[0:03] Welcome, everybody, to yet another edition of California Society Municipal Finance Officers webinar series. My name is Craig Lesterner. I am your host for today. I'm going to give it just a minute or so as we get people on boarded into the session. I'm not sure how many people have registered, but I'm sure it's a good amount as we usually get a good crowd for these sorts of topics. But today we're talking about sales tax 101. And so the question might come up, why do you need to know what's what about sales taxes? And why is there 101 classified it?

[0:32] because they're fundamental to what we do here in government,

[0:35] not just in California, all.

[0:36] That's what we're going to be talking about today.

[0:38] But elsewhere, where I live in Chicago,

[0:40] one of my first jobs out of college

[0:42] was learning the laws and the legal applications

[0:46] of sales tax limitations and how they apply to things

[0:48] like restaurants and how they don't apply for food

[0:50] taken for consumption at home.

[0:53] And all sorts of differentials like that

[0:55] that make it just as complex as it needs

[0:58] to be to give you a headache.

[0:59] And to require other people to kind of help

[1:01] us understand these sorts of things. So as we get people sort of in session, which I'm saying we've

[1:06] got about 200 people now, so I think that's a pretty good number to move on with. So without further ado,

[1:14] please participate with poll questions today. We have poll questions today as we do almost every time.

[1:20] If you can't take at least 75% of them or the math is because we have six of them,

[1:24] five of the poll questions you will not be eligible for CPU credits. So if you need CPU credits,

[1:30] you need to have told us before hand that you want to see any credits. One and two, you have to

[1:35] take poll questions. And of course, if you don't need to see any credits, take the poll questions

[1:39] too because they're funny and interesting and they'll keep you informed as to what's going on

[1:43] representation. The session is being recorded and we'll be available for review and download at

[1:48] that website, which I'm not going to read, but it's time to see some of those websites. I think you

[1:52] just go in and look for Agendas. You'll find it. But without further ado, again, I'd like to introduce

[1:59] our speakers for today both Bobby Young and Tim Kirby. Of course it's running in front of

[2:06] my bios. Bobby Young has 26 years of local government experiences director of client services

[2:12] at HDL. He leads the team in developing reporting advancements and efficiencies for clients

[2:17] along with providing meaningful presentations regarding both sales tax and transaction tax

[2:22] districts. Tim is the director of finance for the city of Sunnyvale California and Tim has been

[2:26] with Sunnyville for 24 years working in both the Department of Finance and Public Works and

[2:30] varying capacities. Tim manages the city's finance department now including his court functions

[2:35] of budget, accounting, purchasing, utility billing, revenue collection and paywall. And without

[2:40] further a view of you, I do. I will hand it over to Bobby and give me a second Bobby while I get

[2:46] you control. You should have control. Yep. Thanks so much Greg. I'm just going to move it one.

[2:52] Perfect. Welcome, everybody. Thanks. Thanks so much for joining us today. It's

[2:57] glad great to see so many participants joining Tim and myself to kind of walk

[3:02] through some of the basics of sales tax with sales tax 101. You can see on

[3:07] the screen here kind of what we're going to be going through there. A little bit of

[3:10] history, allocations and data. How we do auditing and a little bit of forecasting.

[3:15] Then Tim's I'll turn it over to Tim and he'll he'll go deeper into specifically

[3:20] Sunnyvale and how they used sales tax data and really go deep and and put it to put it to use to

[3:27] especially when it comes to businesses and business retention.

[3:32] Let's see. Okay. There we go.

[3:34] So let's start with the history. Go back in time, lay in some some foundation groundwork here.

[3:41] You'll see 1933 was when the first state sales tax got adopted. If you flash back in your history

[3:49] books. You can kind of realize what was going on there in 1933, post great depression here in

[3:56] the state. It's really starting to figure out how to generate revenue to get the economy going

[4:01] and structure built. As you kind of go down, I'm going to use some of my slides here in the

[4:06] presentation and say goodness, we're recording this and it'll be available, is meant to be a little bit

[4:12] of a more of a history or resource guide.

[4:19] There we go.

[4:20] So I won't be going in deep on everything.

