LEGISLATIVE ANALYST REPORT

TO: Honorable Members of the Board of Supervisors

FROM: Gabe Cabrera, Office of the Legislative Analyst (OLA)

DATE: July 7, 2003

SUBJECT: San Francisco's Flower Markets (File No. 021787)

SUMMARY OF REQUESTED ACTION

Motion (sponsored by Supervisor Sandoval) requesting the OLA to survey other major cities to find out if they require flower-vending stands or other similar cash-based businesses to keep track of all sales and what equipment or system is used. The Sponsor's office previously requested the OLA to review the history of flower-vending stands in San Francisco, and estimate the total revenue generated by them for the City (see File No. 020316).

EXECUTIVE SUMMARY

Compliance with tax laws in the United States relies heavily on self-assessments of what tax is owed. This is called voluntary compliance. This method of computing taxes eliminates the government's need for an army of tax accountants, but may also tempt owners of businesses to under-report their incomes and subsequent business tax liabilities. This is especially true of cash-based businesses.

The OLA conducted an expedited but thorough survey of other jurisdictions and discovered that there are few options for government agencies to promote taxpayer compliance and detect any underreporting by businesses. Specifically, our office contacted three cities in California (Berkeley, Los Angeles and San Diego) and the State Board of Equalization (BOE), which administers sales tax laws in California.

The elimination of the City's Gross Receipts Tax in 2001 also eliminated the City's ability to track gross receipts (income), as businesses are no longer required to report this information to the City Treasurer and Tax Collector. Nevertheless, if the primary objective of this request is to increase revenues for the City, the Board of Supervisors should urge the BOE to perform tax audits of San Francisco's flower-vending stands. Any sales taxes recovered as a result of these audits would increase revenues for local services. This option is described in more detail in the "Discussion" section of this report.

BACKGROUND

All flower-vending stands must have a permit issued by the Department of Public Works (DPW) to operate in San Francisco.¹ Currently, there are 15 stands doing business in the City and County of San Francisco. Flower-vending stands must also register with the City Treasurer and Tax Collector to pay local business taxes. According to their office, all currently registered flower-vending stands qualify for the City's Small Business Tax Exemption and therefore do not pay business taxes.²

Moreover, all sellers of goods, wares and merchandise at wholesale and retail must obtain a State Seller's Permit issued by the BOE.³ This applies to flower-vending stands too. In 2001, the Board of Equalization reported that there were 272 florists with seller permits operating in San Francisco.⁴ Of these 272 florists, the BOE could not differentiate which are flower vending stands. Presumably, the 15 stands operating in San Francisco are included in the BOE's report.

CURRENT LAW

In May 2001, the Mayor and the Board of Supervisors passed legislation repealing the City's gross receipts method of computing business taxes. This legislation was made retroactive to January 2000 with provisions to refund all taxes paid on the basis of gross receipts after such date. The City now computes business taxes based upon payroll expenses only. Furthermore, elimination of the Gross Receipts Tax also eliminated the City's ability to track gross receipts (income), as businesses are no longer required to report this information to the City Treasurer and Tax Collector.

OTHER GOVERNMENT AGENCIES

A. State Board of Equalization (BOE)

In general, retail sales of tangible personal property in California are subject to sales tax. The responsibility for paying the sales tax is upon the seller (retailer). Under State law, any person who evades the reporting, assessment or payment of sales taxes that would otherwise be due may be guilty of sales tax evasion. Violators are subject to fines and/or jail time. According to BOE staff, tax evasion decreases the revenue available to fund essential State and local services. These services include funds for police and fire departments, highway improvements, libraries, schools, parks, hospitals, courts and more. Plus, it may also hurt the honest business owners. When sales tax evasion is suspected, the BOE Investigations Unit responds and forwards the case to the appropriate BOE district office. The district office may then initiate a tax audit. Moreover, according to BOE staff, public awareness and involvement are essential in eliminating sales tax evasion. For this reason, the general public may report suspected sales tax evasion by contacting the BOE Investigations Division directly or its Tax Evasion Hotline.

