REPORT TO COUNCIL
SUBJECT
Title
Action to Authorize the City Manager to Negotiate and Execute Agreements with Hinderliter, De Llamas, & Associates dba HdL Companies and HdL Coren and Cone for Sales, Use, Tax Audit and Recovery Services; Property Tax Audit and Management Services; Transient Occupancy Tax Audit Services; and Santa Clara Tourism Improvement District Assessment Audit and Compliance Services
Report
BACKGROUND
The City receives revenues from (a) sales, use, and transactions tax, (b) property tax, (c) transient occupancy tax (TOT), and (d) Community Facilities District and Santa Clara Tourism Improvement District special assessment fees. The two largest revenue sources for the City’s General Fund are property tax and sales tax with revenues expected to total approximately $108 million and $76 million in FY 2026/27, respectively. The City is also projected to receive TOT revenues of approximately $31 million in FY 2026/27.
To ensure that the City is receiving all the revenues from the County of Santa Clara and the State of California, the Finance Department uses third-party consultants to audit tax records and recover misallocated revenues. The current agreements for tax audit and recovery services expire on June 30, 2026.
DISCUSSION
Pursuant to City Code Section 2.105.140(c), a formal Request for Proposals (RFP) was conducted, with the award recommendation based on “best value.”
On January 6, 2026, the City released an RFP seeking proposals from qualified firms to provide the following services: (1) Sales, Use and Transaction Tax Audit and Recovery Services; (2) Property Tax Audit and Management Services; (3) Transient Occupancy Tax Audit and Compliance Services; and (4) Santa Clara Tourism Improvement District Assessment Audit and Compliance Services. Firms were allowed to submit proposals for any or all of the service categories. The RFP was published on the City’s e-procurement system. Four proposals were received as follows:
• HdL Companies
• HdL Coren and Cone
• Neumo MuniServices
• The Pun Group
Proposals were evaluated based on criteria including experience and qualifications, proposed approach and methodology, and cost. Based on the evaluation, HdL Companies was determined to provide the best value to the City for Sales, Use and Transaction Tax Audit and Recovery Services; Transient Occupancy Tax Audit and Compliance Services; and Santa Clara Tourism Improvement District Assessment Audit and Compliance Services. HdL Coren and Cone was determined to provide the best value to City for Property Tax Audit and Management Services.
(1) Sales, Use, and Transaction Tax Audit and Recovery Services
The proposed agreement with Hinderliter, De Llamas & Associates dba HdL Companies (HdL Companies) provides sales, use, and transaction tax recovery services. The agreement has a five-year term starting on July 1, 2026 and ending on June 30, 2031, with a total not-to-exceed compensation amount of $1,600,000.
HdL Companies’ fees are based on a percentage of revenue recovered from the California Department of Tax and Fee Administration for misallocated sales, use and transaction taxes. The contingency-based compensation for recovered revenues is outlined in Table 1 below.
Table 1 - Sales, Use, and Tax and Recovery Services Contingency-Based Compensation
|
Tier |
Recovered Revenue¹ |
Contingency Fee |
|
1 |
$1 - $2.5 Million |
13% of Recovered Revenue |
|
2 |
over $2.5 Million |
10% of Recovered Revenue |
|
1 Recovered revenue shall be the cumulative amount recovered during the full term of the Agreement (July 1, 2026 through June 30, 2031). |
Given the uncertainty regarding sales tax recoveries, staff is requesting authorization for the City Manager or designee to increase the maximum compensation, as necessary, to account for additional revenue resulting from the contingency-based compensation structure. Any additional expense would be offset by the additional sales tax revenue recovered by the consultant.
In addition, HdL Companies will provide sales tax management services, which include identifying and maximizing use tax recovery opportunities, analyzing and reporting quarterly sales tax data and trends, providing technical training and advisory services, and maintaining exportable data systems and mapping capabilities to support the City’s revenue management and tax allocation services. This service will be provided at no cost to the City for the first 12 months of the Agreement. Beginning July 1, 2027, the rate will be $1,000 per month, subject to annual increases not to exceed 5%. Additional services may be provided on time-and-materials basis. These rates may be adjusted annually and must be substantiated by HdL Companies to the satisfaction of the City.
(2) Property Tax Audit and Management Services
The proposed agreement with HdL Coren & Cone provides comprehensive property tax management services, including audit and recovery of misallocated property taxes, ongoing monitoring of secure and unsecured tax rolls, and analysis of property tax trends. The agreement also includes access to a web-based property tax database to support staff in analyzing and managing property tax data.
The agreement has a five-year term starting on July 1, 2026, and ending on June 30, 2031, with a total not-to-exceed compensation amount of $200,000.
Compensation under the agreement consists of a quarterly base fee for ongoing services and a 25% contingency fee on net new revenues recovered as a result of the audit efforts. The base fee is subject to annual adjustments based on the Consumer Price Index (CPI). For purposes of estimating total compensation, a 5% annual increase has been assumed for Years 2 through 5.