[4:22] It'll be here for you if you want to flash back and come back into

[4:26] remind yourself.

[4:27] But one of the items middle of the screen here,

[5:00] County's hint hint when it, as Craig mentioned, there will be quizzes that go along. So 1962 was when our local Bradley Burns got enacted and that's really the portion that we focus on the most as you see, you kind of scroll down 1969 as when counties were authorized to go to the voters for transactions use tax over rise. Then here, as we kind of get closer to more modern history. Scrolling down, we had a couple

[5:29] A couple of few years there of state sales tax increases to the base rate, 1993.

[5:37] Prop 172 is imposed.

[5:39] And as many of you know, and I'll talk about it in a couple of slides, prop 172 ends up

[5:44] being another piece of the sales tax funding sources, especially when it comes to public

[5:50] safety.

[5:51] 2004 is when cities finally got authorized to seek voter approval for transactions use

[5:57] tax overrides, thereby not needing legislative approval to do so. Just go right to the voters.

[6:03] So 2004 was such a big year for us here in the state. And then most recently, 2019,

[6:11] probably the, you know, aside from a lot of our history when it comes to sales tax,

[6:16] AV-147 and the implementation of the Wayfair decision became so crucial when it came to how sales

[6:23] tax gets allocated locally. So just some points in time to lay it in. And the first poll question,

[6:31] Tim, I'll let you let you run with this. Yeah. And before I read it, I just want to throw out

[6:36] there for the attendees that Craig has told us we have to hit at least an 86% response rate. So

[6:42] please, please jump in there and respond. So in what year was the local Bradley Burns 1% sales

[6:50] tax rate enacted for all cities and counties. And now I'll play the Jeopardy music but I don't have it.

[6:58] That's that poll should have jumped up on your screen there. Yeah. It says host and

[7:05] panelists can't vote. So who's the link this morning and ready to get to that 86%.

[7:15] All right. Just a couple more.

[7:20] Feel free. Oh, looks like you got it. Yeah. You got the chat wonderful. And folks, so you know, I'll be monitoring the chat.

[7:30] If you have questions along the way, go ahead. You can also put them in the chat and we'll try to weave them in throughout the presentation.

[7:41] All right.

[7:44] So I'm going to move us through. Oh, it looks like it popped up. Oh, 79% said 1962.

[7:52] Good job there. But good job. We paid our 86% mark. Right. Yeah. Absolutely. So 1933 was the first time

[8:01] the state's portion was enacted.

[8:06] 1971, I don't think we had any. Maybe that was the birth year for

[8:11] a lot of attendees. So it's a it's a popular year.

[8:17] And 2003 almost 2004 was when cities got the

[8:21] authorization to go to the voters for an extra tax on top of the normal 1% Bradley Burns.

[8:29] Okay. So let's keep moving through. Let me see if this is going to pop up the fly-ins.

[8:37] there we go. Base sales tax rate as you see on the screen total 7.25% that's

[8:44] the statewide base. Now as we know in many populated areas populated counties

[8:49] and it's become extremely popular for about the last decade we've had local

[8:54] agencies and counties add on top of that additional tax rates to get more

[9:01] funding, but as far as the base rate goes, the 1% Bradley burns. That's what every city

[9:07] is entitled to as part of the base rate. Then we also have the Countywide Transportation

[9:12] Fund. A quarter cent, many refer to it as the local transportation fund or the LTF. A lot

[9:19] of counties have their own transportation agency, whether it be Orange County, L.A., Riverside,

[9:26] San Bernardino or San Mateo, Santa Clara, many into the North, that's where the .25%

[9:33] transportation funding lands. And then as I made mention during the, during the history,

[9:39] we've got prop 172 and being half-sent part of the base rate. We're not going to take a deep dive

[9:46] here, just know that prop 172 gets allocated to counties first, then inevitably down to cities

[9:53] and at different proportional rates, but it is a part of majority of cities funding them.

[10:00] And the restrictions on the 172 portion. So at a high level, pretty much just public safety and public safety is broadly defined whether it be police fire. We've also, I've had conversations with folks that use it for lifeguards, if you've got a public beach area. Again, especially if those lifeguards are housed or managed within your police department. So it's, and then it's

[10:29] can be salaries, can be equipment, kind of a broad stroke there on what it could be spent on,

[10:35] but the underlying focus is public safety.

