Sales tax within the City of Brea is the largest revenue source for the City’s General Fund which is currently projected at $20.4 million for FY 2019-20 and represents approximately 37 percent of the City’s General Fund budget. Sales tax is levied on retailers who sell or rent tangible personal property and is administered through the California Department of Tax and Fee Administration (CDTFA). The local share (known as Bradley-Burns) is one percent and is remitted to CDTFA by retailers and is later distributed to the jurisdiction where the sale is negotiated, or the order is taken.
Municipal agencies, including the City of Brea, contract with specialized firms that maintain large and complete sales tax databases and work directly with the CDTFA, to maximize the agency’s share of the sales and use tax generated by its business community. Such firms continuously audit to identify, correct, and recover all sales and use allocation errors, and in return, retain a percentage of the discovered revenue as their commission ("contingency fee"). These firms also provide quarterly sales tax analysis reports which include trend analysis, and revenue forecasts specific to the agency.
The City currently contracts with Avenu Insight & Analytics (also known as MuniServices) for services related to SUTA, trend analysis, and sales tax revenue forecasting since 1995. In the past three fiscal years from 2014-15 through 2017-18, the firm has produced $578,839 in additional annual sales tax revenue for the City.
The City also receives property taxes representing the second largest revenue source for the City's General Fund and is currently projected at $11.5 million for FY 2019-20. The County Assessor is the elected official mandated by law to value all taxable property located in the county and produces an Annual Assessment Rolls of Value. The Annual “Roll” is the official listing of the taxable value, location and ownership of all locally assessed property. Property tax auditing services are designed to assist municipal agencies, like the City of Brea, to identify mis-allocated property tax revenue. Administrative errors and omissions combined with general compliance problems are inevitable given the non-standard, complex nature of state and local property taxes. In addition, firms like HdL Companies and Avenu Insight and Analytics offer software access to property tax as well as provide forecasting data and supplemental statistical data needed for the City’s Comprehensive Annual Financial Report (CAFR). Currently, the City does not contract for property tax auditing services and is recommended to be audited following annexation of land within City boundaries (i.e. Blackstone development).
Conducting periodic RFPs is a good practice for entities to evaluate and align service providers that best fit the overall goals of their organization and community. On December 11, 2018, staff issued a Request for Proposal (RFP) for a Sales and Use Tax (SUTA) Audit, Analysis, Reports and Information Services as well as took this as an opportunity to explore other revenue enhancement and auditing services including the following:
- Property Tax Related Services including statistical reports for the City’s Comprehensive Annual Financial Report (CAFR);
- Business License Discovery and Auditing Services;
- Business License Administration;
- Franchise Fee Analysis and Auditing; and
- Hotel/Lodging Tax Analysis.
The purpose of the RFP was to evaluate current market rates for the services requested, revenue enhancement opportunities available to the City and lastly to evaluate options that may enhance services to the City’s customers.
For SUTA Audit, Analysis, Reports and Information Services, Property Tax Auditing Services, the City received proposals from two reputable firms including: Avenu Insight & Analytics and Hinderliter, de Llamas and Associates (HdL Companies). Both firms are considered industry leaders in California that provide these specialized services. The proposal for these services are summarized below:
| |
HdL Companies |
Avenu Insights & Analytics |
| SALES TAX SERVICES |
| SUTA Audit Services |
15% contingency |
14% contingency (up to $2 million)
10% contingency (between $2 million to $3 million)
5% contingency (over $3 million) |
| Sales Tax Management & Report Software Access |
$9,000/yr |
$3,200/yr |
| |
| PROPERTY TAX SERVICES |
| Property Tax Audit Services |
25% net contingency |
$5,000 per annual audit |
| Property Tax Management & Report Software Access |
$14,225/yr |
$7,000/yr |
Both HdL Companies and Avenu Insight & Analytics are considered industry leaders, and as a result, the City interviewed both firms on February 13, 2019. The interview provided an opportunity for staff to meet the project managers and received an overview of the firm’s services and products. Staff concluded, while both firms provide all relatable services, Avenu Insights & Analytics proved to be a superior choice when it came to SUTA Audit, Analysis, Reports and Forecasting Services. This was based on a variety of factors that included working relationship with the project manager, firm’s relationship with the CDTFA, cost benefit, ease of use for staff to utilize the firm’s sales tax analysis software and lastly reporting products that can assist staff to study retail segments.
Staff have also determined that Avenu Insight & Analytics is a more cost effective option to provide property tax related services. This would be considered a new contracted service that would allow staff to better assess property tax revenues including access to proprietary software, semi-annual assessment appeals reports and property tax forecasting services. Avenu Insight and Analytics would also act as an agent of the City to correct any misallocation with the County that would serve as a new revenue opportunity for the City.
The proposed agreement with Avenu Insight & Analytics is provided as Attachment A and stipulates a three (3) year contract with two (2) one-year automatic contract renewals. Any contract adjustments, such as Consumer Price Index (CPI), shall not be revised during the term of the agreement without prior approval from the City Council. |
The agreement is effective September 1, 2019 and the fixed annual cost is $15,200. The contingency fee is above this annual fixed amount and is based upon the revenues received for the City of Brea from the findings of the work performed by the firm. As an example, Avenu Insights & Analytics discovered $94,043 in additional annual revenue for the City for FY 2017-18. The contingency fee would be a one-time cost of $13,166 (or 14%).
The annual fixed cost of $15,200 is currently budgeted in the FY 2019-20 General Fund Operating Budget. The contingency fee is recommended to be appropriated on a quarterly basis through budget adjustments (if applicable) during the fiscal year based upon revenues received and contingency fees incurred. |