Title
Consideration of Placing a Measure on the November 5, 2024, General Municipal Election Ballot updating the Business License Tax. (Karen Chang, Finance Director and Greg Henry, Financial Services Manager)
label
RECOMMENDATION
Recommendation
Staff recommends that City Council:
1. Review and discuss the proposed updates to the Business License Tax selecting the preferred changes and methodology; and
2. Adopt a Resolution of the City Council of South San Francisco ordering the submission to the qualified voters of the City at the general municipal election to be held on November 5, 2024, a measure to amend certain sections of Chapters 6.04, 6.08, 6.12, and 6.16 within Title 6 of the South San Francisco Municipal Code based on the City Council’s selection; authorizing the submittal of ballot arguments in favor of or against the measure; providing for rebuttal arguments; and directing the City Attorney to prepare an impartial analysis; and
3. Authorize the Mayor and/or designee to develop a written argument in favor and rebuttal
Body
BACKGROUND/DISCUSSION
This staff report follows the latest study session on updating the Business License Tax held on June 26, 2024, during which the Council directed staff to continue to proceed with updating the Business License Tax, with additional refinements.
In South San Francisco, all businesses are required to secure a business license, which must be renewed annually by January 31st. This requirement, managed by the City’s Finance Department, has been in place since 1976 and applies to all business activities. South San Francisco Municipal Code (SSFMC) Title 6, last updated in 2008, outlines the business license tax based on business type, with tax rates adjusted annually by the Consumer Price Index for Urban Wage Earners and Clerical Workers (“CPI-W”) for the San Francisco Bay Area.
However, the current tax model is outdated due to the rise of the gig economy and significant economic changes, including growth in the biotech and construction sectors. To address these issues, the City engaged Matrix Consulting Group in January 2021 to develop proposals to modernize the business license structure. Matrix updated their model based on 2023 data in May 2024.
This is the last scheduled Council meeting before the August 9th County deadline for ballot measure submissions.
Attachment 1 provides an overview of the type of taxation and description of the businesses categories that make up the City’s current Business License Tax. The City uses business categories to separate the taxing method for different businesses in the City.
Current Taxing Structure
In 2023, the City collected $2.5 million from 3,503 businesses, with 95% of revenue from the top three categories, as detailed below. Revenue totals include both a $4 State Disability Access Education Fee pursuant to Senate Bill 1186 and 2% database fee. In 2008, a tax cap was established, adjusted annually by CPI-W, reaching $150,886.50 for 2024, which is included in the amount shown in the table below.
|
Business type |
Revenue |
% of Rev. |
# of Businesses |
Description of Business License Tax Type |
|
Professional |
$ 1,342,996 |
54% |
477 |
Per employee |
|
General Business |
754,917 |
30% |
1,637 |
Per employee |
|
Contractor |
281,537 |
11% |
1,300 |
Flat rate |
|
% Gross Receipts |
64,453 |
2.6% |
13 |
% of Gross Receipts |
|
Other |
66,257 |
2.6% |
76 |
Various |
|
Total |
$2,510,160 |
100% |
3,503 |
|
During the June 26th meeting, the following business category updates were presented to Council. There was generally no discussion on these items, and they are presented as they were previously, including the proposed updates to the ordinance to enact the changes.
Professional
The proposed ordinance contains an update to the per associate rate, increasing from $226 to $275. This change was first presented on May 22nd and has not changed from the initial proposal. This category currently accounts for $1.3 million in business license tax revenue. The proposed change will bring this to approximately $1.6 million.
Construction Contractors
The proposed ordinance contains an update to the contractor rate, setting it to 0.18% of the valuation of work. This metric is particularly useful for the City because it must be reported as part of the permitting process. Currently this category is taxed at $0.3 million. The proposed change is estimated to increase the business license tax revenue from this category to $1.5 million.
This approach is used by other entities: Berkeley (0.18%), Menlo Park (Base rate plus 0.025% over $1M with maximum rate of $8,000), and Oakland (0.18%) of gross receipts.
Gross Receipts Businesses
There are no changes proposed for the taxation of businesses in this group. Currently this category accounts for $64,000 in business license tax. The estimated revenue will remain the same.
Public utility
There are no changes proposed for the taxation of businesses in this group. Currently this category accounts for less than $5,000 in business license tax. The estimated revenue will remain the same.
