TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: CAROL LYNCH, CITY ATTORNEY
DATE: September 6, 2005
SUBJECT: AN ORDINANCE OF THE CITY OF RANCHO PALOS VERDES AMENDING PROVISIONS OF CHAPTER 3.16 GOVERNING THE COLLECTION OF TRANSIENT OCCUPANCY TAX AND AMENDING THE RANCHO PALOS VERDES MUNICIPAL CODE
Read Ordinance No. ____ "AN ORDINANCE OF THE CITY OF RANCHO PALOS VERDES AMENDING PROVISIONS OF CHAPTER 3.16 GOVERNING THE COLLECTION OF TRANSIENT OCCUPANCY TAX AND AMENDING THE RANCHO PALOS VERDES MUNICIPAL CODE" by title only, waive further reading, and introduce the ordinance.
Our office has prepared an ordinance amending the City’s regulations governing local transient occupancy taxes. The proposed amendments are necessary to comply with several changes to state law implemented by Assembly Bill 1916 (AB 1916), which became effective January 1, 2005. The proposed ordinance also introduces some clean-up amendments in the City’s Transient Occupancy Tax ("TOT") ordinance to clarify its provisions. The proposed ordinance does not alter the amount of the tax or impose the tax on any new category of persons or otherwise effect any changes that require voter approval. The specific changes are discussed individually below.
Changes required by AB 1916
The following changes are recommended in response to the enactment of AB 1916:
1. New Requirement for an Exemption "Safe Harbor"
AB 1916 added new subsection (e) to Section 7280 of the California Revenue & Taxation Code. While subsection (e) does not require TOT ordinances to include any explicit exemptions, it requires a city that has elected to incorporate governmental exemptions into its municipal code to develop a standard form for hotel operators to use in documenting their guests’ eligibility for a TOT exemption. The state-imposed standard form requirement does not apply to any other exemptions from TOT.
Section 3.16.040 of the City’s TOT ordinance exempts various categories of persons from the TOT tax. The existing regulations delegate to the tax administrator (Finance Director) the authority to prescribe a form to document exemptions. Section 7280(e), however, requires that the City Council itself prescribe the form for this exemption. In addition, Section 7280(e) further requires that the Council decide which single form of proof will be acceptable to show that a governmental employee is on official business and subject to the exemption.
Accordingly, Section 3 of the proposed ordinance amends Section 3.16.040 to require use of a form that complies with subsection (e) of Section 7280 of the Revenue and Taxation Code. The Finance Director will ensure that the form utilized by the City satisfies the requirements of Section 7280(e), and the City Council will approve the form by resolution.
This particular change affects only the method of proving entitlement to exemption, and not the exemption itself. Accordingly, it does not require voter approval.
2. Exemption for Insurance Company Employees and Employees of Federal and State Credit Unions
Article 13, Section 28 of the California Constitution imposes an annual tax on each insurer doing business in the state and further provides that said tax "is in lieu of all other taxes and licenses, state, county, and municipal, upon such insurers and their property." Recently, State Farm Insurance Co., in reliance on this constitutional provision, has asserted that its employees staying at hotels on business are exempt from local transient occupancy taxes and all other local taxes.
In California Credit Union League v. City of Anaheim, the Ninth Circuit held that a similar provision in federal law that exempted federal credit unions from all taxation imposed by the United States, any state, or any local taxing authority exempted credit union employees on credit union business from the City of Anaheim’s transient occupancy tax. The Ninth Circuit acknowledged that "[i]mmunity from state or local taxation is only appropriate ‘when the levy falls on the United States itself, or on any agency or instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities, at least insofar as the activity being taxed is concerned.’" The Ninth Circuit held that the credit union employees paid for hotel rooms solely because they were in the city on credit union business, opining:
"Because the federal credit unions’ employees were attending to credit union business while staying at the Disneyland Hotel in Anaheim, they were ‘constituent parts" of the credit union and immune from Anaheim’s transient occupancy tax under Section 1768. . . . Therefore, Anaheim’s application of its transient occupancy tax to those employees violated Section 1768."
Because of the Ninth Circuit’s decision in the California Credit Union League case, in Section 3 of the Ordinance, we have amended paragraph B of Section 3.16.040 to exempt employees of federal or state credit unions from payment of the City’s TOT, provided they are on official business while staying at a hotel within the City.