[10:41] And as a kickoff there, a little bit of a reminder,

[10:44] at the CSMFO conference in February, down here in Southern California and in Anaheim, I'll be doing

[10:50] a presentation on specifically on Prop 1172, kind of a Prop 1172 101, with folks from county and cities

[10:57] to kind of go deeper on that remark, on that side.

[11:01] So Tim, thanks for that reminder.

[11:06] Let's just spell a little bit of the rumors as well.

[11:09] So here in California, we have our base rate of 7.25.

[11:13] So yes, 7.25% is the largest or the highest sales tax rate

[11:19] in the country, but as a reminder here,

[11:22] this isn't just the state's rate.

[11:26] as we saw that breakdown, it's the accumulation of transportation funding

[11:31] propensity to and also the 1% local Bradley Burns. So it's a little bit of a

[11:36] difference when especially when we're focused on some of the other states. These

[11:42] rates that you see like 7% out in Tennessee, that is their state rate. Then locals

[11:48] get to add on top of that. So while we are the highest in the nation, just here as

[11:55] as far as the state of the state's rate,

[11:58] when we combine and then average it out,

[12:00] it's actually Tennessee that is the highest in the nation

[12:03] as far as average sales tax rate at nine and a half percent.

[12:07] We are number seven in the country

[12:09] when we factor in all of our local add-ons.

[12:13] But another big point as you see down at the bottom of the screen,

[12:16] Hawaii is the lowest at four percent,

[12:19] but that tax breath percentage

[12:21] and really kind of spanning what each state allows to be taxed, really starts to change the picture a little bit.

[12:31] Here in California, we only tax about 19% of what otherwise could be taxed, whereas then you look down below at Hawaii with a low sales tax rate,

[12:41] and they tax almost 94% of all items, whether it be goods and services, goods and services,

[12:50] or anything allowed within their own constitution to be taxed they do.

[12:57] So again, it kind of changes the mantra, I think, for, oh, you know, California is a high tax

[13:04] to rate state. Yes, but we've got some qualifiers in there. So just a little bit extra on the tax rate.

[13:16] As Craig, I think in most everybody kind of gets tripped up, right? Back before 2017, as you look

[13:23] on the screen here, far left, we had the Board of Equalization or BOE. Very easy acronym to remember.

[13:29] They were the ones who were administering our sales tax returns and thereby the data.

[13:36] So a lot of us got kind of entrenched with BOE in 2017, a little bit of a change in the day-to-day operations.

[13:43] The legislature decided that there could be, the day-to-day could be a little bit better if it was under the authority of the governor instead of the four board elected members of BOE.

[13:57] So, they moved all the day-to-day operations over to and created the California Department

[14:04] of Tax and Fee Administration, or CDTFA, and kind of the new acronym.

[14:09] Again, everybody kind of gets tripped up there, but this change happened in 2017, and it's

[14:15] what we're working with today.

[14:17] There's also, as you see the far right, a office of tax appeals anytime.

[14:21] And we have a taxpayer who wants to question CDTFA

[14:26] and their enforcement of revenue and taxation code.

[14:29] It ends up inevitably with the office tax appeals.

[14:33] So just kind of knowing it administratively

[14:35] who's over the top of our sales tax.

[14:38] What is taxed?

[14:40] And in a simple form definition why sales tax is imposed

[14:43] on all sales of tangible personal property.

[14:46] I've got a slide coming up here to talk about what isn't,

[14:50] but we'll reside there of tangible personal property, and it's only taxed once when purchased or used by the ultimate consumer.

[14:59] So read.

[15:00] If a retailer buys or retail or buy goods at wholesale, they're by not paying sales tax, right? And then would collect tax when sold to the consumer. And retailers do so. They file for a resale or permit and provide that to anybody they buy goods from. So, again, just a little bit of a definition there. What is not taxed? I've got some bullet points here. But most notably you see down at the bottom of the screen.

