REPORT TO COUNCIL
SUBJECT
Title
Action on Amendment No. 1 to the Agreement with Hinderliter, De Llamas & Associates DBA HdL Companies for Business License Tax Process Improvements, Software, Transition Support and Audit Services
Report
COUNCIL PILLAR
Deliver and Enhance High Quality Efficient Services and Infrastructure
BACKGROUND
In November 2022, residents approved the passage of Measure H, a “City of Santa Clara Business License Update / Tax Equity Measure.” Several elements of the updated business license tax include, but are not limited to, the following:
• Rolling invoicing/billing throughout the year
• Cap of $500 increased to $350,000 per business
• Flat $45 per employee tax rate
• Annual CPI adjustment
• One license for each business entity (certificates required for each location)
• Out of area business registration pro-rated based on estimated workdays in the year
• Flat landlord tax per rental unit
• Various exemptions
• Home-based businesses
• Penalties for non-payment
• Simplification of tax rates by removing tiers based on business industry size and type.
In response to the passage of Measure H, staff completed a competitive Request for Proposals process (RFP) to select a qualified firm to assist with the development and implementation of a new business tax system. Five proposals were received, and Hinderliter, De Llamas & Associates DBA HdL Companies (HdL) was awarded the agreement having submitted the best value proposal as determined by the evaluation panel.
In July 2023, the City worked with HdL and went live with changes to the business tax system based on the elements of the updated Business Tax Ordinance (Ordinance). This change required businesses to update license information to include accurate employee-based headcount. HdL supported this transition by redirecting all inquiries conducted by phone and online for business license tax renewals. New renewals continued to be serviced by the City’s Finance Department. In addition, accounts for businesses with multiple locations were consolidated into a single account. Due to potential data integrity issues, this consolidation effort was conducted in phases, often requiring individual review of accounts to ensure a smooth transition process for the business license renewal.
DISCUSSION
The current agreement with HdL has a term of five years through May 11, 2028 and includes services for business process review, system configuration, and tax administration. The agreement’s maximum compensation of $250,000 covers these services on a fixed fee basis. Under the agreement, HdL also provides audit services which are compensated on a percentage of amounts recovered.
Tax Administration Services
HdL has already completed the business process review and system configuration and has been providing tax administration services for a fixed monthly fee of $15,000. The current contract has capacity for these services through July 2024. Due to the extended time needed to consolidate existing business accounts, address system upgrades, correct data integrity issues and revise training materials, additional tax administration services are necessary to ensure a seamless transition for our businesses and to fully implement the system and process changes required as a result of the passage of Measure H.
Tax administration services include:
• Providing phone and email customer support to augment existing City call taking services to assist with the transition to the new Business Tax. (The current average volume is approximately 500 calls and 180 email inquiries per month).
• Providing staffing support to supplement existing staff resources to process business license renewals (equivalent to 1 full-time position) until the Business Tax Program is fully transitioned.
• Providing advisory services on behalf of the City to conduct outreach to impacted businesses until the Business Tax Program is fully transitioned.
• Providing outreach materials and advisory support to help the City encourage businesses that do not currently have a business license to sign up.
• Conducting clean-up and migration of existing data to the new system.
Staff is seeking authorization to execute Amendment No. 1 to the Agreement to increase the maximum compensation by $137,500 for a new revised maximum compensation amount of $387,500. This will enable staff to extend HdL’s tax administration services at a lower monthly fee of $13,500 until June 30, 2025. Additionally, staff is requesting authorization for the City Manager to negotiate and execute future amendments to increase the maximum compensation by an additional $536,240 for a total maximum compensation not to exceed $923,740 for ongoing tax administration services through June 30, 2028. As part of this Amendment No. 1, staff is requesting to revise the expiration date from May 11, 2028 to June 30, 2028 to align with the fiscal year.
Audit Services
In addition to the tax administration services outlined above, HdL also provides audit services as part of the agreement. Unlike tax administration services, there is no maximum compensation for audit services, as the fee is based on amounts recovered. The fee for audit services is 40% of all revenues collected by HdL, with a $350 minimum. For any new revenues collected by HdL through audit services, the City would retain 60% of the revenues collected by HdL in the first year, and 100% of the revenues thereafter.
Audit services include:
• Ensuring a complete and accurate receipt and recording of business tax revenues, thereby enhancing the City’s business tax revenue.
• Conducting audits on the reporting of the 20 top businesses (by number of employees) after the implementation of the Ordinance.
• Auditing the application of business tax caps in accordance with the Ordinance.
• Performing random audits of a minimum of 50 businesses every two years located outside the City, and annual audits of 10 landlords, starting with the landlords with the greatest number of rental units, to ensure compliance with the Ordinance.
• Conducting randomized annual audits of 50 businesses located within the City to determine compliance with the Ordinance.
• Identifying potential businesses that do not have a business license using available external data sources.
• Comparing audit findings to independently reported sources (e.g., State EDD reporting).
• Preparing documentation for each error/omission to substantiate and facilitate revenue recovery, including applicable interest and penalties.
• Providing additional assistance, as necessary, to support the City in recovering and preventing tax allocation errors/omissions.
• Delivering written or electronic reports summarizing findings upon completion of annual audits.
Audit services are necessary to ensure compliance with the revised Business Tax Ordinance and correct reporting by businesses. Authorization to approve audit services on an ongoing basis is included in this report.
Update on Business Tax Collections
As of February 2024, Business Tax collections have totaled $3.1 million or 52% of the budgeted estimate of $6 million. With the implementation of the revised Business Tax Ordinance, the transition and need to re-register every business impacted collections in the first few months of the 2023/24 fiscal year. Consolidation efforts for business licenses with multiple locations are ongoing and staff anticipates ending the year close to the budgeted estimate. The review of business licenses through the audit services is anticipated to enhance revenues moving forward.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to section 15378(b)(5) of Title 14 of the California Code of Regulations as the proposed services are administrative activities that will not result in either a direct or indirect physical change in the environment.
FISCAL IMPACT
The Finance Department budget will cover the cost of the HdL services for implementation support in FY 2024/25. Costs for audit services will be funded by new revenue collected through HdL audit services and any necessary budget actions will be brought forward to recognize those revenues and appropriate funding to cover the audit costs as those funds are received.
COORDINATION
This report has been coordinated with the City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov> or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
1. Authorize the City Manager or designee to execute Amendment No. 1 to the Agreement with Hinderliter, De Llamas & Associates DBA HdL Companies to revise the expiration date from May 11, 2028 to June 30, 2028 and increase the maximum compensation by $137,500 from $250,000 to $387,500 for additional tax administration services, subject to the appropriation of funds;
2. Authorize the City Manager or designee to take any actions as necessary to implement and administer the Agreement as amended and negotiate and execute amendments to add or delete services consistent with the scope of services and increase the maximum compensation by an additional $536,240 for a total maximum compensation not to exceed $923,740, subject to the appropriation of funds and the review and approval as to form by the City Attorney; and
3. Authorize the City Manager or designee to approve ongoing audit services by HdL, as directed by staff, throughout the duration of the term of the agreement with fee to HdL of 40% of new revenues collected, through audit services, with a minimum fee of $350.
Staff
Reviewed by: Kenn Lee, Director of Finance
Approved by: Jovan Grogan, City Manager
ATTACHMENTS
1. Agreement with HdL Companies
2. Proposed Amendment No. 1 to the Agreement with HdL Companies