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Council Communication

Title:	First Reading of an ordinance entitled "An Ordinance Amending Sections 4.34.050, 4.34.070, 4.34.110, 4.34.120, 4.34.130 and 4.34.140 of Food and Beverage Tax Code of the City of Ashland to Specify Application of Delinquent Payments, Clarify Appeals and Correct Errors."
Dept:	Legal Department
Date:	July 16, 2002
Submitted By:	Paul Nolte
Reviewed By: ........................	Greg Scoles, City Administrator

Synopsis:	This ordinance amends the city's food and beverage tax code to clarify how payments are to be applied when an operator is delinquent in remitting taxes. The ordinance also explicitly provides that returns will not be considered as filed until they are actually received by the city. Other amendments clarify that when an operator owes taxes for previous reporting periods, any payments received are to be applied first to outstanding penalties and interest, then to delinquent taxes then to current taxes. Section 4.34.070 has been modified to limit the appeal rights of an operator to those situations where the operator has failed to file a report thereby requiring the finance director to estimate the amount of taxes due. The operator can then appeal the amount of the estimate to the council. Several other sections are amended for "housekeeping" reasons to correct grammatical and other errors.
Recommendation:	Staff recommends approval of the ordinance for first reading. Council may want to consider additional suggestions for amendments set forth in the attached memorandum in paragraph 5.
Fiscal Impact:	No direct fiscal impact is anticipated should the proposed amendments be adopted. A savings in staff time will result from the more efficient administration of the tax code if the amendments are adopted. A direct fiscal impact will occur if council elects to increase operator remuneration as described in paragraph 5 of the attached memorandum.
Background:	Additional information regarding these modifications can be found in the attached memorandum previously sent to the council on June 26th.

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ORDINANCE NO. 2002-_____

AN ORDINANCE AMENDING SECTIONS 4.34.050, 4.34.070, 4.34.110, 4.34.120, 4.34.130 AND 4.34.140 OF FOOD AND BEVERAGE TAX CODE OF THE CITY OF ASHLAND TO SPECIFY APPLICATION OF DELINQUENT PAYMENTS, CLARIFY APPEALS AND CORRECT ERRORS.

THE PEOPLE OF THE CITY OF ASHLAND DO ORDAIN AS FOLLOWS:

Annotated to show deletions and additions to the code sections being modified. Deletions are lined through and additions are underlined.

SECTION 1. Section 4.34.050 of the Ashland Municipal Code is amended to read:

SECTION 4.34.050 Reporting and remitting. On or after July 1, 1993, every operator shall, on or before the 25th last day of the month following the end of each calendar quarter (in the months of April, July, October and January), make a return to the director, on forms provided by the City, specifying the total sales subject to this chapter and the amount of tax collected under this chapter. At the time the return is filed, the full amount of the tax collected shall be remitted to the director. A return shall not be considered filed until it is actually received by the director. Any payment made under this section shall first be applied to any delinquent taxes owed for previous reporting periods. If the delinquent taxes include penalties or interest the payment shall first be applied to penalties then to interest then to the underlying tax. The director may establish shorter reporting periods for any operator if the administrator director deems it necessary in order to insure collection of the tax and the administrator director may require further information in the return relevant to payment of the liability. When a shorter return period is required, penalties and interest shall be computed according to the shorter return period.  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 is made to the director. A separate trust bank account is not required in order to comply with this provision. (Ord. 2716 S7, 1993)

SECTION 2. Section 4.34.070 of the Ashland Municipal Code is amended to read:

SECTION 4.34.070 Failure to Collect and Report Tax--Determination of Tax by Director. If any operator should fail to keep adequate records or refuse to pay the tax imposed by this chapter, or to make, within the time provided in this chapter, any report and remittance of the tax or any portion required by this chapter, the director shall proceed in such manner as deemed best to obtain facts and information on which to base the estimate of tax due. As soon as the director shall procure such facts and information as is able to be obtained, upon which to base the assessment of any tax imposed by this chapter and payable by any operator who has failed or refused to collect the same and to make such report and remittance, the administrator director shall proceed to determine and assess against such operator the tax, interest and penalties provided for by this chapter. In case such determination is made, the director shall give a notice of the amount so assessed by having it served personally or by depositing it in the United States mail, postage prepaid, addressed to the operator so assessed at the last known place of address. Such operator may make an appeal of such determinations as provided in section 4.34.080. If no appeal is filed, the director's determination is final and the amount thereby is immediately due and payable.

SECTION 3. Section 4.34.110 of the Ashland Municipal Code is amended to read:

SECTION 4.34.110 Actions to Collect. Any tax required to be paid by any operator under the provisions of this chapter shall be deemed a debt owed by the operator to the city. Any such tax collected by an operator which has not been paid to the city shall be deemed a debt owned to 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 Of Ashland for the recovery of such amount.

SECTION 4. Section 4.34.120 of the Ashland Municipal Code is amended to read:

SECTION 4.34.120 Violations--Infractions. Any operator or other person who fails or refuses to comply as required herein, or to furnish any return required to be make made, or fails or refuses to furnish a supplemental return or other data required by the director, or who renders a false or fraudulent return or claim, or who fails, refuses or neglects to remit the tax to the city by the due date, is guilty of an infraction and shall be punished as set forth in section 1.08.020 of the Ashland Municipal Code.