[15:28] We've got CDTFA publication 61, it's 26 pages of a lot of small print of everything that isn't

[15:35] taxed. Most notably property utilities, merchandise sold to the federal government,

[15:41] food sold for a home consumption. So these are some items and think about that slide that I just

[15:46] showed you when Hawaii tax is 94% of goods or services that could be taxed. We've got a lot of

[15:56] exemptions, but you can find them all under publication 61.

[16:00] Hey, Bobby, this is a backing up a bit. This is a great area where you see a lot of attempts

[16:08] legislatively to maybe expand the base. And also you see the impact of changing markets,

[16:15] the most notable one in this example might be computer software right used to buy,

[16:19] I'm going to aid myself here, but it used to buy a stack of discets to load software. That was

[16:24] taxable. Yeah. Now you just downloaded it's not, right? So where are we at with that just generally

[16:32] in this state right now in terms of the taxable base? Yeah, it's really been on a continual decline,

[16:41] not so much on a pathway to expansion. And I think it's twofold. It's easier when you've got known

[16:51] to just, you know, exclude. And I think most recently we've had things like female health

[17:01] products that, you know, kind of get petitioned or even children's health products that, you know,

[17:08] get petitioned like things like diapers, petitioned to not be taxable. So it's easier because you've got

[17:16] the unknown there. The unknown is really the part where I think everybody gets tripped

[17:21] up, especially the legislature, if it's a matter of trying to expand the base into things

[17:26] like services, accounting services or attorneys and other types of professional services, is

[17:35] the unknown of, well, how much revenue are we talking about with regards to, you know,

[17:42] So what's our big number that would be taxed, thereby how much tax revenue would it generate,

[17:49] right?

[17:49] It's the unknown of, well, how much are attorneys and accountants charging right now?

[17:57] And then what's a reasonable tax rate around that?

[18:01] I think the 7.25, most of us would agree, is far too much for things like professional

[18:07] services.

[18:07] And I think that that's where the legislature and folks looking to expand the base really

[18:12] did get kind of hung up.

[18:16] It's trying to nail that down now on software and I see we did have a question pop up yes

[18:23] when there was tangible property i.e. a disk if we go back into the early 2000s it made it

[18:30] a lot simpler right because you sold 10 disks with software on it you could tax it.

[18:36] Now with the downloaded, and this is an element that those cities that have a utility,

[18:42] user's tax, really are struggling with because you've got online services,

[18:47] you, below YouTube and others, that aren't taking the normal cable route, right?

[18:54] So how do you monitor it?

[18:57] How do you enforce it?

[18:59] It becomes very, very difficult, and I would say then for the majority of software

[19:04] that is downloaded onto a hard drive, it is not taxed in most cases. Unless you have more

[19:14] of software sold to a company, loaded onto company software or kind of a network drive,

[19:22] then in many cases those are taxable. So it gets into that gray area and I've got slides coming up

[19:29] on online taxes, or purchase of goods online and how taxes flow around that to go a little

[19:36] deeper on it.

[19:38] Bobbi, before you move, we got one other question, how about shipping and handling?

[20:00] I'd say generally because I've had some cities, city clients who have shown me invoices where

[20:08] shipping and handling did get taxed. And it was also because that was part of the installation

[20:16] cost of a physical office space or equipment. And because it was included with the installation

[20:25] the shipping and handling there by yes, it would be taxed. So we do end up again in gray areas

[20:33] for some items. And then last one, can you expand on food sold or for home consumption?

[20:43] Oh yeah, no, that's a great one. So because your head, right, it's, well, I went into Starbucks and

[20:51] and I bought X and it was taxed.

[20:53] And the next day, I went into Starbucks and I bought Y

[20:56] and it wasn't taxed.

[20:59] Food sold for home consumption.

[21:02] Again, we gotta talk to generalities here, right?

[21:05] Vegetables, meat, dairy products.

[21:08] As we think about kind of the base

[21:10] and things getting excluded, those were excluded.

[21:13] And that's really kind of that food sold for home consumption.

[21:18] When you're buying hot food,

[21:22] prepared food, taxable, in many cases cold food, not taxable.