Peddler or solicitor & Transportation of persons
Updated to charge the current per employee rate plus $250 per vehicle. The current revenue from this category is less than $6,000, with no significant change in projected revenue due to the update.
Temporary business
The daily charge for temporary businesses is proposed to increase from $75.25 per day to $150 per day, in line with neighboring cities. The number of businesses in this category currently do not represent a significant change to projected revenue with the change.
Further, the proposed ordinance provides businesses which earn less than $500 annually within the City an exemption from the tax, while still requiring the business to file for a business license. This will simplify the process and remove the burden for businesses which are hired by the City to provide one-time programs for residents. Given the high ratio of the tax to the amount earned in this type of business, the City has increased the payment to the vendor to cover the cost of the business license tax itself (a net zero change).
Tax Impact
For the above business categories, the following table provides an estimate of the tax impact of the proposed changes.
|
Business type |
Current Tax |
Proposed Tax |
Increase |
|
Professional |
$1,342,996 |
$1,634,177 |
$291,181 |
|
Construction Contractor |
281,537 |
1,500,000 |
1,218,463 |
|
% Gross Receipts |
64,453 |
64,453 |
- |
|
Total |
$1,688,986 |
$3,198,630 |
$1,509,644 |
Employee Definition
As noted, one of the primary drivers of the Business License Tax update is to adjust the employee definition to include independent contractors and “gig” employees, (employees for whom the company files a 1099 instead of a W-2, <https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee>). That is, to the City, there will be no distinction between independent contractors and employees. The ordinance does not affect the relationship between the business and worker. It just treats all workers as “employees” for the purpose of calculating the tax.
Penalty Update
In addition to the proposed changes to the tax itself, the proposed ordinance changes the non-compliance penalty for the Business License Tax. Currently, as defined in SSFMC Section 6.12.150, the penalty is 10% of the tax due if payment is more than 30 days late with an additional 15% of the tax due if it is more than 60 days late.
At the June 26, 2024 meeting, staff proposed changing this to a monthly penalty of 10% of the tax due for each month the tax is delinquent, up to 100% of the original tax amount. This modification will help with timely compliance with the City’s Business License Ordinance.
DISCUSSION
In addition to the above changes, which haven’t been updated since the prior review by the City Council, the following components of the tax have been updated since the prior meeting. For each item, staff have presented a recommendation, which forms the basis for the attached ordinance. Alternatives are presented in this report, with the necessary ordinance language to enact, should the Council wish to approve one of the alternatives.
Rental of real property
On June 26, 2024, staff presented an update for short-term rental properties that are currently generating Transient Occupancy Tax (TOT) which propose an increase of the current tax rate of a $113.50 base and an $8 per unit charge to a base rate of $150 with a per unit charge of $10. In that meeting, the Council asked staff to evaluate whether this type of business should be included in the General Business category, who pay a per employee rate. Staff do not recommend making this change, as the number of employees is unknown and the fiscal impact on the businesses cannot be estimated at this time. Further, the businesses are accustomed to using the per unit rate, which will simplify the update.
Additionally, the proposed ordinance includes an update of $50 per unit for all residential long term rental properties with the removal of the 5-unit threshold. This update will improve equity under the business license tax as all residential rental properties will be asked to participate in the tax.
No new changes are proposed for these business categories and the proposed ordinance contains both updates.
The following table shows the expected tax impact of these changes. For Long Term Residential Rental, US census data estimating the number of households that rent was estimated at 9,000 and used for the expected revenue.
<https://www.census.gov/quickfacts/fact/table/southsanfranciscocitycalifornia/SBO060217>
|
Business type - Rental of Real Property |
Current Tax |
Proposed Tax |
Increase |
|
Hotel/STR |
22,000 |
27,000 |
5,000 |
|
Long Term Residential |
- |
450,000 |
450,000 |
|
Total |
22,000 |
477,000 |
455,000 |
General Business
The General Business category in South San Francisco is the broad category that contains all businesses not specifically named in SSFMC Title 6. Businesses that fall into the General Business category pay a Business License Tax based upon the number of employees.
As discussed on June 26th, the first element of the update to the General Business Category is the consolidation of businesses categories under General Business. Many of these businesses currently pay at the per employee rate but are called out as separate categories in the ordinance. The proposed changes will remove these categories, simplifying the code without any fiscal impact.