The estimated compensation is summarized in Table 2 below:
Table 2 - Cost Summary for Property Tax Services
|
Description |
Amount |
|
Year 1 Base Fee |
$25,000 |
|
Years 2-5 Estimated Base Fee |
$113,141 |
|
Additional Property Tax Related Services |
$21,859 |
|
Estimated Contingency Fee |
$40,000 |
|
Total Not-to-Exceed Compensation |
$200,000 |
Contingency fees are dependent on actual recoveries and are not guaranteed. Historically, the City has experienced little to no recoveries related to secured property tax misallocations, as such allocations are generally coded correctly. However, misallocations related to unsecured parcels may occur and, while infrequent, can result in significant recoveries. Accordingly, staff is requesting authority for the City Manager to execute amendments to increase the maximum compensation, as needed, in the event that contingency-based recoveries exceed the current estimate.
(3) Transient Occupancy Tax Audit and Compliance Services and Santa Clara Tourism Improvement District Assessment Audit and Compliance Services
The proposed agreement with Hinderliter, De Llamas & Associates dba HdL Companies provides comprehensive Transient Occupancy Tax (TOT), Community Facilities District (CFD), and Santa Clara Tourism Improvement District (SCTID) administration and audit services, including tax registration database management, online filing and payment processing, customer support, and reporting services. HdL Companies will conduct regular audits, analyze tax administration procedures, and ensure accurate filings of TOT/CFD/SCTID returns.
Compensation includes a one-time implementation fee of $5,000 and an annual administration fee of $950 per property. Table 3 summarizes the total cost based on the City’s current inventory of 35 lodging properties. The administration fee will increase annually in accordance with the percentage change in the Consumer Price Index, not to exceed 3% annually.
Table 3 - TOT/CFD/SCTID Compensation Summary
|
Description |
Amount |
|
One Time Implementation Fee |
$5,000 |
|
Year 1 Cost |
$33,250 |
|
Year 2 Cost |
$34,248 |
|
Year 3 Cost |
$35,275 |
|
Year 4 Cost |
$36,333 |
|
Year 5 Cost |
$37,423 |
|
Additional TOT/CFD/SCTID Related Services |
$48,471 |
|
Total |
$230,000 |
Additional lodging properties may be added during the term of the agreement which will result in increases to the annual administration costs. Accordingly, staff is requesting authority for the City Manager to increase the agreement maximum compensation, as necessary, to account for additional lodging properties added during the term of the agreement.
Out of the total maximum compensation of $230,000, $48,471 is reserved for additional TOT/CFD/SCFTID-related services. These services may include supplemental auditing support for short-term rental operators, such as AirBNB and VRBO, that are not currently included in the City’s inventory of lodging properties. Any additional services requested by the City will be provided on time-and-materials basis. These rates may be adjusted annually and must be substantiated by the HdL Companies to the satisfaction of the City.
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
Funding for audit services is included in FY 2026/27 Adopted Budget for the Finance Department. If the contingency-based audit recovery services for Sales Tax and Property Tax exceed the budgeted levels, budget adjustments will be brought forward, offset by the additional revenue generated from the audits.
COORDINATION
This report has been coordinated with the Department of Finance and 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 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 an agreement with Hinderliter, De Llamas & Associates DBA HdL Companies for sales, use, and transaction tax recovery services for a five-year term starting on July 1, 2026 and ending on June 30, 2031, with a maximum compensation of $1,600,000, subject to the appropriation of funds and the review and approval as to form by the City Attorney;
2. Authorize the City Manager or designee to negotiate and execute an agreement with Hinderliter, De Llamas & Associates DBA HdL Companies for Transient Occupancy Tax (TOT), Community Facilities District (CFD), and Santa Clara Tourism Improvement District (SCTID) administration and audit services for a five-year term starting on July 1, 2026 and ending on June 30, 2031, with a maximum compensation of $230,000, subject to the appropriation of funds and the review and approval as to form by the City Attorney;
3. Authorize the City Manager or designee to execute an agreement with HdL Coren & Cone for comprehensive property tax management services for a five-year term starting on July 1, 2026 and ending on June 30, 2031, with a maximum compensation of $200,000, subject to the appropriation of funds and the review and approval as to form by the City Attorney; and
4. Authorize the City Manager or designee to take any actions necessary to implement and administer the agreements, and to negotiate and execute future amendment(s) to: (a) increase the maximum compensation under the agreements identified in Recommendations No. 1 and No. 3, as necessary, to account for additional revenue resulting from contingency-based compensation structure, and identified in Recommendation No. 2, as necessary, to account for additional properties added during the term of the agreement, (b) add or delete services associated with the services, (c) adjust rates in accordance with the agreements’ rate adjustment provisions, and (d) make de minimis changes, subject to the appropriation of funds and the review and approval as to form by the City Attorney.
Staff
Reviewed by: Kenn Lee, Director of Finance
Approved by: Jovan D. Grogan, City Manager
ATTACHMENTS
1. Agreement - HdL Companies - Sales, Use and Transaction Tax Services
2. Agreement - HdLCC - Property Tax Services