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Home My WebLink About08 BUSINESS LICENSE PROGRAMAgenda Vern P AGENDA REPORT City ManReviewed: ager Finance Director? y MEETING DATE: NOVEMBER 19, 2013 TO: MAYOR AND CITY COUNCIL FROM: JEFFREY C. PARKER, CITY MANAGER SUBJECT: BUSINESS LICENSE PROGRAM SUMMARY: At the City Council's October 22, 2013, City staff requested policy direction from the City Council regarding the implementation of Tustin Municipal Code, Chapter 5, Section 251' Business License which requires any person that transacts and/or does business in the c'ty must procure a City License. The City Council directed staff to conduct the following course of action: 1. Authorcee a penalty /business registration amnesty program for businesses that are contacted by either MAS or the City that do not have a business license but are doing business within the City. Unlicensed businesses will not be required to pay penalties for the Tax due if they pay the total Tax due within 30 days of the date of the first notice requesting the business become compliant with the City's ordinance; and, 2. Relative to this program, authorize the refund of all penalties collected by MAS from newly found businesses under this program. This would not include licensed business in delinquent status; and, 3. Relative to this program, authorize the refund of business license fees collected by MAS for the years 2000 -2010 which is prior to the reinstatement of the City's original 2011 amnesty program. This would not include licensed business in delinquent status; and, 4. Prepare several options for the City Council to consider relative to the licensing of brokers and realtors. BACKGROUND. Staff contacted Pacific West Association of Realtors (PWR) and met with Mr. Phil Hawkins, Executive Vice President. PWR represents many realtors and brokers in the Orange County area. Mr. Hawkins provided additional input and comments on behalf of his constituency to City staff. The Association of California Cities Orange County (ACCOC) conducted a survey of 28 Orange County cities to determine business license law and practice. One city exempts realtors, seven cities do not require business licenses, and 20 cities require a business license. The purpose of the City Business License is to insure businesses are in the appropriate location and within guidelines associated with their specific activity. The Business License tax also helps fund critical city services that are utilized by those businesses, such as Police and Fire protection, street rehabilitation and paving, and sidewalk maintenance. Staff has drafted several options for the City Council to consider. Two of the options consider efforts to reduce staff time, increase efficiency both with staff and the customer, increase a business friendly environment, and to allow for consistency within the program. In no particular order, one option is to maintain the current system of requiring Real Estate Brokers obtain a business license based on total gross receipts; however, exempt Real Estate Agents from obtaining a business license per California State Code Section 3200 which indicates that realtors are employees of brokers. A second option is to modify the program to set a flat fee of $25 annually for both Real Estate Brokers and Real Estate Agents. Lastly, the City Council may determine to not change the current program. RECOMMENDATION: It is recommended that the City Council: 1. Maintain the current system of requiring Real Estate Brokers obtain a business license based on total gross receipts; however, exempt Real Estate Agents from obtaining a business license per California State Code Section 3200 which indicates that realtors are employees of brokers, o � 2. Modify the program to set a flat fee of $25 annually for both Real Estate Brokers and Real Estate Agents, M 3. Make no changes to the existing program. FISCAL IMPACT: The fiscal impact is unknown at this time. CORRELATION TO THE STRATEGIC PLAN: The review of the Business License program correlates to the Strategic Plan Goal C Financial Strength, 2. Explore opportunities for new or increased revenues, b. Evaluate the City's business license program to ensure fairness and equity for all businesses. Attachments: ACCOC Survey of Orange County Cities Department of Real Estate Article Referencing California State Labor Code Section 3200 Attachment 1 r IWA� Ji A -4 ASS( -)CEATION l0 F CAL! f-ORN IA CITIES OR[GE COUNTY FAR ,,qaHUBI�� THE ONLINE RESOURCE FOR GOOD PUBLIC POLICY Orange County Business Licenses: Brokers and Realtors Overview: In general, most cis ies throughout Orange County require any individual who files their federal taxes using a 1099 form to acquire a business license. Due to the real estate business' inherent business structure, both brokers and realtors usually have to acquire a business license. The largest exception to this general rule is found in Huntington Beach. In recent years, the City Council voted to exempt real estate agents from acquiring a business license even if they technically file their federal taxes using a 1099 form. The city requires only brokers to obtain a business license because the Council felt that, since the agent works under the broker, they would not technically have a business without the broker. Therefore, realtors /agents that are technically classified as an independent contractor but work under a broker in the city do not require a business license 1. A1iso Viejo • The city does not require a business to obtain a business license. 