For auctioneer, card rooms, and recreation and entertainment businesses, there will be a change from their current methodology to the per employee rate. Staff do not anticipate any significant revenue impact from this change.
Per the recommended structure, the following businesses will be charged at the per employee rate, becoming part of the general business category:
1. Auctioneer
2. Business or personal services
3. Card Room
4. Manufacturer
5. Recreation and entertainment
6. Warehousing
7. Wholesale
In addition to the consolidation of business categories, the business license tax update has proposed an update to the per employee rate paid by businesses in this category. Previously, the Council directed staff to update the per employee rate to a progressive tax where in addition to a base rate of $150, the rate per employee increases as the number of employees increases. The primary reason to use a progressive tax is to ensure that the small business community (which comprises a substantial portion of the current business environment) is protected while increasing contributions from larger companies. In previous meetings, the rate presented had nine tiers and a per employee rate ranging from $30 to $150, as shown in the table below.
|
# of employees |
Per Employee |
|
0-4 employees |
$30 |
|
5-9 employees |
$35 |
|
10-19 employees |
$50 |
|
20-49 employees |
$60 |
|
50-99 employees |
$75 |
|
100-249 employees |
$80 |
|
250-499 employees |
$90 |
|
500-999 employees |
$100 |
|
1,000 employees+ |
$150 |
In the June 26th meeting, the Council directed staff to simplify this structure and reduce the number of tiers. Additionally, following the outreach detailed below, staff determined, in order for the measure to have the greatest chance to be approved by voters that the maximum per employee rate needed to be adjusted. Staff are therefore proposing the following rate schedule for General Businesses.
|
June 26th Proposal |
Revised Proposal (July 24th) |
|
# Employees |
# Companies |
Rate (Initial Prop) |
# Employees |
# Companies |
Option 1 |
Option 2 |
Option 3 |
|
0-4 |
1,067 |
$30 |
0-9 |
1,322 |
$30 |
$30 |
$30 |
|
5-9 |
255 |
$35 |
|
|
|
|
|
|
10-19 |
166 |
$50 |
10-99 |
321 |
$45 |
$45 |
$50 |
|
20-49 |
121 |
$60 |
|
|
|
|
|
|
50-99 |
34 |
$75 |
|
|
|
|
|
|
100-249 |
22 |
$80 |
100 + |
29 |
$55 |
$75 |
$90 |
|
250-499 |
4 |
$90 |
|
|
|
|
|
|
500-999 |
2 |
$100 |
|
|
|
|
|
|
1,000 + |
1 |
$150 |
|
|
|
|
|
The following table shows the breakdown by company size. For the sake of the calculation, no cap is applied to the tax per business. While all companies will feel an increase with this new rate structure, as shown in the chart, the smaller companies will be bearing a much smaller burden of the total amount of tax collected. This improves the equity of the tax distribution within the new tax structures.
The following table shows the fee impact on sample businesses with various employee sizes.
|
# of employees |
Current Tax |
Option 1 |
Option 1 $ Increase |
Option 2 |
Option 2 $ Increase |
Option 3 |
Option 3 $ Increase |
|
5 |
$223 |
$300 |
$77 |
$300 |
$77 |
$300 |
77 |
|
50 |
1,213 |
2,265 |
1,052 |
2,265 |
1,052 |
2,470 |
1,257 |
|
200 |
4,513 |
10,025 |
5,512 |
12,045 |
7,532 |
14,010 |
9,497 |
|
500 |
11,113 |
26,525 |
15,412 |
34,545 |
23,432 |
41,010 |
29,897 |
|
1,000 |
22,113 |
54,025 |
31,912 |
72,045 |
49,932 |
86,010 |
63,897 |
|
5,000 |
110,113 |
274,025 |
163,912 |
372,045 |
261,932 |
446,010 |
335,897 |
|
10,000 |
$150,887 |
$549,025 |
$398,139 |
$747,045 |
$596,159 |
$896,010 |
$745,124 |
For Option 1, the total expected tax for this category is $1,442,775, an increase of $661,297. For Option 2 total expected tax is $ 1,676,175, an increase of $894,697. For Option 3, the total expected tax is $1,890,760, an increase of $1,109,282.
