MUNICIPAL AUDITING COMPANIES ARE BEING USED BY CITIES TO INCREASE DELIQUENT BUSINESS LICENSE TAX COLLECTIONSDecember 22, 2005Taxation Committee Legislative CommitteeThe following is for study only and hasNOT been approved by the Taxation Committee, Legislative or Executive Committees or the Board of Directors.Issue: How should C.A.R. deal with the Municipal Auditing Companies cities are hiring to collect delinquent business license tax revenue?
Options: 1. Do nothing. 2. Investigate the matter further. 3. Sponsor legislation. 4. Refer the issue to C.A.R.’s Legal Department for consideration. 5. Seek a Legislative Counsel opinion that cities cannot delegate their tax collection authority. 6. Other.Status/Summary: Cities are hiring municipal auditing companies (MACs) to help them collect delinquent business license taxes (BLTs). At the September 2005 meeting, it was believed that the prohibitions in law were insufficient to prevent cities from sharing confidential tax information with MACs. However, rather than seeking additional statutory protections, the committee requested that C.A.R. staff look into what would be involved in bringing legal action against a city thought to be sharing tax information with a MAC. It now appears that cities may not be, in fact, sharing confidential tax information with MACs. Moreover, legislative or legal action would not address the heavy-handed tax collection activities of the MACs, the primary problem with which REALTORS® are confronted with regard to this matter. Curtailing the use of the MACs by thecities – by confronting cities with an authoritative legal opinion that using MACs to perform actual tax collections is prohibited by law – may be a best course of action. DiscussionDue to the budget deficits that the state has faced in recent years and the resulting cuts in appropriations to local governments, many cities are turning to MACs to supplement revenues. MACs aggressively market their services to cities as “no cost” revenue sources. The companies assistcities in collecting delinquent tax revenues by auditing revenue databases to identify delinquent taxpayers and then contacting the taxpayer to collect the past due taxes. Generally, these companies keep from 20% to 50% of the tax revenue collected.The efforts of cities to collect delinquent BLT revenues are assisted by Assembly Bill 63 (Cedillo, 2001). This measure allows the FTB to provide tax information to city officials including name, address, Social Security Number or taxpayer identification number, and business activity code. Comparing FTB’s records for businesses operating within a city’s jurisdiction against the city’s records of the businesses that have paid the BLT can reveal potential delinquent BLT accounts. Due to constrained city budgets, many cities are turning over finding and collecting delinquent BLT accounts to MACs rather than dedicating limited city resources to those efforts.AB 63, however, clearly states: “Tax information provided to the taxing authority of a city many not be furnished to, or used by, any person other than an employee of that taxing authority.” This restriction is reiterated in the contract each city signs with the FTB to acquire the tax information. As a result, at the September 2005 meeting, it was believed that these prohibitions were insufficient to prevent cities from sharing confidential tax information with MACs. However, rather than seeking additional statutory protections, the committee requested that C.A.R. staff look into what would be involved in bringing legal action against a city thought to be sharing tax information with a MAC and report back to the committee at the January 2006 meeting.Bringing a legal action against a city suspected of sharing confidential tax information with a MAC is problematic given the cost and evidence requirements. The C.A.R. Legal Department was contacted about taking this course of action and, depending on the complexity of the case, a court case could be brought for less than $100,000 but the cost could ultimately exceed $200,000. In addition, while there is circumstantial evidence that the MACs are receiving information to which they are not entitled, the fact of such sharing would have to be proven which may or may not be possible.This is particularly so given that there is an avenue available to cities around the prohibition found in law and the FTB contract. According to the FTB, if the information is independently confirmed by thecity, the information is deemed to belong to the city and, at that point, it may do with it as it chooses – including sharing it with a MAC.In addition, cities and/or the MACs may be getting information about potentially delinquent BLT accounts through any number of readily available databases containing the names and addresses of businesses operating in each city of the state. By comparing these names against a list of those that have paid a city’s BLT, cities and MACs can identify businesses that may have been delinquent in paying the BLT. As a result, the data sharing that was believed to have been occurring may not, in fact, actually be happening.However, even if the sharing of FTB tax information is occurring and it is successfully dealt with through legislative or legal action, such actions would not address the heavy-handed tax collection activities of the MACs, the primary problem with which REALTORS® are confronted with regard to this matter. Of key importance on this point is that C.A.R. staff has received an oral opinion – and has requested a written opinion – from the Office of the Legislative Counsel that cities cannot deputize an independent third party to collect delinquent BLTs. Therefore, curtailing the use of the MACs by the cities – by confronting cities with an authoritative legal opinion that using MACs to perform actual tax collections is prohibited by law – may be a best course of action. (Many of the concerns described above have been shared by C.A.R. staff with the author of the report required by AB 63 on the impact of that legislation. The Legislature will undoubtedly look to that report when considering whether to extend or eliminate the sunset date ofDecember 2008 contained in AB 63. If the AB 63 law is not extended, the FTB will not be able to continue sharing the data it now provides to cities under the provisions of AB 63.In addition, C.A.R. could attempt to legislatively change how the BLT is applied to businesses – please see the separate Issue Briefing Paper on “Local Business License Taxes.”)