2. Anaheim • The city requires every entity that does business to have a license If an agent is working under a broker, only the broker would require a license. • Realty serv-ces are classified under the "services" category and the license fee costs $68 plus ,10 per employee. There ;.s an additional S32 processing fee. • Fees are due annually. 3. Brea • The city requires a broker to have a business license, but the real estate agent does not need a business license. • The buskness license fee is calculated using a formula that takes the past year's gross receipts into consideration. The entire processing typically takes 7 -10 days. • Fees are due annually. 4. Buena Park • Both brokers and realtors are classified under the "professional" category and require a business 1 tense. • The fee for the business license is $64 plus $4 for each add -t onal employee. • Fees are due annually. S. Costa Mesa • The city requires business licenses for all those filing their federal taxes with a 1099 form (W -2 employees do not require a business license). • The fee for a business license starts at $26 if the business' gross income is under $25,000. Any income higher than $25,000 requires the I!cense fee to be based on a calculation that takes the year's gross income into consideration. • Fees are due annually. 6. Cypress • As long as a realtor or broker is working within the city limits and files their federal taxes with a 1099 form, they both require a business license. Those working as a W -2 employee do not require a business license. • The business license fee for the first year is $41. Each year after the fee is based on the previous year's gross receipts of money made within the city limits. 7. Dana Point • The city does not require a business license. S. Fountain Valley • As long as a realtor or broker files their federal taxes with a 1099 form, they both require a business license. Those working as a W -2 employee do not require a business license. • The business license fee for the first year is $86 (base fee, plus processing fee, plus state fee) for the first person and $4.25 for each employee thereafter. The second year the fee goes down to $76 plus $4.25 for each employee thereafter. • Fees are due annually. N 9. Garden Grove • Both brokers and realtors are licensed in the same way, whether or not they have a physical locat,on within the city. As long as they are conducting business within city limits, they must obtain a business license. There is an addit onal form to fill out if the business is within city limits in order for the Planning Department to approve the business' location. • The business license fee for the first year is $68.50. Each year after the fee is based on the previous year's gross income. • Fees are due annually. 10. Huntington Beach • For real estate businesses that are located within and conducting business within city limits: In recent years, the City Council voted to exempt real estate agents from acquiring a business license even if they technically file their federal taxes using a 1099 form. Only brokers are required to acquire a bus ness license because the Council felt that, since the agent works under the broker, they would not technically have a business without the broker. Therefore, realtors /agents that are technically classified as an independent contractor but work under a broker in the city do not require a business license. • For real estate businesses located outside city limas but conducting business within city limits: Any realtor or broker is required to acquire a business license. • Business license fees are charged according to how many employees are in the business, starting at $100, rather than what the gross ; ncome is. • Fees are due annually. 11. Irvine Any person conducting business within the city limits is required to obtain a business license — both realtors and brokers. • Along with the $51 business license fee, the city requires a copy of the realtor /broker license. • Fees are due annually. 12. Ea Habra • The city requires all those that file their federal taxes using a 1099 form to acquire a business license —this includes both realtors and brokers. • While the owner of the real estate company (broker) is required to pay for the entire business license fee, any agents /realtors that are contracted by the broker (1099 employees) must also pay partial fees for a business license. • Any W -2 agent, realtor, or other employee is not required to acquire any form if business license. 13. La Palma • The city requires all those that file their federal taxes using a 1099 form to acquire a business license —this includes both realtors and brokers. • The business license fee for the first year is $35 while the following years fee is based on the business' gross receipts. • Fees due annually. 14. Laguna Hills • The city does not require a business license for anyone. If, however, a business has a physical location within the city, the business is required to obtain a Certificate of Use and Occupancy — this applies to both brokers and realtors who have a physical business location within the city. • The Certificate of Use and Occupancy costs $95 to obtain and is valid as long as the business remains in the same location. 15. Laguna Niguel • The city does not require a business license. 16. Laguna Woods • The city does not require a business license. 