[21:29] So you've got somebody behind the counter preparing your sandwich,

[21:35] taxable, sandwich already pre-prepared in a cooler,

[21:41] most likely not taxable.

[21:43] So it's, again, these are all great questions,

[21:47] but they get into the into the gray area and CDTFA also has a different publication specifically

[21:54] for hot and cold food and run the gamut of different scenarios. It's mostly for merchants

[22:01] and retailers that have to determine kind of work it into their register or their their cash

[22:07] software of when to charge when not to charge but but there's also more publications to go deeper.

[22:15] And Bobby, I promise I'll let you get up the slide, but just as a side comment, just

[22:21] Craig, if you can jump in if I'm incorrect about this, but we're getting some questions

[22:24] coming directly to host some panelists, so I think we wanted to do the Q&A when one did

[22:31] come in that way.

[22:32] So folks can do that.

[22:34] That would be great.

[22:35] Or if you do use the chat, try to chat everyone so everyone can see the question.

[22:41] Yeah, we can add on both ways.

[22:43] I mean, you know, with the one used chat,

[22:45] I mean, I'm monitoring both as well too.

[22:46] Okay, great.

[22:47] Thanks for it.

[22:48] Sure.

[22:50] Yeah, I also, I've got the chat open,

[22:53] and I notice we've got a question on

[22:55] if you're going to consume on the premises,

[23:00] or for here, it can be taxed,

[23:02] or if you take home, or, you know, to go,

[23:07] it's not taxed, it's, yeah,

[23:09] Yeah, it's a fun gray area to go through, I say fun because it's just, yeah, it could

[23:17] be.

[23:18] It could not be.

[23:20] Inevitably, and something that I want to say since we've got so many, again, I'm so

[23:24] thankful to have a lot of attendees here, that at HDL, when we get these questions, and

[23:31] we've gotten folks who, you know, we meet with so many people, they'll, when we were doing

[23:38] it in person I would have somebody come from their lunch and show me the receipt that they just got

[23:43] from you know a particular restaurant or whatever and it's got you know oh wait it's got an

[23:48] incorrect tax rate for the city that they're in. What we normally recommend is to reach out to your

[23:56] local CDTFA office. If you go on CDTFA's website they've got a list of all of their local offices

[24:02] And those are the people, the folks that are really in charge of following up with the

[24:07] businesses to ensure the proper tax rate is charged and collected, and then also remitted.

[24:15] So when you've got issues around the tax being charged at a particular business, feel free

[24:21] or reach out to your local CDTFA office, they're there to help you.

[24:25] It's not a case where you have to call Sacramento, which is usually a good thing.

[24:31] So then the other portion we've got sales and use tax. So let's focus then on the use tax component.

[24:39] Again in general here we've got some definitions charged on goods sold to California customers from

[24:44] out-of-state retailers. So goods coming in to be put first in use here in California.

[24:53] And it's also when taxes are collected but a local place of sale could not be determined.

[25:00] You'll see how use taxes distributed. Long ago, back when the BOE was trying to figure out, make it easy for out-of-state retailers to remit taxes. We have 58 counties. And so, but we have 480 plus cities. So less back, back during the time when they created this method of the pool. But BOE kind of, they had figured that it was easier for out-of-state retailers to remember which county they sent the goods into.

[25:28] and thereby they would, you know,

[25:31] remit the tax into the county pool.

[25:34] That's the first part of what you see here.

[25:36] And the second is each quarter,

[25:38] the pool gets distributed out to each agency within the pool,

[25:41] based on your pro-rata share of sales activity that quarter.

[25:46] So it's every quarter,

[25:48] the pool percentage of pool gets calculated.

[25:51] And think of it as just kind of a big fall of the register,

[25:55] all that money just kind of comes out of a bucket there.

[25:58] there with the pool to each agency.

[26:01] So that was the methodology originally.

[26:06] Back I believe it was in about the 70s

[26:08] that the pool methodology was created

[26:11] and it's still in place now.

[26:14] And I'll go a little bit deeper on the pools

[26:16] when you see us talk about data more specifically

[26:20] in a few slides.

[26:23] So tax returns, right?