The preferred General Business category tax structure (Option 1/ Option 2 or Option 3) must be determined by the City Council prior to the adoption of the Resolution so that the attached ordinance can be amended to include the rate table of the preferred option.
Business License Tax Cap
There are a limited number of businesses which are impacted by the Tax Cap. However, some of the impacted businesses are also undergoing discussion as part of the proposed Community Facilities District (CFD). The City values the contribution that these businesses make to the South San Francisco community and the likely impact of multiple revenue measures can have on them, therefore, staff recommend lowering the highest per employee tax rate than the one initially proposed, but with no tax cap limit.
In the June 26th meeting, and in subsequent requests to staff, Councilmembers proposed a number of alternatives for the cap. Each is described below with the accompanying ordinance language; however, no cap is included in the proposed attached ordinance.
• For any year, the Council can choose to increase the cap by less than the annual CPI, non-action would result in the full CPI being applied. This option would update the dollar amount in Section 6.04.125 of the Municipal Code. The proposed ordinance adds Section 6.04.126(E), which would allow Council to decide annually whether to adjust the cap by CPI.
• The cap increases each year by something other than the CPI until it reaches a second ceiling, then increases by CPI.
6.04.125 Annual cap on amount of business license tax.
A. The annual business license tax per business shall not exceed the amounts in the following schedule:
|
CALENDAR YEAR |
ANNUAL CAP |
|
2025 |
|
|
2026 |
|
|
2027 |
|
B. Beginning in calendar year 2028, the annual cap shall be adjusted annually as set forth in Section 6.04.126.
C. If a business has multiple locations within the city and is required to obtain a separate business license for each location, as provided for in Section 6.12.040, then the annual cap shall apply separately to the license tax levied on each license.
• The annual cap is eliminated, but the City Council would have the option to reinstate an annual cap and then increase it, lower it, or re-eliminate it, all by resolution.
Beginning in calendar year 2025, there shall be no limit on the annual business license tax per business (“annual cap”). Thereafter, the City Council may, by resolution, reinstate an annual cap of any amount or increase, decrease, or eliminate an annual cap previously approved by the City Council. If the City Council reinstates an annual cap, until it takes further action by resolution, the amount of the annual cap shall be adjusted as set forth in Section 6.04.125. The voters of the City declare that the reinstatement of an annual cap or the subsequent increase, decrease, or elimination of a reinstated annual cap shall not constitute an increase in the business license tax within the meaning of Article XIIIC, section 2 of the California Constitution, and shall not require voter approval.
Should a cap be preferred by the Council, the impact on total tax income would depend on both the taxing option selected for the General Business category and the level of the cap.
Outreach
For broad business outreach, staff met with the South San Francisco Chamber of Commerce on June 17th and 18th to discuss the measure and with San Mateo County Economic Development Association (SAMCEDA) on July 10th.
Staff engaged with several business organizations for businesses utilizing real property. Staff met with representatives from the San Mateo County Association of Realtors (SAMCAR) on July 9th to discuss the proposed ballot measure. Staff also met with representatives for the South San Francisco Conference Center.
Specifically for the biotech sector, staff have met with the California Life Sciences Association and BioCom California.
Staff met with or communicated with the largest business taxpayers directly, including Kaiser, Stripe, and Genentech.
The results of the outreach to date have been incorporated into the proposed language and tax structure to produce a ballot measure that staff believe has the support from the community to pass. However, broadly, staff feel that the outreach has been positive with most responses tempered but supportive.
Ballot Measure Process and Ballot Language
As a tax measure, adoption of the proposed resolution requires a super majority (4 votes in favor) and would call an election to place a measure on the November 2024 ballot to seek voter approval of the proposed ordinance. The ordinance would only become effective if approved by a simple majority (50% + 1) of the voters voting on the measure at the November 2024 election. The new rates and structure would be effective January 1, 2025, applying to the 2025 annual business license tax (due by January 31, 2025). The first CPI increase would apply to the rates for January 2026.
In addition to the ordinance, the proposed resolution contains the ballot measure language which would be presented to the voters at the November 5, 2024, election. The following are the requirements for a tax measure (Cal. Elections Code § 13119, 13247 and 9051):
• The measure statement must be no longer than 75 words and phrased as a question stating the nature of the ordinance.
• If the proposed measure imposes a tax or raises the rate of a tax, the ballot shall include in the statement of the measure to be voted on the amount of money to be raised annually and the rate and duration of the tax to be levied.