17. Lake Forest • The city does not require a business license. 18. Los Alamitos • Both brokers and agents /realtors are required to have a business license, but the fee for agents /realtors (independent contractors) is less than the brokers fee. • If an agent /realtor is a W -2 employee, then the broker is the only one that needs a business license. 4 • The fees are as follows and are due annually: 101100 General Buslne.s 0-3 S 237.33 175.00 11!.67 5933 501500 ReWlMksc./FoodStores 4-29 $ 449.78 352.34 234.89 117.45 501 -SOI Eating andOrinkinsPlaces {Restauran* 30.99 $1.17455 8110.91 58718 293.64 701 -700 Import/Eapon auslrsess 10G� $2,352.45 1.76 .34 L37623 555.11 Sol -B00 corntnerewAght M4nulactunn5 301. 320 301 -351 laundry/ory cleaning Business Coinapweai l�ax�arr fry [lean�g� �5ai15eewj L Base RaW$107" WAZ 53.62 Add .30 r+ rrs.hb. 26,51 _ CA?66=2 -InOy 441 -600 professional -see LAMCS.04ior.ating S 237.33 178.00 118.67 SA33 Iyn*rofesslonal S 15.68 11.76 7,84 3.92 Real Estate Broker S 232.33 178.00 118.67 59.33 I_Contracs Rea! Estate ARC nl dal eR0r4 3,- use cod a 1 201 rert-Tine Is a modmurn 412011l+rrs tar.retlk Part- T(me"essimal S 118.67 5900 59.34 29.67 Part -Tmw Non - Professional $ 7 -84 5.118 .192 L96 110 -310 Contract Employee (Beauty, rail and hair salon/shop} $ 79.03 59.27 3952 19.76 114131 Contract Instructor (Teacher, trainers of the at*. music. t raft dance, physical fitness. or professkuW 110.140 MaL4W Practitioner 19. Mission Viejo • In general, the c ty does not require a bus ness to obtd -n a business license. 20. Newport Beach • The requirement for a business license is determined by how an individual files their federal taxes. Therefore, both a broker and a realtor would mqu,re a business license if they f le their federal taxes using a 1099 form. W -2 employees do not require any form of business license. • The fees are as follows= The Cay Business Manse T ax is an annual tax, based on a !kcal year 0 Is renewable ftvq 12 months. The busnees kense tax is based on the location of where your businea operates In the City. Every year n July, the busing tax Is adlus44 to retied Inflation, as m4asiA ed by the ;nn = Iaxr rn.e far. &. TAe 201V2013 tax year rates are: 6rTerrw t CORKU Sales? ax $159 It $8,00 $797 No Sales Tax Collected $159 M $16.00 $3595 Residential Stsl $1 WA W A Out of Town Based $230 V N/A WA Post OMlce am f S154 31 WA WA Q1RA' • Fees are due annually. 21.Orange • Brokers are required to have a business license, but any aF.ents /realtors working under a broker does not require a business license. • The business license fee for the broker only is 5 112, for a broker pius a n additional agent /realtor the fee is $122, and for a broker plus more than one add tional a ,-ent /realtor the fee is $142. • Fees are due annually. A 22. Placentia • Whether a broker /realtor is licensed by the state determines what kind of business license fee the broker /realtor pays. • If a broker /realtor is licensed by the state then they are classified under the "professional" category and pay a fee of $60 /professional (it is $72 /professional if business is outside city but business is being conducted within city limits) in the business, plus $13 for any "non- professionals" (like receptionists), plus a $14 administrative fee, plus $1 in state fees. The following years are determined by the business' gross receipts. • If a broker /realtor is not licensed by the state then they are classified under the "services" category and, for the first year, pay a fee of $48, plus a $14 administrative fee, plus $1 in state fees. The following years are determined by the business' gross receipts. • Fees are due annually. 23. Rancho Santa Margarita • The city does not require a business license. 24. San Juan Capistrano • The city requires all those that file their federal taxes using a 1099 form to acquire a business license --this includes both realtors and brokers. • The business license fee for the first year is $37.30 for out -of -town realtors (those that sell property within the city limits) and $70.48 for those with an office within city limits. The following year's fee is $37.30 for both. • Fees due annually. 25. Santa Ana • The city requires both brokers and realtors to have a business license and defines them in the following manner: • "Real estate agent shall mean any person licensed as such by the state and engaged wholly or in part in transacting and carrying on the sale of real estate." • "Real estate broker shall mean any person licensed as such by the state and engaged wholly or in part in transacting and carrying on the sale of real estate including soliciting or offering to buy, sell or lease real property for others; negotiating and collecting loans for borrowers or lenders; dealing in real property sales contracts and promissory notes; receiving advance fees for real estate listings; and dealing in real estate syndicate securities." • In general, any person filing their federal taxes using a 1099 form must have a business license. • Brokers and realtors are charged differently for their business license fee. 6 26.Villa Park • The city treats any professional service the same way when it comes to businesses licenses -- this includes both brokers and realtors. • The business license fee is a flat rate of $107.95 for the first year. The fee for the following years is based on the business' gross income. 