[26:25] Right, we've got up top here, kind of some thresholds of different average liability size

[26:32] and thereby, you know, we do have taxpayers who file annually.

[26:37] So we'll only see a return once a year for them.

[26:42] Many fall into the fact that they file quarterly.

[26:45] So they collect during the three months of the quarter and then remit at the very end.

[26:51] Then as businesses have grown and we've got extremely large businesses all over the state,

[26:58] those that are in excess of 17,000 or more per month collected need to remit monthly

[27:04] and thereby kind of pre-pay as they're going through their quarter.

[27:08] They still need to file a quarterly return with CDTFA, but we see cash flow a little bit

[27:14] more frequently on a monthly basis from very large retailers.

[27:19] So let's put it in perspective here of how it all comes together. I've got some sample

[27:24] months here. So we got sales during the fourth quarter calendar year, right? So it's

[27:31] October, November, December. It's the time period we're living in right now. Sorry for

[27:36] those that watch this later. But October, November, December, sales period, the returns aren't

[27:43] do until the end of January.

[27:45] So retailers get a full month to file that return.

[27:49] CDTFA does a reconciliation and a final payment in March.

[27:54] Thereby, fourth quarter data to consultants like HDL,

[27:58] ourselves, we get the data in March, March one.

[28:02] And we start meeting with clients during the months of April

[28:04] and May to go over the fourth quarter results.

[28:07] So this is really the technical side of kind of the delay that we always talk about and why we're always looking back at history and it feels so far away.

[28:20] And simply because of the time it takes for remitters to file the return, then a whole another month for CETFA to reconcile it all and get final payments out to local agencies.

[28:33] and then I'll also show you in a few slides how that breaks down into your

[28:37] ledgers and onto your cache reports, but this is just focus on that timing

[28:42] mechanism.

[28:45] And we're on to poll question number two. I

[28:51] am on mute, I seem to be

[28:52] having that problem today. So poll question number two, how often are most

[28:58] tax returns filed?

[29:02] And we'll give everybody a few minutes here to jump in and

[29:06] respond? Your reminder, most tax returns. Not just payments, but tax returns. And in

[29:16] Bobby and the interim, we got a question in the chat, how many returns are filed quarterly

[29:21] with the state? I heard an estimate of 8 million once. Do you happen to know that?

[29:27] Oh, great question. I think my mind first goes to, does 8 million seem reasonable?

[29:38] Now

[29:39] with out-of-state retailers, filing so much, it's funny when we talk coming up here about online

[30:00] Kind of recalculated that because Amazon does have to file for so many or any retailer that it administers the sale for $8 million annually, I would say that's probably a pretty good number. Yeah, probably not so much quarterly, but annually might be good.

[30:24] And our results are up and good responses.

[30:29] Now that, yeah.

[30:31] Yeah, there are in annually and monthly.

[30:33] Yep, absolutely.

[30:34] We talked about them now, the majority,

[30:36] even those that file monthly,

[30:39] they still, or they, they pay monthly,

[30:42] but they still need to file the quarterly return.

[30:45] And then obviously there are less that file.

[30:50] So, great job there.

[30:52] Yeah, and then Bobby, how close this is an interesting one?

[30:56] How close are we to real time payment of sales tax?

[31:00] Oh, yeah, no, great question there because CDTFA has been.

[31:06] And yeah, it's in a couple of slides, but CDTFA has been working hard ever since they were created back in 2017.

[31:13] 2017, the implementation of the cross or CROS system definitely sped up their ability

[31:21] to process payments from retailers, file a lot more payments electronically, and then

[31:27] turn those around back to local agencies.

[31:31] I would say that cross system is also helping them break down when they get monthly payments,

[31:37] who's it coming from, who's it applicable to, we're starting to see more of that data.

[31:42] real-time, and there's always going to be a lag, right?

[31:46] Even folks who remit on a monthly basis, they have to wait,

[31:49] let's say their monthly activity was in October,

[31:52] they still have to process that in November

[31:55] and get it to CDTFA, they still need time to do it.

[31:59] So there's always going to be a couple of months of lag,

[32:02] but I would definitely tell you, since 2017,

[32:06] we've spent the process out quite a bit.

