Consideration and Adoption of Resolution No. 2018-27: A resolution of the City Council of the City of Flagstaff, Arizona declaring that certain document known as "the 2018 Business License Regulations" as a public record; and Ordinance No. 2018-22, an ordinance of the City Council of the City of Flagstaff, Arizona, amending the Flagstaff City Code, Title 3, Business Regulations, Chapters 3-01, 3-03, 3-05, and 3-0810, by updating business licensing regulations to obtain a more complete picture of the Flagstaff business community, simplify licensing procedures, and update licensing fees; providing for penalties, repeal of conflicting ordinances, severability, and establishing an effective date. (Business license updates)

The proposed updated 2018 Business License Regulations will assist in streamlining the licensing processes for businesses and City staff, as well as ensure that local and state mandates are currently reflected.  The City proposes to require a business license for all non-exempt business locations, at $8 per year.  This is a decrease from the current $20/year fee for occupational licenses. The City proposes to change the local transaction privilege tax license from a one-time $46/year  to an annual $38$36/year. At the June 5, 2018 Council Meeting Council approved a first reading of the Ordinance 2018-22 that will set the local transaction privilege tax license fee at $18/year. 

 

Currently, the City budgets and recoups approximately 10% of the costs associated with administering the local privilege and use tax (Sales Tax) program and 58% of the costs associated with administering Business Licensing.  The proposed fees would allow for almost 100% cost recovery of both City staff, as well as the annual fee charged by the Arizona Department of Revenue for local tax administration.

 None.

City of Flagstaff Council Goals 2017-2019:

Community Outreach

Enhance public transparency and accessibility.

Team Flagstaff Strategic Plan 2017:

Strategic Priority #3: Foster a resilient and economically prosperous city

1. Enhance the organization's fiscal stability and resourcefulness.

2. Deliver outstanding services through a healthy environment, resources, and infrastructure.

3. Support sustainable economic development and its practices.

5. Continue to enhance community outreach and engagement.

 Yes.  Staff recommended changes were presented to City Council at the May 8, 2018, Work Session. Further discussion and first read of the ordinance and resolution were held on June 5, 2018.

1. Approve Resolution 2018-27 and Ordinance 2018-22 as presented.
2. Amend and approve licensing requirements in Resolution 2018-27 and Ordinance 2018-22.
3. Amend and approve licensing fees in Resolution 2018-27 and Ordinance 2018-22 at 50% cost recovery.
4. Amend and approve licensing fees in and Resolution 2018-27 and Ordinance 2018-22 at approximate 23% cost recovery.
5. Direct staff to take other action.

The City's Revenue Director and Senior Assistant City Attorney will present information on staff proposed amendments to the Business License Regulations, as well as recommended changes in associated Business License and Transaction Privilege Tax (TPT) fees.

City staff is proposing amendments to Business Licensing Regulations to obtain a complete picture of all businesses located within the City and to help with code compliance. The City currently only requires a business license for certain occupations. The City requires a local transaction privilege tax (TPT) license, but this is now issued by the Arizona Department of Revenue (ADOR). ADOR relies on the City and taxpayers to update its records.

The City Council in the past has directed staff to work on new Business Licensing Regulations. The proposed changes are outlined in the attached handout. The proposed fee changes have been posted on the City website and social media. City staff presented the proposed changes to the Chamber of Commerce Business Advocacy Group on April 19th, the Downtown Business Alliance group on April 30th, the Flagstaff Lodging and Restaurant Association on May 15th, and the Flagstaff Independent Business Alliance on May 22nd.  Additionally, information was provided to the Greater Chamber of Commerce and feedback was discussed with their representative. City staff hopes to meet with other community groups as well before the final adoption of changes

The primary changes are:

1. All businesses located within the City must obtain a business license unless exempted by law;
2. The business license fee will be reduced from $20/year to $8/year (the City is able to reduce the annual fee because more businesses will now be licensed);
3. The local TPT license fee will be changed from $46/one time to $38 $36/year (the City is seeking to recoup the $150,000/year being charged to the City by ADOR for local tax administration);
4. Peddlers and solicitors will no longer have a separate licensing system, they will obtain a business license.