Given the similar Constitutional provision exempting insurance companies from the payment of city taxes, the Ninth Circuit’s rationale in the California Credit Union League case leads to the conclusion that insurance company businesses are similarly exempt from the application of local transient occupancy taxes. Accordingly, Section 3 of the ordinance also adds new subsection D to Section 3.16.040 to expressly exempt any officer of or employee of an insurer when on official business for the insurer from the City’s TOT.
3. Longer Statute of Limitations for TOT Collection Actions
Before AB 1916, no statute specifically addressed the limitations period for filing TOT collection actions. The most likely statute of limitations was the three-year limit on actions on a liability created by statute. Consistent with this three-year limitations period, the City’s TOT regulations require hotel operators to maintain any records reflecting their TOT liability for at least three years.
AB 1916 added Section 7283.51 to the Revenue and Taxation Code. Section 7283.51 sets a four-year statute of limitations on TOT collection actions. Accordingly, Section 5 of the proposed ordinance amends Section 3.16.110 to require that operators keep records for at least four years.
4. New Requirements Regarding Successor Liability
TOT is an excise tax on the activity of renting hotel rooms to transients; it is not a property tax. Nevertheless, new Revenue and Taxation Code Section 7283.5 provides for "tax clearance certificates" for property owners. Cities must comply with Section 7283.5.
Section 8 of the proposed ordinance amends the City’s TOT regulations by adding new Section 3.16.150 to Chapter 3.16. Section 3.16.150 provides for the issuance of tax clearance certificates to property owners. In addition, Section 3.16.150 clarifies and supplements the requirements of Section 7283.5 as follows:
► First, Section 7283.5 does not address a hotel operator’s responsibility upon selling its business. The proposed amendment imposes reporting and payment obligations upon sellers, to reduce the likelihood that a hotel operator will sell its business and vanish without paying TOT for its final weeks or months of operation. These provisions further require sellers to inform buyers of the buyers’ potential responsibility for unpaid TOT.
► Second, Section 7283.5 allows a city to audit a selling hotel operator in order to determine that operator’s tax liability, but it does not set any time limit on the selling operator’s duty to supply records for such an audit. Furthermore, Section 7283.5 is unclear as to the city’s options if a selling operator refuses to supply records. The proposed ordinance establishes a 30-day time limit for the selling operator to provide the records as well as authority for the tax administrator (Finance Director) to estimate a seller’s liability if the seller fails or refuses to cooperate in the City’s issuance of a tax clearance certificate to the buyer.
Clean Up Amendments
The remaining changes effected by the Ordinance are clean up amendments.
5. Revised Definition of "Transient"
In accordance with Revenue and Taxation Code Section 7280, the City’s TOT ordinance imposes an occupancy tax on guests who spend 30 days or fewer at a time in a hotel. Our office recommends revising the definition of "transient" to address the circumstances under which longer stays will and will not create exemption from TOT. The proposed amendment set forth in Section 1 of the ordinance modifies the definition of "Transient" to require a written agreement between the operator and the occupant that obligates the occupant to pay market rate for the occupancy for a period of at least thirty-one (31) consecutive days in order to be excluded from the definition of "transient." The proposed ordinance also authorizes the Tax Administrator (Finance Director) to develop and promulgate standard forms setting forth the minimum substance of such agreements and to require submission of such forms with the operator’s TOT returns.
6. "Block Booking" Guests are Transients
Section 2 of the ordinance also amends the section that imposes the tax by adding new subparagraph (B) to clarify that people who stay for thirty or fewer days in a hotel, but whose hotel bills are paid under a long-term "block booking" agreement with a business or organization, still are transients for whom TOT must be paid.
7. Confidentiality of TOT Reports
In connection with the collection of TOT, Section 3.16.070 of the Municipal Code requires each operator to submit a return to the tax administrator (Finance Director) setting forth the total rents charged and received and the amount of tax collected for transient occupancies during the reporting period. Section 7056 of the California Revenue and Taxation Code requires that the City preserve the confidentiality of a taxpayer's financial information and exempts from disclosure information received in confidence from a taxpayer in connection with the collection of local taxes. In order to avoid confusion over the disclosability of the information collected from the hotel operators, our office recommends that the reporting provisions expressly acknowledge the confidentiality of this information. Accordingly, Section 4 of the ordinance amends Section 3.16.070 of the Municipal Code by adding new subsection B prohibiting disclosure of the TOT reports received by the tax administrator except as otherwise required by Revenue and Taxation Code Section 7056.