27. Westminster • Anyone who does business in the city and who file their federal taxes with a 1099 form is required to have a business license. W -z employees do not require a business license. • The business license fee is a flat fee of $211 for the first year and the renewal rate is dependent on gross receipts with a minimum fee of $141. 28.Yorba Linda Real estate brokers must acquire a business license that is classified under the "professional services" category and must pay an annual $41 flat rate fee which is prorated quarterly. Large real estate agencies must acquire a business license that is classified under the "retail sales" category and must pay an annual fee that is based on gross receipts. Attachment 2 A - .6 10 -- Real Estate 801 M California real estate brokers and compensation insurance front the Department oflndustrial Relations California law requires real estate brokers to provide workers' compensation insurance coverage for their real estate sales agents, even when those agents are independent con - trwiors. For purposes of workers' com- pensation insurance, the relationship be- tween a real estate broker and a real estate salesperson is governed by Section 3200 et seq. of the California Labor Code, available at www.leginfn.ca.gav (click on California Law). The law mandating that employers carry workers' compensation insurance came into existence as an exclusive rem- edy for on the job injuries, which would save them from personal injury lawsuits that could devastate their businesses and employment opportunf ties for agents. In recent months, the failure o f some real estatebrokersto comply with th is law has come to the attention of the Depart- ment of Industrial Relations (DIR), the state agency thait oversees en fores ment of the Labor Code, underscoring the need to educate brokers about their responsibtl - ties. Fallury to comply carries stiff penalties If an agent of an uninsured broker gets injured while working and cannot collect the workers' compensation ben- efits to which they are ent'tled through the broker's policy, the agent receives ben- efits from the state's Uninsured Employ- ers Fund (UEF), administered by the De- partment of Industrial Relation's Divi- sion of Workers' Compensation (DWC). The DWC, in turn, makes every attempt to collect from the broker on behalf ofthe UEF. The DWC takes steps to recoup funds using the same methods the state uses to collect overdue taxes, child sup. port and student loans, which can include liens against real property and asset at- tachments. Additionally, when an investigation conducted by the Department of Indus- trial Relation's Division of Labor Stan- dards Enforcement (DLSE) determine an employer is illegally uninsured, DLSE issues orders preventing the employer from conducting business until they show proof of valid workers' compensw on insurance, along with civil citation. Civil citations for failure to carry workers com- pensation insurance carry fines of up to $100,000. Real estate brokers who erroneously require agents to carry their own workers' compensation insurance may also be li- able for potential claims for re,mburse- ment and law suits from current or former sales agents. L onumied on peg,, 12 Education and Research Section The Education and Research Sec - tion is responsible forthe review and approval of all real estate license continuing education course offerings as well as pre - license qualifi- cation courses offered by private schools. It also administers a research program authorized under Section 10451.5 of the Business and Profes- sions Code and assists the Real Estate Commissioner with the advancement ofeducati on and research in the field of real estate. Accomplishments > Reviewed and approved 536 con- tinuing education course offerings and pre - license qualification courses. Revised and updated the applica- tion forms for continuing educa- tion offerings and pre- license course approval. D Placed all Education Section forms on the DRE Web site providing easier access for course sponsors. Z Implemented the provisions of re- vised Regulations 3000 and 3006 F N ",'114 Financial Statement ast year, actual revenue received for the 2003 -04 fiscal year totaled $35,444,538. DRE's actual expenditures for the 2003 -04 fiscal year were $30,999,3 03. Thus, DBE's revenues exceeded ex- penditures by $4,445,235. With rev- enue and expenditures as they were DRE's reserve balance at the end of fiscal year 2003 -04 was $23,190,177. Fiscal Year 2003-2004 Revenue Examinations $ 5,785,858 Licensing $ 17,939,048 Subdivisions $ 9,929,918 Other $ 1,789,714 Total Revenue $ 35,444,538 Expenditures Personnel $ 21,080,108 Facili;,es $ 7,461,913 Other $ 2,500,000 — Reimbursements $ 42,718 Total Expenses $ 30,999,303 Net Result $ 4,445,235 Expenditure Comparison (No of reimbursements) Actual FY 02 -03 $ 29,807,437 Actual FY 03 -04 $ 30,999,303 Reserves Comparison * Actual FY 02 -03 $ 17,465,920 Actual FY 03-04 $ 23,190,177 * Reflects the $10.9 million loan to the General Fund establishing instructor qualifica- tions for continuing education of- ferings and pre - license courses. Implemented an online evaluation form allowing students ofcontinu- ing education offerings and pre- license courses to electronically submit an evaluation of courses and instructors to DRE. i Prepared and distributed to propri- etary schools the course content criteria for the new optional pre - li cerise course in Common Interest Developments. 1*