REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Oliver Chi, City Manager
PREPARED BY: Dahle Bulosan, Chief Financial Officer
Subject:
title
Approve and authorize execution of a Professional Services Contract between the City of Huntington Beach and Hinderliter, De Llamas and Associates, for Sales and Use Tax Auditing Services
body
Statement of Issue:
City Council approval is requested to authorize a three-year professional services contract between the City and Hinderliter, De Llamas and Associates (HdL) to provide professional sales and use tax auditing services.
Financial Impact:
The proposed new contract includes an annual fixed fee for a total of $16,200 in fixed fees. In addition, HDL would receive 15 percent of any new sales and use tax revenue received by the City as a result of its extensive audit and sales and use tax recovery work, if the tax recovery work is approved by the State Board of Equalization (BOE). This audit fee applies to additional monies received in the first six consecutive reporting quarters beginning with the receipt of the audit revenue, and includes retroactive back-quarter adjustments obtained by the firm. Sufficient appropriation ($75,000 per year for three years) is budgeted in the Finance Department (account 10035201) for year one of the contract. Future years of the contract will be funded through out-year budgets to cover the remaining contract commitment. Payments will only be made for audit recoveries if approved by the BOE and after the revenue has been received by the City. The City received approximately $1.4 million in additional sales tax revenue from a comprehensive multi-year audit recovery project performed by HdL. This recovery was performed under the current contract with HDL that is expiring on July 31, 2020.
Recommended Action:
recommendation
Approve and authorize the Mayor and City Clerk to execute a “Professional Services Contract Between the City of Huntington Beach and Hinderliter, De Llamas and Associates, for Sales and Use Tax Auditing Services.”
end
Alternative Action(s):
Do not approve the recommended action, and direct staff accordingly.
Analysis:
The City of Huntington Beach’s FY 2020/21 Adopted Budget reflects $42.2 million in projected sales and use tax revenue. This revenue is deposited into the City’s General Fund and helps to finance core services, such as public safety, recreation, library, public works and other community programs. Ensuring the City receives its fair share of funding is critical as each dollar helps to fund these essential services. The State Board of Equalization (BOE) determines all sales and use tax revenues remitted to local governments; however, occasionally mistakes do occur.
To ensure that allocations made by the BOE are as accurate as possible, the City has utilized the services of HdL since 1988 to act on behalf of the City to pursue misallocated funds. The City’s most recent contract with HdL is a three-year contract, which ends on July 31, 2020. To ensure competitive pricing going forward, and re-evaluate the existing pool of firms providing sales tax auditing services, a Request for Proposals (RFP) was issued on April 23, 2020, to reconsider the pool of vendors that are eligible to perform this service.
As a result of the RFP, proposals were received from three firms: Hinderliter, de Llamas and Associates (HdL); MuniServices, LLC; and Sotomayor & Associates. The proposals were evaluated by a committee of Finance Department and Administration Department staff on the basis of the following: 1) Ability to provide the required services; 2) Approach to accomplishing the work plan; 3) Experience in providing similar services to other jurisdictions successfully; and 4) Cost.
HdL is recommended as the chosen firm based on the complete responsiveness to the RFP requirements, and their experience in providing the required services. After a competitive RFP process, the City is requesting approval to enter into a three-year professional services agreement with HdL totaling $225,000.
Currently, 500 local government agencies in 11 states utilize HdL to assist in the tracking, monitoring, and auditing of sales and property tax allocations by the State. As sales and use tax information is proprietary pursuant to State Law, jurisdictions choosing to hire a specialized auditing firm to verify the tax allocations made by the State must have City Council authorization allowing the firm access to the City’s sales and use tax information. HdL extensively analyzes sales and use tax data to ensure BOE allocations are correct on their client’s behalf. The audit recovery service has a 15 percent fee for all revenue recovered, up to a maximum of six quarters, due to the extensive work and documentation it entails, as well as testifying before the BOE if needed. This specialized firm identifies and corrects various tax allocation errors including, but not limited to, the following:
• Sales reported as “use tax” transactions.
• “Point of Sale” revenues misreported to administrative offices or other locations.
• Misallocations occurring because sales from multiple retail outlets, order desk, or offices are credited to a single location.
• Misallocations due to jurisdiction miscoding.
• “Use Tax” transactions exceeding $500,000 not allocated to the host agency.
• Construction-related sales listed as “installation” rather than “over-the-counter.”
• Warehouses that function as a “point of sales” but not identified as such.
• Misallocations that occur due to zip code, boundary, or jurisdictional discrepancies.
Below is a summary of the fixed cost and recovery fees responsive to the Request for Proposal:
|
Consultant |
|
Annual Flat Fee |
Recovery Fees |
Other |
|
HdL |
|
Year 1: $ 0 |
15% contingency fee |
Contingency applies to 6 quarters |
|
|
|
Year 2: $ 6,000 |
15% contingency fee |
Contingency applies to 6 quarters |
|
|
|
Year 3: $10.200 |
15% contingency fee |
Contingency applies to 6 quarters |
|
Vendor #2 |
|
$5,000 Subject to annual CPI |
8% contingency fee |
Contingency applies to 5 quarters after the Date of Correction and all eligible prior quarters back to and including the 3 quarters prior to the Date of Knowledge quarter with a maximum of 9 total quarter |
Staff analyzed and reviewed the proposals based on a variety of factors, including the consultant’s responsiveness to the RFP; qualifications and relevant experience; references; and resumes of key staff. Staff is recommending HdL to provide Sales and Use Tax Auditing Services as defined in Exhibit A and Exhibit B of the contract. HdL’s experience in identifying businesses whose sales and use tax remittances to the State were erroneously allocated to other jurisdictions, due to one or more of the aforementioned reasons, is exceptional.
The requested contract is to compensate HdL for audit activities that result in additional revenues to the City. Under the current three-year contract, HdL recovered approximately $1.4 million in revenue from the BOE on behalf of the City of Huntington Beach.
Please note that procedures are in place by the City’s Finance Department to help ensure that HdL is only paid for additional tax revenue received by the City attributable to their efforts. Staff has created an internal multi-step procedure to confirm amounts HdL submits for payment including obtaining copies of the BOE letters to HdL that confirm BOE approval of their audit findings made on behalf of the City. In addition, pursuant to the contract, payments are not made to HdL until the increased sales tax revenue is actually received by the City as a result of their audit work, which is also confirmed by the Finance Department by reviewing detailed proprietary sales and use tax reports provided by the BOE.
Environmental Status:
Not applicable.
Strategic Plan Goal:
Enhance and maintain high quality City services
Enhance and maintain the infrastructure
Strengthen long-term financial and economic sustainability
Enhance and modernize public safety service delivery
Attachment(s):
1. Professional Services Contract between the City of Huntington Beach and Hinderliter, De Llamas and Associates for Sales and Use Tax Auditing Services
2. Professional Services Rating Sheets