Historically, and especially since the advent of Arizona Department of Revenue assuming administrative duties for Transaction Privilege Tax (TPT), the program has not fully recovered costs of the program with existing revenues.  Current revenues are approximately $57,000 wich represents a 20% cost recovery.  Though there has been some concern expressed regarding the annual fee, most reaction from the community outreach has been positive and businesses understand it is a reasonable cost and the justification.

Below are three options for Council consideration, based on concerns raised regarding $38 $36 annual fee and a request for a nominal fee.  The represent Option 1 with full cost recovery, Option 2 with 50% cost recovery, and Option 3 with approximately a 23% cost recovery.  Option 3 provides similar annual revenues as current fees represent.   Staff recommends Option 1.
 

# of Licenses
Business Licenses	7,000
Transaction Privilege Tax Licenses	6,684

 

Option 1: Full Cost Recovery

Description	Revenue	Staff Cost	ADOR Cost	Variance	Recovery %	Cost/License
Business License	$56,000	$56,020	$0	($20)	100%	$8
Transaction Privilege Tax License	$240,624	$92,586	$150,000	($1,962)	99%	$36

Description	Revenue	Staff Cost	ADOR Cost	Variance	Recovery %	Cost/License
Business License	$28,000	$56,020	$0	($28,020)	50%	$4
Transaction Privilege Tax License	$120,312	$92,586	$150,000	($122,274)	50%	$18

Description	Revenue	Staff Cost	ADOR Cost	Variance	Recovery %	Cost/License
Business License	$14,000	$56,020	$0	($42.020)	25%	$2
Transaction Privilege Tax License	$53,472	$92,586	$150,000	($189,114)	22%	$8

City staff proposes annual business licensing renewals in order to obtain a more complete and accurate picture of the Flagsaff business community. With an annual renewal, staff is able to determine the number and types of businesses that are operating, opening, relocating, and closing.  By cross checking the applications for business licenses with transaction privilege numbers issued by ADOR, staff can assist businesses in ensuring they are in compliance with having the applicable license, reporting under the correct category, and collecting the correct amount of tax for their business type.  In turn, we can again build a database, to share information and statistics with City staff, as well as interested community partners.

The recommended changes go beyond how the fees can assist with improving capturing data, staff is also making recommendations for code compliance to reflect current practices and to implement updated software for business licensing and renewal that will streamline the process and payments for businesses.  Most importantly is bringing the code up to current legal standards while eliminating duplicative licensing requirements.

City staff met with following Flagstaff business community groups to inform them of proposed business licensing regulation changes, and to solicit their views and comments:

April 19, 2018 Chamber Greater Advocacy Group
April 30, 2018 Downtown Business Alliance
May 15, 2018 Flagstaff Lodging and Restaurant Association
May 22, 2018 Flagstaff Independent Business Alliance

Additionally, material was shared and feedback received with the Greater Chamber of Commerce.

Regarding the comments received at the writing of this agenda item, individuals and groups expressed a desire for improved aggregate tax revenue reporting to better understand the economic health of the geographic areas or industries.  We are working with the Arizona Department of Revenue to help improve their reporting to the City.  Some were concerned with the proposed annual transaction privilege tax license fee of $38, which would allow for 100% cost recovery of City and State pass through administrative cost, however, most were not opposed to the fee.  Overwhelming, the feedback was positive in the efforts to ensure data is correct by knowing when businesses are no longer within the community, which would be achieved through an annual renewal.

After meeting with community groups, City staff obtained updated data concerning the numbers of businesses located in the City that require a local TPT license.   With that updated number, City staff is able to conclude that the annual $38 fee may be reduced to $36.  Also City staff reviewed other cities' business and TPT licensing fees.  This information will be presented at the Council Meeting simply for comparison purposes.  The City's fees are based on its administrative costs, which may differ from other cities.