8. Use of a Lien Procedure to Collect Confirmed TOT Delinquencies
The City’s TOT ordinance includes an administrative procedure for calculating and assessing an operator’s delinquent TOT. By statute, a local tax delinquency has the "effect of a judgment against the person." Furthermore, a judgment creditor may create a judgment lien by "recording an abstract of the judgment with the county recorder."
Although the law is not completely clear on this issue, many cities have concluded that these statutes permit a city to create, by ordinance, a procedure for recording certificates of TOT delinquency to create liens for collection that have the same priority and effect as judgment liens. If a court disagreed and invalidated this provision, the city would have to refund any collection it had made because of the lien, or expunge the lien from the public records. If the City Council elects to incorporate such a lien procedure into its code, we recommend the revision that is set forth in paragraph (c) of Section 3.16.130, which is set forth in Section 7 of the ordinance.
If the City Council concurs with staff’s recommendation that the ordinance be adopted, the Council should read the proposed Ordinance by title only, waive further reading and introduce the Ordinance. The Ordinance may be adopted after second reading at the next Regular or Adjourned meeting of the City Council.
Adopting the staff recommendation will update the City’s transient occupancy ordinance to reflect recent amendments to state law.
Carol Lynch, City Attorney
Les Evans, City Manager
ORDINANCE NO. ___
AN ORDINANCE OF THE CITY OF RANCHO PALOS VERDES AMENDING PROVISIONS OF CHAPTER 3.16 GOVERNING THE COLLECTION OF TRANSIENT OCCUPANCY TAX AND AMENDING THE RANCHO PALOS VERDES MUNICIPAL CODE
THE CITY COUNCIL OF THE CITY OF RANCHO PALOS VERDES DOES HEREBY ORDAIN AS FOLLOWS:
Section 1. Title 3 of the Rancho Palos Verdes Municipal Code is hereby amended by amending subparagraph (H) of Section 3.16.020 of Chapter 3.16 to read as follows:
"H. ‘Transient’ means any person who exercises temporary occupancy or is entitled to temporary occupancy. Any person who exercises temporary occupancy or is entitled to temporary occupancy shall be deemed to be a transient until thirty consecutive calendar days of actual occupancy have elapsed unless there is an agreement in writing between the operator and the occupant obliging the occupant to pay market rate for the occupancy for a period of at least thirty-one (31) consecutive days. The tax administrator may develop and promulgate standard forms setting forth the minimum substance of such agreements, and may require submission of such forms with the returns required by section 3.16.070 of this chapter."
Section 2. Title 3 of the Rancho Palos Verdes Municipal Code is hereby amended by amending Section 3.16.030 of Chapter 3.16 to read as follows:
"Section 3.16.030 Tax imposed.
A. For the privilege of occupancy in any hotel, each transient is subject to and shall pay a tax in the amount of ten percent of the rent charged by the operator. The tax constitutes a debt owed by the transient to the city which is extinguished only by payment to the operator or to the city. The transient shall pay the tax to the operator of the hotel at the time the rent is paid. If the rent is paid in installments, a proportionate share of the tax shall be paid with each installment. The unpaid tax shall be due upon the transient’ s ceasing to occupy space in the hotel. If for any reason the tax due is not paid to the operator of the hotel, the tax administrator may require that such tax shall be paid directly to the tax administrator.
B. In the event that an agreement exists between the hotel and any person for occupancy, as defined in this chapter, for a period in excess of thirty (30) days, and in the event that such person allows occupancy by another person for thirty (30) days or less as a subtenant, guest, licensee or permittee, the person who has made the agreement with the hotel shall be subject to and shall pay the tax required by this chapter."
Section 3. Title 3 of the Rancho Palos Verdes Municipal Code is hereby amended by amending Section 3.16.040 of Chapter 3.16 to read as follows:
"Section 3.16.040 Exemptions.