OTHER JURISDICTIONS

A. City of Los Angeles

In Los Angeles, most business taxes are based on gross receipts. Like state and federal income taxes, businesses are responsible for calculating their own tax liabilities. The city's Office of Finance periodically performs scheduled and unscheduled audits to detect any underreporting by registered businesses. In addition, the city's Whistleblower Program provides rewards for information resulting in the recovery of business taxes. The amount of the reward may not exceed 10% of the taxes, interest and penalties, which are recovered as a result of the information provided.

Interestingly, selling any goods wares or merchandise on public streets and sidewalks on foot or using a pack, stand or pushcart is illegal, according to the Tax and Permit Division. This applies to flower-vending stands too. Nevertheless, the Division does not enforce this law. It has authority to administer city tax laws only. Therefore, it is possible for a registered business to illegally sell flowers or other goods on streets and sidewalks, while legitimately paying business taxes.

B. City of San Diego

Business taxes in San Diego are based on the number of employees (rather than gross receipts or payroll expenses). The annual fee is $34 for a business with twelve or fewer employees and $125 plus $5 per employee for a business with thirteen or more employees. Businesses may calculate their own fees and remit a check or fees may be calculated by the city and a bill sent to them. If a business miscalculates its fees the city will issue a supplemental bill for the outstanding amount.

Furthermore, selling any goods, wares or merchandise on any sidewalk or curb is illegal in San Diego, as is the case in Los Angeles.⁵ According to the City Treasurer's Office, sellers who sell from a fixed location must be on private property and posses a business tax certificate for the fixed location. Presumably, this applies to flower-vending stands too. However, a registered business may still illegally sell flowers on sidewalks, while legitimately paying business taxes, as the ban on selling on sidewalks is enforced by the Police Department, not the Treasurer's Office.

C. City of Berkeley

In Berkeley, most business taxes are based on gross receipts or payroll expenses. However, flower-vending stands, of which there are 8 currently registered with the city's Department of Finance, are regulated under the city's Sidewalk Vending Ordinance. ⁶ They are charged a flat tax of $240 plus $5 per employee per year. They calculate their own tax liabilities, but the Finance Department periodically performs audits to detect inadvertent and deliberate inaccuracies.

DISCUSSION

If the primary objective of this request is to increase revenues for the City, the following are a few suggestions for your consideration.

· Urge the BOE to prioritize sales tax audits of San Francisco's flower-vending stands. Businesses are still required to report gross receipts to the State and any amount of sales taxes recovered as a result of these audits would increase revenues for local services. Furthermore, interpretations of the State's tax laws, which are obtained by businesses during the audit process, provide them with a basis for proper reporting of future sales tax liabilities.

Of course the Board of Supervisors may require the City Treasurer and Tax Collector to perform business tax audits of flower-vending stands. However, according to that office, this approach would probably not be cost-effective because flower-vending stands are typically owner-operated and have relatively low payroll expenses, which the City uses to compute business taxes.

· Amend Article 12A of the City's Business and Tax Regulations Code to compute business taxes on flower-vending stands based on a flat rate rather than on payroll expenses, as is the case in Berkeley. As previously noted, all currently registered flower-vending stands qualify for the City's Small Business Tax Exemption and therefore do not pay business taxes. This approach would certainly increase tax revenues, but may also require prior voter approval.

CONCLUSION

The Legislative Analyst recommends that the Board of Supervisors urge the State Board of Equalization to audit San Francisco's flower-vending stands. If one assumes that flower-vending stands are generating more income in sales for which sales tax is not now being collected, the State and the City and County of San Francisco are not receiving their due share of sales tax revenues.

¹ San Francisco Public Works Code, Article 5, Street Flower Markets, Section 159.

² To qualify for the Small Business Tax Exemption, a business's tax liability cannot exceed $2,500.

³ Revenue and Tax Code, Section 6066-6077.

⁴ Taxable Sales in California (State & Use Tax), During 2001, Forty-First Annual Report, Page 9.

⁵ San Diego Municipal Code, Section 54.105.

⁶ Berkeley Municipal Code, Chapter 9.48.