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HomeMy WebLinkAboutCC 4 SALES TAX AUDIT 02-22-83AG OATE: TO: FROM: SUBJECT: February 14, 1983 CONSENT CALENDAR No. 4 2-22-83 Inter-Corn Bill Huston, Cit~;ager Ron Nault, Finan~ector Sales Tax Audit Agreement RECOMMENDATION It is recommended that the City Council authorize the City Manager to sign the attached agreement for sales tax auditing services with Municipal Resource Consultants. BACKGROUND In the era since the passage of proposition thirteen and the current recessive economic conditions being felt throughout the country, discr~&]¢onary resources available to municipal.ities are dwindling. One of the major'r~evenue sources for the City of Tustin is sales tax. This single sour6e represents 50% of all budgeted revenue .for the General Fund. While general econ6mic conditions will impact sales tax receipts beyond management's control, it is the responsi6ility of management to be sure that the City receives proper credit for the recorded point of sale. DISCUSSION Municipal Resoq~ Consultants ha~ developed a system that reviews the current State Board of Equalization listings and develops a target list of potential point of sale distribution errors. They will then take this target list and audit each permit holder to assure that the point of origin of all sales is properly recorded. Any discrepancies will be forwarded to the State Board of Equalization for correction, These corrections will become new sources of sales tax revenue to the City and will be the basis by which MRC's fees are based. A secondary result of this audit will be a list of potential firms that could produce new sales tax income to the City through constructive changes in marketing procedures. The fee to conduct this audit will be 35% of the new sales tax income produced for the first year following verification of changes by the State Board of Equalization. Start-up costs to be incurred include a maximum $500 fee to the State for an updated permit listing and a $600 advance to MRC for out-of-pocket expenses. The advance will be deducted from the first quarterly payment to MRC from the new sales tax income generated from their study. Municipal Resource Consultants have been given good references by the cities that I have contacted that have used their service. I have discussed the alternatives Bill Huston Sals Tax Audit Agreemtn February 14, 1983 page 2. with the City's auditors and we both feel ~hat ~R¢ is cost effective and has the most potential for positive results. The ~ty~torney has reviewed and approved the agreement according to form. recommend that the City enter into an agreement with Mu~jpal Resource I Consultants for sales tax auditing services. RN:mm MUNICIPAL RESOURCE CONSULTANTS 32129 W. Lindero Canyon Rd. Suite 210 Weetlake Village, CA 91361 (213) 991-5220 December 28, 1982 Mr. Ronald A. Nault Finance Director City of Tustin 300 Centennial Way Tustin, California 92680 ..... Sales Tax Specialists 1533 W. Locust Ave. Fresno, CA 93711 R .F.. C g Io J AN 0 6 1983 FINANCE DEPT. Dear Mr. Nault: In accordance with our recent conversation, Municipal Resource Consultants (MRC) hereby proposes to provide a professional service to identify and recover sales tax income for the City of Tustin unrealized due to distribution errors. BACKGROUND The City of Tustin, together with most of the other cities in California, has been materially .affected by Pro- position 13, the recessi~nary 'economy and ~he State and Federal cutbacks. With few prospects for new revenue sources, it is vitally important that cities maximize existing sources of revenue. Clearly emerging from these fiscal changes is the increasing role of sales tax as the City's most important revenue source. Prior to these fiscal changes, sales tax has generally been taken for granted with cities simply accepting payments.from the State without question. Today, it is essential that the sales tax resource be audited to determine whether the City is receiving the sales tax income it is entitled to. The Board of Equalization is charged with overall audit responsibility; however, staffing is not adequate to audit all aspects of sales tax reporting. The Board concentrates primarily on auditing sales tax collections reported by the business. Very little audit takes place with regard to "point of sale" distribution, which results in many cities being subject to distribution errors. These errors exist because companies register for sales tax permits according to their convenience which is not always consistent with point of sales regulations. Furthermore, these errors are often difficult to detect. Mr. Ronald A. Nault December 28, 1982 Page Two The proposed service is the outgrowth of twelve years of experience in developing and performing sales tax audits for various cities. This experience enables MRC to offer the City of Tustin a refined and effective audit service to identify and correct point of sale distribution errors and thereby generate new sales tax income for the City. SCOPE OF SERVICE Function 1: MRC is to identify potential point of sale distribution errors pertaining to the City of Tustin. The sales'tax in ques- tion is that which is being distributed in error to the State Pool, the County Pool or to other jurisdictions. All busi- nesses in the City are to be evaluated according to guidelines established by MRC formulated through expert knowledge of business marketing organization and methods, commercial sales