• The statement of the measure shall be a true and impartial synopsis of the purpose of the proposed measure and shall be in language that is neither argumentative nor likely to create prejudice for or against the measure.
Staff are proposing the following ballot language. This language is based on what was used by Godbe Research as part of the public outreach poll which was conducted in 2023 and presented to Council on January 27, 2024. Given that the question on this language tested well, it serves as a good base for the proposed language. The ballot language is required for an item which goes before the public for a vote, and while not as specific as the ordinance changes, needs to provide a clear understanding of what the proposed changes will do.
|
To maintain City services, such as: fire protection/paramedic emergency response; neighborhood police patrols and services; pothole, street and road maintenance; parks and recreation programs; library programs and services; and for general government use; shall the City of South San Francisco ordinance be adopted modernizing the business license tax, with increases in rates varying with the size of the business, as described in the ordinance, providing approximately $3,400,000 annually, until ended by voters, with annual audits and citizens' oversight. |
Yes |
|
|
No |
Submission to County Officials
The City is required to file a certified copy of this Resolution, with Attachments, with the County of San Mateo Board of Supervisors and the County Elections Official no later than close of business on Friday, August 9, 2024. The proposed resolution directs the City Clerk to file.
Impartial Analysis
As part of the ballot process, the City is required to prepare an impartial analysis. Staff are proposing that the Council direct the City Attorney to prepare this in accordance with Elections Code Section 9280 and provide to the City Clerk for submittal to the County.
Ballot Arguments
Ballot arguments for or against the measure may be submitted in accordance with this resolution and applicable provisions of the law. Staff are proposing that the City Council designate, by motion, a subcommittee of two Councilmembers for the Ballot Arguments. The resolution currently states that it will be the Mayor and/or designee, but that can be changed.
The subcommittee would have the authority to develop and submit a written argument not exceeding 300 words in favor of the measure. If a qualified argument against the measure is submitted, the subcommittee may develop a rebuttal argument not exceeding 250 words.
Further, at the discretion of the subcommittee, the argument in favor and rebuttal, if any, may also be signed by other members of the City Council, bona fide associations of citizens, or by individual voters who are eligible to vote. Arguments and rebuttals shall otherwise conform to and comply with all applicable provisions of the Elections Code and be submitted by the deadline required by the County of San Mateo Elections Official.
FISCAL IMPACT
If approved by voters in November, the estimated additional revenues generated by the business license tax is estimated to be $3.4 million The cost of the ballot measure is approximately $74,000, which would account for San Mateo County election costs as well as publishing expenses. This amount is incorporated in the FY 2024-25 adopted budget.
RELATIONSHIP TO STRATEGIC PLAN
The City’s business license tax program revenue supports Priority Area 3, Financial Stability.
ENVIRONMENTAL REVIEW
Approval of the proposed resolution is exempt from review under the California Environmental Quality Act (Public Resources Code § 21000 et seq. (“CEQA”) and 14 Cal. Code Reg. § 15000 et seq. (“CEQA Guidelines”)). The tax to be submitted to the voters by the resolution is a general tax that may only be used for specified governmental purpose(s). As such, under CEQA Guidelines section 15378(b)(4), the tax is not a project within the meaning of CEQA because it creates a government funding mechanism that does not involve any commitment to any specific project that may result in a potentially significant physical impact on the environment. If revenue from the tax were used for a purpose that would have such effect, the City would undertake the required CEQA review for that particular project at the earliest feasible time prior to approval of the project, consistent with CEQA Guidelines Sections 15004 and 15352. Therefore, pursuant to CEQA Guidelines section 15060, CEQA analysis is not required.
CONCLUSION
The City’s business license tax has not been updated since 2008 and the current tax model is outdated due to the rise of the gig economy and significant economic changes, including growth in the biotech and construction sectors. Further, the City’s General Fund is in a structural deficit and while this business license tax update is not a sole solution to that issue, it would help support the services that the City provides. If the City Council would like to move forward with an update to the business license tax, it will require a 2/3rds (4 Councilmembers) approval of the resolution including finalizing the draft ordinance. It would then go to voters on the November 2024 ballot and must obtain a simple majority for approval.
Attachments:
1. Overview of current types of Taxation and Business Category
2. Business license Tax Presentation - City Staff