misallocated account detected, MuniServices will coordinate with the business and SBE to make the necessary corrections plus retroactive adjustments for eligible amounts of sales/transactions/use tax improperly distributed in prior quarters. MuniServices coordinates and communicates between typically four parties; sales/operations personnel at the taxpayer's local operation,tax personnel at the company's corporate headquarters,and SBE personnel and the in-state/out-of- state district offices. Correction of the account is considered to have been made once the payments on identified taxpayer accounts are being properly allocated by the taxpayer to the City in the period in which the payment was made. As needed,MuniServices will represent the City before state officials,boards,commissions and committees for the purpose of correcting sales tax distribution errors that have deprived the City of revenue to which it is entitled. Article 4-Compensation What the City will pay MuniServices MuniServices' compensation for the Sales and Use Tax Audit Service is a 15% contingency fee. This fee applies to revenue received for six quarters beginning with the quarter in which the Date of Correction falls and all eligible prior quarters back to and including the three quarters prior to the Date of Knowledge quarter for Bradley-Burns sales tax revenues and all eligible prior quarters back to and including all corrected quarters prior to the Date of Knowledge quarter for district tax revenues.As used herein, the Date of Knowledge is the quarter during which MuniServices notifies the SBE of the existence of a misallocation. As used herein, the Date of Correction refers to the quarter in which the taxpayer has correctly reported the local tax and the SBE distributes the local tax properly to City based on the taxpayer's reporting. For QDR Misallocations detected and corrected, MuniServices' compensation shall only include the quarters for which the misallocation actually occurred. 07 Palm Springs,CA-SUTA 102215 3 ©,MUNISERVOO s For clarification and to encourage communication and collaboration between MuniServices and the City,MuniServices shall be entitled to full payment of all compensation as provided herein even if any one or more of City, its personnel, agents, or representatives,or any third party or parties provide(s) information to MuniServices that assists or is used by MuniServices in the identification, detection, and correction of point-of-sale distribution errors or the reporting and/or misallocation of revenue. In the event that the City identifies, documents, and notifies the SBE of a point-of-sale distribution error, reporting error or misallocation as those terms are used herein, the City agrees to notify MuniServices of the City's discovery no later than ten (10) days after the Date of Knowledge as defined in Title 18 of the California Code of Regulations, Regulation 1807 ("Date of Knowledge'). The City also agrees to notify MuniServices promptly if it is working on a local tax misallocation issue independently of MuniServices and to maintain and promptly make available to MuniServices on request contemporaneous documentation of such work and its timing so that the duplication of work can be avoided. If the City fails to so notify MuniServices as provided above and MuniServices later detects, documents,and reports the misallocation or reporting error to the State Board of Equalization,or if MuniServices has established a Date of Knowledge with the SBE prior to notification to the Board by the City,then MuniServices is entitled to full compensation for the affected account as provided herein. Invoicing/Billing MuniServices will invoice City quarterly based on past and/or prospective compliance secured on behalf of City. Invoices are due and payable upon receipt. All expenses incurred by MuniServices in providing the Sales Tax service are the sole and exclusive responsibility of MuniServices,except those expenses that receive prior written approval by City. Additional Consulting City may request that MuniServices provide additional consulting services at any time during the term of the Agreement. If MuniServices and City agree on the scope of the additional consulting services requested,then MuniServices shall provide the additional consulting on a Time and Materials basis. Depending on the personnel assigned to perform the work,MuniServices' standard hourly rates range from$75 per hour to$200 per hour. The following are sample hourly rates based on the job classification: • Principal:$200 per hour • Project Manager: $175 per hour • Client Services: $150 per hour • Information Technology(M support: $175 per hour • Operational Support: o Director or Manager:$175 per hour o Senior Analyst: $125 per hour o Analyst:$100 per hour o Administrative: $75 per hour These additional consulting services will be invoiced at least monthly based on actual time and expenses incurred. All reimbursable expenses shall receive prior approval from the City and shall be reimbursed at cost to MuniServices. Article 5— Completion of Services Notwithstanding any other provision of this Agreement, because Consultant's services performed hereunder result in corrections of misallocations and other revenue after cessation of services by Consultant for City,City agrees that with regards to misallocations identified to the SBE whose Date of Knowledge occurred during Consultant's performance of services for City or for other revenue resulting from Consultant's actions taken during the term of this Agreement,that City's obligation to pay Consultant in accordance with the compensation language of this Agreement shall survive expiration or termination of this Agreement for any reason. Additionally, notwithstanding any other provision of this Agreement, if this Agreement is terminated or expires, Consultant shall continue to pursue corrections of accounts identified during the term of this Agreement that have not been corrected by the SBE as of the effective date of termination or expiration. The period after termination during which Consultant is pursuing correction of accounts identified before termination is referred to as the "completion period." City shall compensate Consultant in accordance with the compensation language of this Agreement for corrected misallocations that result from Consultant's efforts during the completion period. City will also take all necessary steps to allow Consultant to continue to receive the required information from the SBE during this completion period. O8 Palm Springs,CA-SUTA 102215 4 �YIUH�emM;ES �Qt PALM SP'y , Department of Finance � MEMORANDUM [/FOV- November 4, 2015 TO: City Council FROM: Geoffrey Kiehl, Director of Finance and Treasurer :;) ,Q SUBJECT: Correction on Term Expiration — MuniServices Sale Tax Amendment (Item 2.M.) The staff report and proposed Amendment #1 to Agreement No. A5482 for Sales Tax Auditing Services with MuniServices incorrectly indicate the new three-year term will end on June 30, 2017. It should read the new three-year term will end on June 30, 2018.