SECTION 5. Section 4.34.130.C of the Ashland Municipal Code is amended to read:

SECTION 4.34.130 Confidentiality. Except as otherwise required by law, it shall be unlawful for the city, any officer, employee or agent to divulge, release or make known in any manner any financial information submitted or disclosed to the city under the terms of this chapter. Nothing in this section shall prohibit:

A. The disclosure of the names and addresses of any person who are operating a restaurant; or

B. The disclosure of general statistics in a form which would prevent the identification of financial information regarding an individual operator; or

C. Presentation of evidence to the court, or other tribunal having jurisdiction in the prosecution of a claim by the administrator director or an appeal form from the city administrator director for amount due the city under this chapter.

SECTION 6. Section 4.34.140 of the Ashland Municipal Code is amended to read:

SECTION 4.34.140 Examining Books, Records, or Persons. The city, for the purpose of determining the correctness of any operator of a restaurant tax return, or for the purpose of an estimate of taxes due, may examine or may cause to be examined by an agent or representative designed designated by it for that purpose, any books, papers, records, or memoranda, including copies of operator's state and federal income tax return, bearing upon the matter of the operator's tax return.

The foregoing ordinance was first read by title only in accordance with Article X,
Section 2(C) of the City Charter on the _____ day of _____, 2002,

and duly PASSED and ADOPTED this _____day of _____, 2002.
Barbara Christensen, City Recorder

SIGNED and APPROVED this ____day of _____, 2002.
Alan DeBoer, Mayor

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Memo

DATE: June 26, 2002
TO: Mayor and City Council
FROM: Paul Nolte
RE: Revisions to the Food and Beverage Tax Code

Attached are revisions to the food and beverage tax code that will be proposed for the July 16, 2002, council meeting. Because of the interest in these changes, I wanted to get them into your hands and to interested operators as soon as possible. For your convenience I have also attached the entire code chapter even though not all sections are proposed to be modified.

1. Clarification of payment application when delinquencies exist. Section 4.34.050 has been amended to provide that returns will not be considered as filed until they are actually received by the city. Other amendments clarify that when an operator owes taxes for previous reporting periods, any payments received are to be applied first to outstanding penalties and interest, then to delinquent taxes then to the current taxes. This clarification is necessary to avoid a problem where an operator is delinquent for several quarters and requests payments be applied or divided among several different tax periods. Increased accounting and tracking costs result from the creation of multiple accounts for one operator.

This section has also been amended to make it clearer when penalties and interest are due for monthly reporting periods. Under section 4.34.050, the finance director has the authority to move a chronically or significantly delinquent operator from a quarterly reporting period to a monthly one.

2. A perspective on penalties. The penalty section (4.34.060) has not been modified. Perhaps the greatest recent criticism has been focused on this section. To put penalties in perspective, an analysis of the criminal vs. civil system may help.

Funds held by an operator are held in trust for the city. They are held in trust because the operator collects the tax on behalf of the city from the restaurant customers. The operator is paid to collect this tax from the customers. Failure to pay funds held in trust is a form of embezzlement. Embezzlement is classified as theft under Oregon criminal law (ORS 164.015). Depending on the amount illegally withheld, the theft is either a misdemeanor or a felony. Failure to pay entrusted funds in an amount exceeding $750 is a class C felony (ORS 164.055). A class C felony is punishable by up to five years in prison and a maximum $100,000 fine.

In contrast, the City has chosen, both legislatively and administratively, to treat the conversion of entrusted funds as a civil matter. The code provides that failure to remit taxes when due is to

This does not necessarily preclude the City from treating the conversion criminally, but it does indicate that the City can also pursue its civil remedies through the judicial system.

Administratively, staff has attempted to enforce nonpayment of funds though civil, not criminal, proceedings. By working with delinquent operators, developing payment plans, establishing deadlines, etc., the City has treated these delinquencies as debts not crimes.

The code as currently written requires penalties to be assessed and collected. The civil penalties under the tax code pale in comparison to the criminal code. For example, if an operator fails to remit $2,000 of taxes collected in the restaurant, the maximum penalty is $400. If prosecuted as a crime the maximum penalty is $100,000. These civil penalties are neither excessive nor oppressive.

Should the council desire to modify penalties, one alternative to consider would be to consider the elimination of penalties if favor of terminating utilities when an operator fails to remit taxes. Additional details would need to be researched on this alternative but one scenario could be: For any operator who fails to remit taxes in excess of $10,000 or for more than one reporting period, notice of utility termination would be delivered to the operator. The operator would have 72 hours to remit the taxes and interest or the utilities would be terminated.

3. Clarifying appeals. Section 4.34.070 has been modified to limit the appeal rights of an operator to those situations where the operator has failed to file a report thereby requiring the finance director to estimate the amount of taxes due. The operator can then appeal the amount of the estimate to the council. If the operator files a report, but underpays the taxes, the calculations are merely mathematical, and there is no reason to provide an appeal.

4. Housekeeping amendments. Several sections are proposed to be amended to correct grammatical and other errors.

5. Suggestions not incorporated into this draft. Several suggestions to modify the ordinance have been made over the past several months. These suggestions remain open for council consideration.

One suggestion was to increase operator remuneration from 5% to 10%. The council may want to further consider this suggestion. The fiscal impact would diminish the amount available for open space purchases and waste water treatment plant payments by about $75,000 per year, or $600,000 over the remaining life of the ordinance.

Another suggestion would be to lower the interest rate on delinquent accounts from 1% per month to 9% per annum.

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