No tax shall be imposed upon:
A. Any person as to whom, or any occupancy as to which, it is beyond the power of the city to impose the tax provided in this chapter;
B. Any federal or state officer or employee, including an employee of a federal or state credit union, when on official business;
C. Any officer or employee of a foreign government who is exempt by reason of express provision of federal law or international treaty;
D. Any officer or employee of an insurer when on official business for the insurer. For the purposes of this exemption, ‘insurer’ shall have the meaning set forth in Section 28 of Article 13 of the California Constitution.
No exemption shall be granted except upon a written claim therefor made at the time rent is collected upon a form complying with subsection (e) of Section 7280 of the California Revenue and Taxation Code, or any successor statute. Such form shall be signed under penalty of perjury. The tax administrator may require submission of copies of such forms with the returns required by Section 3.16.070 of this chapter."
Section 4. Title 3 of the Rancho Palos Verdes Municipal Code is hereby amended by amending Section 3.16.070 of Chapter 3.16 to read as follows:
"Section 3.16.070 Reporting and remitting; confidentiality.
A. Each operator shall, on or before the last day of the month following the close of each calendar quarter, or at the close of any shorter period which may be established by the tax administrator, make a return to the tax administrator, on forms provided by the tax administrator, of the total rents charged and received and the amount of tax collected for transient occupancies. At the time the return is filed, the full amount of the tax collected shall be remitted to the tax administrator. The tax administrator may establish shorter reporting periods for any certificate holder if the tax administrator deems it necessary in order to insure collection of the tax, and the tax administrator may require further information in the return. Returns and payments are due immediately upon cessation of business for any reason. All taxes collected by operators pursuant to this chapter shall be held in trust for the account of the city until payment thereof is made to the tax administrator.
B. In accordance with Section 7056 of the California Revenue and Taxation Code, all tax returns and information furnished by any operator pursuant to this chapter are confidential and shall not disclosed for public inspection except as otherwise required by said Section 7056 or any successor statute."
Section 5. Title 3 of the Rancho Palos Verdes Municipal Code is hereby amended by amending Section 3.16.110 of Chapter 3.16 to read as follows:
"Section 3.16.110 Records.
It shall be the duty of every operator liable for the collection and payment to the city of any tax imposed by this chapter to keep and preserve, for a period of four (4) years, all records as may be necessary to determine the amount of such tax as he or she may have been liable for the collection of and payment to the city, which records the tax administrator shall have the right to inspect at all reasonable times."
Section 6. Title 3 of the Rancho Palos Verdes Municipal Code is hereby amended by amending Section 3.16.130 of Chapter 3.16 to read as follows:
"Section 3.16.130 Actions to collect.
A. Any tax required to be paid by any transient under the provisions of this chapter shall be deemed a debt owed by the transient to the city. Any such tax collected by an operator which has not been paid to the city shall be deemed a debt owed by the operator to the city. Any person owing money to the city under the provisions of this chapter shall be liable to an action brought in the name of the city for the recovery of such amount.
B. Failure of an operator to collect tax required to be paid by any transient shall not excuse the operator’s obligation under this chapter. An operator must pay to the city any tax required to be paid by any transient, whether or not the operator collects such tax from that transient.
C. If any amount required to be paid to the city under this chapter is not paid when due, the tax administrator may, within ten years after the amount is confirmed according to the procedure set forth in Section 3.16.090 of this chapter, file for record in the office of the Los Angeles County recorder a certificate specifying the amount of tax, penalties, and interest due; the name and address, as it appears on the tax administrator’s records, of the operator liable for the tax, penalties, and interest; and the fact that the tax administrator has complied with all provisions of this chapter in the determination of the amount required to be paid. From the time of filing for record, the amount of the tax, penalties, and interest constitutes a lien upon any real property in the county owned by the operator or acquired by the operator thereafter. This lien has the force, effect, and priority of a judgment lien and shall continue for ten years from the time of filing of the certificate, unless sooner released or otherwise discharged, or unless renewed for subsequent periods in the manner prescribed by law. This chapter does not give the city a preference over any recorded lien that was attached before the date when the amounts required to be paid became a lien.
D. The amounts required to be paid by any operator under this chapter, together with all penalties and interest accrued thereon, shall be satisfied first in any of the following cases:
(1) Whenever the operator is insolvent;
(2) Whenever the operator makes a voluntary assignment of its assets;
(3) Whenever the estate of the operator in the hands of executors, administrators, heirs, or receivers is insufficient to pay all debts;
(4) Whenever the estate and effects of an absconding, concealed, or absent operator required to pay any amount under this chapter are levied upon by process of law."