tax reporting practices, and other conditions contributing to reporting errors. A Target List is to be developed consisting of those specific businesses that have potential point of sale errors. Function 2: MRC is to highly refine the Target List to include those firms possessing the greatest potential for sales tax recovery. Experience in this area is essential to being effective as the majority of sales tax recovered is from organizations with complex reporting requirements. Function 3: MRC is to contact each business on the refined Target List to determine whether a point of sale distribution error exists. The use of refined field evaluation techniques allows MRC to analyze the firm's sales tax reporting methodology, which is essential to making this determination. This is to be accom- plished with the highest regard to discretion and proper conduct. Based on previous experience, we have found firms to be most cooperative. Those firms with more complex correc- tions are given the proper correction procedures in a professional manner with clear, concise instructions. If a firm should not be cooperative, and this is rare, the firm's name and the nature of the distribution error is to be submitted to the Board of Equalization for it to handle specific request. Mr. Ronald A. Nault December 28, 1982 Page Three Function 4: The effort described in the previous three functions is to result in new sales tax income to the City. Itemization of firms with corrected distribution errors together with permit numbers is to be provided to the City of Tustin. Function 5: A Contact List is to be provided listing specific firms which are properly not producing sales tax to the City of Tustin, but could be through constructive change in market- ing procedures. A narrative is to be included to explain the rationale and action necessary to redirect sales tax to the City of Tustin. Either the City can contact these firms or MRC can contract separately to handle the contact if the City desires. In summary, it is important ~o remember that sales tax recovered is usually not a one-time recovery of.income, but an ongoing income source to the City as long as the firm remains in the City's locale. VERIFICATION Ail sales tax produced by MRC for the City is to be verified 'by consulting the State of California Board of Equalization's report of quarterly distribution of sales tax. This report itemizes each permit and the amount of sales tax reported for the quarter or monthly. In addition, the City is to receive a registration control record card for each corrected permit from the State Board of Equalization identifying the business and giving its sales tax permit number. TIMING It is estimated that the proposed service is to be accomplished in 30 to 60 days after the receipt of updated Board of Equal- ization tax permit information from the State. Municipal Re- source Consultants guarantee that they will complete the pro- posed services for the City of Tustin by no later than December 31, 1983. Mr. Ronald A. Nault December 29, 1982 Page Four FEE The fee for the proposed service is entirely predicated and contingent upon MRC's ability to produce new sales tax income for the City. The total fee is thirty-five percent (35%) of new sales tax income recovered as a result of the audit performed by MRC as applied to each new permit produced for the first four consecutive reporting quarters following completion of the audit by MRC and confirmation of correc- tions by the State Board of Equalization. An itemized list of these corrections is to be presented to the City at the audit's completion. The fee payments are due quarterly following receipt by the City of the State Board of Equalization's report of quarterly distribution of sales tax. EXPENSES Upon commencement of the project, the City is to advance $600 to MRC to partially offset front end expenses. This $600-is to be reimbursed to the City from the first $600 of sales tax income recovered. CITY COOPERATION The proposed service is contingent upon City cooperation in several areas. The first area involves the ordering of a computer tape of sales tax permit records from the State Board of Equaliza- tion, which costs approximately $500. Only the City can order this tape. The new tape is necessary as this is the only assurance that all current sales tax permits are properly recorded. Secondly, we ask the City's cooperation in reviewing the quarterly sales tax report from the State Board of Equaliza- tion with regard to the recovered sales tax income for the specific pezmits produced by the audit. It is from these figures that the City verifies the sales tax generated by the audit which is the basis for MRC's incentive fee. Lastly, we need access to Business Tax or License data for business telephone numbers, addresses and other reference purposes to assist in the evaluation. Mr. Ronald A. Nault December 28, 1982 Page Five CERTIFICATION OF CONFIDENTIALITY The consultant hereby certifies that any and all information utilized in the conduct of work performed is to be utilized only for Bradley-Burns Uniform Local Sales and Use Taxes purposes on behalf of the City of Tustin. All material is to remain confidential consistent with our actions as agents of the City. AUTHORIZATION If the provisions of this proposal meet with your approval, please endorse the enclosed copy and return it to my atten- tion. The original is for your records. stin CCEPTED FOR THE CITY OF'TUSTIN By Title: Dated: