The State of California considers the transactions tax to be a separate data base from the Bradley-Burns tax and requires separate agreements and resolutions with the CDTFA.  HdL Companies, the City’s current sales/property tax consultant, will also require a separate agreement for the transaction tax.

Once all documents have been submitted and processed by CDTFA, the CDTFA will start collecting the new tax on April 1, 2019. The City will receive its first advance at the end of June 2019.  The full quarter’s data will not be available until September 2019. 

In March 2019, the CDTFA will send a letter to each taxpayer in the region informing them of the new transaction tax requirements.  They will also send out press releases to the media and include an article in their quarterly Tax Information Bulletin which is received by most accountants and tax professionals.  Staff feels it is important to supplement this information with additional outreach and is planning to include a notice in the City’s utility billings to businesses and City and chamber of commerce newsletters as well as posting information on the City website.   

All sales tax data is confidential and only authorized positions in the City are allowed to examine the records of the CDTFA.  City Council action is required by resolution to name the authorized representatives of the City who may examine confidential sales, use and transactions taxes collected by the CDTFA.  Section 7056 of the Revenue and Taxation Code sets forth certain requirements and conditions for the disclosure of CDTFA records and establishes criminal penalties for the unlawful disclosure of information contained in or derived from, the sales, use, and transactions records of the CDTFA. 

The City Manager, Finance Director, Finance Division Manager, Business Tax Supervisor or other officer or employee of the District designated in writing by the City Manager to the CDTFA is appointed via the attached resolution to represent the City with authority to examine those transactions and use tax records of the CDTFA for purposes related to the following governmental functions of the City:

a)   City Administration;

b)   Revenue management and budgeting;

c)   Community and Economic Development;

d)   Business License tax administration;

e)   Other related City financial administration

The information obtained by examination of CDTFA records shall be used only for those governmental functions of the City.  The resolution also authorizes the City Manager to sign the CDTFA Agreement for State Administration of City Transactions and Use Taxes and the Agreement for Preparation to Administer and Operate the City’s Transactions and Use Tax Ordinance.

The Preparatory Agreement with CDTFA requires that each City implementing a transactions and use tax will pay their share of CDTFA’s preparatory costs to administer the new tax based on actual costs as established by the Revenue and Taxation Code Section 7272.  Actual charges to be billed include costs of developing procedures, programming for data processing, developing and adopting regulations, updating publications, designing and printing forms, developing instructions for the Department’s staff and for taxpayers, and other appropriate and necessary preparatory costs to administer the transactions and use tax ordinance as specified under section 11256 of the Government Code.  It is anticipated that the cost will be lower than the $175,000 cap authorized in the agreement due to the large number of California agencies (over 50 agencies) that will be implementing new transactions and use tax districts.  However, CDTFA cannot provide the total number to the participating agencies at this time. 

HdL Companies is also designated by resolution to examine the transactions and use tax records of the CDTFA pertaining to transactions and use taxes collected for the City by the CDTFA.  The person or entity designated by the resolution must meet all of the following conditions:

a)   has an existing contract with the City to examine those transactions and use tax records;

b)   is required by that contract to disclose information contained in, or derived from those transactions and use tax records only to the officer or employee authorized by the resolution to examine the information;

c)   is prohibited by that contract from performing consulting services for a retailer during the term of that contract;

d)   is prohibited by that contract from retaining the information contained in, or derived from those transactions and use tax records after that contract has expired. 

HdL will begin a business to business review of the CDTFA data with the first download in September 2019 as well as review all related “use tax” data bases to ensure that both sales and out of state purchases are being properly taxed and collected.  HdL’s experience has shown that the sooner the transaction tax is audited, the sooner the City gets to full compliance of the new tax. 

The contract with HdL will be a $100 per month charge for the transaction district tax reports and quarterly sales tax analysis.  This district tax process is separate from the Bradley-Burns local 1% sales tax agreement and analysis.  There will be a flat 25% fee for any initial audit finds, since most of the audit issues are related to non-payment rather than misallocations.  There will be no prospective payments.

Specific costs associated with implementation of the transaction tax cannot be determined by CDFTA at this time.  The agreement with CDFTA does place a cap on the implementation costs of no more than $175,000 for the City.  However, it is anticipated based on the number of agencies that will be implementing a transaction tax that the shared costs should reduce the City’s amount to less than the maximum cap amount.  An additional budget appropriation will be needed to cover this cost, since it is anticipated the CDTFA will provide the City the actual implementation charge in the current 2018-19 fiscal year.

The contract with HdL will be a $100 per month charge for the transaction district report and quarterly sales tax analysis.  The district tax process is separate from the Bradley-Burns local 1% sales tax agreement and analysis.  There will be a flat 25% fee for any audit finds, since most of the audit issues are related to non-payment rather than misallocation.  Any related expenses incurred during the current fiscal year will be absorbed within the current fiscal year budget.  Costs for following years will be allocated as part of the budget development process.

It is recommended that the City Council:

• Adopt a Resolution authorizing the City Manager to execute the attached Preparatory Agreement and Administrative Agreement with the California Department of Tax and Fee Administration for implementation of a local transactions and use tax;
• Adopt a Resolution authorizing the examination of California Department of Tax and Fee Administration’s transactions and use tax records by the City of Garden Grove and HdL Companies;
• Authorize the City Manager to execute an agreement with HdL Companies for transactions tax audit and information services;
• Authorize a budget appropriation in the amount of $175,000 from the General Fund to pay for costs associated with implementation of the transaction tax in the current fiscal year 2018-19.