Section 7. Title 3 of the Rancho Palos Verdes Municipal Code is hereby amended by renumbering Section 3.16.150 of Chapter 3.16 as Section 3.16.160.
Section 8. Title 3 of the Rancho Palos Verdes Municipal Code is hereby amended by adding new Section 3.16.150 to Chapter 3.16 to read as follows:
"Section 3.16.150 Reporting and remitting requirements upon transfer or cessation of business.
A. Each operator who is transferring, selling, or terminating its business shall notify the tax administrator in writing at least thirty (30) days in advance of the date of transfer, sale, or termination. If the decision to sell, transfer, or terminate the business is made fewer than thirty (30) days before the transfer, sale, or termination occurs, the operator shall notify the tax administrator immediately upon making that decision and in no event later than the date of transfer, sale, or termination. The operator shall concurrently notify any purchaser or transferee of its hotel in writing of the purchaser’s or transferee’s potential responsibility for unpaid collected taxes, if any, as set forth in this chapter and in Section 7283.5 of the California Revenue and Taxation Code, or any successor statute.
B. Upon cessation of business, whether by sale, transfer, termination, an operator shall, on or before the same day of the next month following the cessation of business, or on the last day of that month if no corresponding day exists, make a return to the tax administrator on forms approved by the tax administrator of the total taxable rents charged, the amount of tax collected for the reporting period ending on the cessation date, remittances made, if any, and the balance of the tax due. The balance of tax due, if any, shall be remitted to the tax administrator at the time the final return is filed. After filing the final return and remitting the balance due, the operator shall make its records of account available for a closeout audit by the tax administrator or his or her designee. Returns filed and taxes remitted and actually received by the tax administrator on or before the same day of the next month following cessation of business, or on the last day of that month if no corresponding day exists, shall be timely filed and remitted; otherwise, the taxes are delinquent and subject to the penalties imposed by this chapter.
C. Any person purchasing an ongoing hotel business may apply to the tax administrator for a tax clearance certificate showing the tax due, if any, from the selling operator as of a date specified in the tax clearance certificate request. For purposes of this section, successive hotel businesses conducted without substantial interruption at the same hotel shall constitute an ongoing hotel business.
(1) The issuance and effect of such certificates shall be as set forth in Section 7283.5 of the California Revenue and Taxation Code, or any successor statute.
(2) Before requesting records and conducting the audit permitted by subdivision (b) of Section 7283.5 of the California Revenue and Taxation Code, or any successor statute, the tax administrator shall proceed in such manner as he or she may deem best to obtain facts and information on which to base an estimate of the tax due. The tax administrator shall notify the selling operator of this estimate when requesting records for audit. If the selling operator fails to provide records in response to the request within thirty (30) days after the serving or mailing of the estimate and record request, the tax administrator may issue a tax certificate in the amount of the estimate.
(3) The city council may, by resolution, set an administrative fee for issuance of any such certificate."
Section 9. The City Council declares that, should any provision, section, paragraph, sentence, or word of this ordinance be rendered or declared invalid by any final action in a court of competent jurisdiction, or by reason of any preemptive legislation, the remaining provisions, sections, paragraphs, sentences and words of this ordinance shall remain in full force and effect.
Section 10. This ordinance is declaratory of existing law and merely clarifies certain provisions of Chapter 3.16 of the Rancho Palos Verdes Municipal Code. This ordinance does not increase the amount of the City’s transient occupancy tax, and it does not impose the tax upon anyone who is not already subject to the tax. Accordingly, the City Council hereby finds that voter approval of this ordinance is not required.
Section 11. The City Clerk shall cause this Ordinance to be posted in three (3) public places in the City within fifteen (15) days after its passage, in accordance with the provisions of Section 36933 of the Government Code. The City Clerk shall further certify to the adoption and posting of this Ordinance, and shall cause this Ordinance and its certification, together with proof of posting, to be entered in the Book of Ordinances of the Council of this City.
Section 12. This Ordinance shall go into effect and be in full force and effect at 12:01 a.m. on the thirty-first (31st) day after its passage.
PASSED, APPROVED and ADOPTED this _______ day of _______________, 2005.