REPORT TO COUNCIL
SUBJECT
Title
Action on Agreements for Sales, Use, Tax Audit and Recovery Services; Property Tax Audit and Management Services; and Transient Occupancy Tax Audit Services
Report
COUNCIL PILLAR
Manage Strategically Our Workforce Capacity and Resources
BACKGROUND
The City receives revenues from (a) sales, use, and transactions tax, (b) property tax, and (c) transient occupancy tax (TOT). The two largest revenue sources for the City’s General Fund are property tax and sales tax with revenues expected to total approximately $67 million and $56 million in FY 2020/21, respectively. The City is projected to receive TOT revenues of approximately $3.6 million in FY 2020/21. This TOT amount, however, is well below the pre-COVID-19 levels of over $20 million, and this revenue source is expected to recover over the next few years.
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 are expiring on June 30, 2021.
DISCUSSION
In October 2020, the City released a Request for Proposals (RFP) seeking proposals from qualified firms to provide sales, use, and transactions, property, and transient occupancy tax audit and recovery services. Firms were allowed to submit a proposal on any or all of the service elements. The RFP was published on BidSync, the City’s e-procurement system. A total of 54 firms viewed the RFP, and three proposals were received as follows:
1. HdL Companies - Submitted a proposal for both Sales, Use and Transactions Tax Audit and Recovery Services and Transient Occupancy Tax Audit Services
2. HdL Coren & Cone (HdLCC) - Submitted a proposal for Property Tax Audit and Management Services only
3. MuniServices, LLC, doing business as Avenu MuniServices LLC (MuniServices) - Submitted a proposal for all services but subsequently withdrew its proposal for Property Tax Audit and Management Services
Proposal Evaluation Process
The written proposals were evaluated independently by a three-member evaluation team consisting of staff from the Finance Department against the criteria and weights published in the RFP. The proposals were evaluated on proposer qualifications, experience, technical approach, and cost. All proposers were invited to oral interviews to demonstrate their knowledge and understanding of the City’s requirements and to introduce their key personnel who would be assigned to the City if awarded the contract.
Staff recommends three contract awards to proposers MuniServices and HdLCC as follows:
MuniServices for Sales, Use and Transactions Tax Audit and Recovery Services
Staff recommends award of contract to MuniServices for Sales, Use and Transactions Tax Audit Services as having submitted the best value proposal. MuniServices has a dedicated team of revenue consulting and tax audit services to over 350 public agencies in California, including the City of Santa Clara. Since 1995, MuniServices has recovered over $107,000,000 in sales, use and transaction tax revenue for the City.
The maximum compensation under the proposed five-year agreement is $1,500,000. MuniServices’ 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. In addition, MuniServices has an annual fee of $2,000, subject to annual increases tied to the Consumer Price Index, for its online sales tax reporting software tool called “Clearview.”
As a result of the competitive process, MuniServices reduced its contingency fee from the current rate of 15% to a tiered rate schedule as shown in the table below. The City will realize an estimated amount of $315,000 in savings, if recoveries are the same as they have been over the past five years.
|
Tier |
Recovered Revenue |
Contingency Fee |
|
1 |
$1 - $1,000,000 |
13% Contingency Fee for Recovered Revenue |
|
2 |
$1,000,001 - $2,500,000 |
12% Contingency Fee for Recovered Revenue |
|
3 |
over $2,500,000 |
10% Contingency Fee for Recovered Revenue |
HdLCC for Property Tax Audit and Management Services
After a thorough evaluation of the sole proposal from HdLCC for Property Tax Audit Services, staff determined that the proposal satisfied all the requirements set forth in the RFP. HdLCC is the incumbent vendor and staff has been satisfied with their services. In addition, HdLCC has been recovering property tax revenues and providing comprehensive reports to local governments since 1993 and currently serves over 250 public agencies in California, including eight cities in Santa Clara County.
The maximum compensation under the proposed five-year agreement is $100,000. HdLCC’s standard fee for property tax services will remain at $19,025 per year plus 15% of net tax revenues recovered. The standard fee includes HdLCC auditing and monitoring property taxes, providing City access to its proprietary tax software tool, and preparing detailed analysis of the City’s property taxes, including a summary of annual performance, description of performance by property type, identification of major increases or decreases in property values and largest property tax payers, comparison with prior year performance, identification of pending appeals, discussion of real estate trends and property sales history (including price and number of transactions), and property tax revenue forecasting.
Historically, there have been little or no recoveries due to property tax misallocations because corrections for secured parcels continue to be coded correctly. While it does not happen often, property tax misallocations for unsecured parcels may occur in which case recovery amount could be significant for the City. Therefore, staff is also requesting authority from Council to execute future amendments during the term of the agreement to increase compensation in the event net tax revenues recovered for which the City pays 15% contingency exceeds estimates.
MuniServices for Transient Occupancy Tax Audit Services
Staff recommends award of contract to MuniServices for Transient Occupancy Tax Audit Services as having submitted the best value proposal. MuniServices presented a comprehensive two-phase approach to audit services. In phase one, MuniServices will conduct an initial inventory and audit of lodging properties and will identify those properties for a more comprehensive phase two audit. In phase two, the consultant will perform a detailed audit of the records for a selected number of lodging providers.
The maximum compensation under the proposed five-year agreement is $150,000. MuniServices will audit lodging properties each year on a fixed fee basis plus travel expenses billed at cost. Currently, there are 30 lodging properties in the City but this number may change over the term of the agreement. Therefore, staff is also requesting authority from Council to execute future amendments during the term of the agreement to increase compensation for additional audits as may be required.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of a California Environmental Quality Act (“CEQA”) pursuant to the CEQA Guidelines section 15378(a) as it has no potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment. Furthermore, the action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(5) in that it is a governmental organizational or administrative activity that will not result in direct or indirect changes in the environment.
FISCAL IMPACT
The audit services agreements generate additional General Fund revenues for the City through the identification of misallocated taxes. The funding for these agreements is included in the General Fund Operating Budget for the Finance Department.
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 to execute an agreement with MuniServices, LLC, doing business as Avenu MuniServices LLC, for Sales, Use and Transactions Tax Audit and Recovery Services for a five-year term starting July 1, 2021 and ending on June 30, 2026, with maximum compensation not to exceed $1,500,000, subject to the appropriation of funds;
2. Authorize the City Manager to execute an agreement with HdL Coren & Cone for Property Tax Audit and Management Services for a five-year term starting July 1, 2021 and ending on June 30, 2026, with maximum compensation not to exceed $100,000, subject to the appropriation of funds;
3. Authorize the City Manager to execute an agreement with MuniServices, LLC, doing business as Avenu MuniServices LLC, for Transient Occupancy Tax Audit Services for a five-year term starting July 1, 2021 and ending on June 30, 2026, with maximum compensation not to exceed $150,000, subject to the appropriation of funds; and
4. Authorize the City Manager to execute amendments to each of the agreements to add funds as required in the event revenues recovered exceed staff’s estimates and/or additional related audit services are required, subject to the appropriation of funds.
Staff
Reviewed by: Kenn Lee, Director of Finance
Approved by: Deanna J. Santana, City Manager
ATTACHMENTS
1. Agreement for Services with MuniServices, LLC for Sales, Use and Transactions Tax Audit and Recovery Services
2. Agreement for Services with HdL Coren & Cone for Property Tax Audit and Management Services
3. Agreement for Services with MuniServices, LLC for Transient Occupancy Tax Audit Services