[32:11] So you got a great question there.

[32:12] All right. So let's move through. So we've talked about then sales tax and the tax returns. Where does the Bradley burns the 1% local remember the state gets about 4% counties and the 58 counties that we have get their portion.

[32:29] Transportation agencies, but the local Bradley burns is is kind of a big one for for cities, especially so the majority of brick and mortar storage.

[32:39] you'll see it here, bullet point number one, are all and all car dealerships. So where car dealerships

[32:46] are physically located, restaurants, gas stations, they were meant to the agency where the sales took

[32:51] place. When we talk car dealerships, let's not talk Tesla, let's talk Chevy and Honda and the others.

[32:58] We can have that discussion as we need to, but think where the sales actually took place. And regulation

[33:04] 1802 is that again, kind of from the educational side, that's which kind of set that in place.

[33:11] Then the third bullet point you see on the screen, merchandise coming from out of state,

[33:16] into the county pool where goods were shipped.

[33:20] That, you know, we talked about that,

[33:23] it's into the county, then each agency, each city gets a piece of the county pool. So it's not

[33:30] exact but it was kind of meant to replicate where the majority of transactions take place which is

[33:39] kind of that first bullet point. You'll see the exception there. Purchases greater than half

[33:44] million dollars. There is exceptions within that pool. If we have over half million dollars technically

[33:52] the use tax is supposed to get allocated to the jurisdiction where the goods were shipped, the specific

[33:59] jurisdiction. So, you know, kind of large pieces of physical equipment, like I think like

[34:05] a fire truck, whatever agency that got delivered to, that's where the use tax dollars are supposed

[34:11] to go. And I can tell you, it's a big part of our business at HDL, or we're looking into

[34:15] the pool for large single allocations, where no, it didn't, the merchant didn't follow the

[34:23] rules and allocated directly. So we have been, and you're usually pretty successful pulling

[34:28] and money out of the county pool,

[34:30] making sure it's allocated to specifically for our clients,

[34:34] where it should have been.

[34:36] So, Bob, and I ask a nuanced question there.

[34:40] So, sticking with the fire truck example,

[34:43] let's say I buy a fire truck from Pierce fire manufacturing,

[34:47] it's manufactured in Wisconsin,

[34:50] it's shipped to the reseller in Sacramento

[34:54] and they do a buildup on it

[34:56] and then it's delivered to the city of Syville.

[35:00] Whole sale transaction between Pierce and the retailer and Sacramento. As soon as they finalize it and then ship it over to Sunnyvale, then the Sacramento becomes the place of, yeah, for the transaction. Great. Yeah. Good question there. Final bullet point here. When we're talking about the, the countywide use tax school. Remember, as I made mentioned before, a lot of goods coming from out of state, but we also have additional.

[35:29] items that flow in private private private to private party vehicle transactions think DMV and used cars where there's no dealership involved.

[35:42] That all goes into the use the countywide use tax pool catering and food trucks are not required to, you know, call you know, remit back to the amount of sales that they had

[35:55] within a particular jurisdiction because they're driving around so under revenue and taxation code they're able to just put into the county pool.

[36:03] Whatever county they sold they had sales in also monthly equipment leases merchandise installed on buyer's site as part of the sale, which again this is a bit of a tricky one.

[36:17] The merchandise installed versus where the retailer was who sold it to us.

[36:23] So there's some technicalities there.

[36:27] Another one that has jumped up, if you're a client of ours

[36:30] and you've seen the report, another one that has jumped up

[36:33] is UberEats because they have no physical location

[36:37] but they are administering the transaction

[36:41] between the restaurant and the consumer.

[36:43] They're required to collect and remit

[36:45] and they allocate into the countywide use tax pool as well.

[36:49] So just some examples, there are other things that go into the the countywide

[36:56] course.

[37:01] Online sales, talk about it, kind of let up to it, the gray area. If you

[37:05] will, let's get some clarification on terms real quick. As you'll see here on

[37:09] the screen, number one is distribution centers or warehouses. Just physical

[37:14] goods that are brought in, maybe on one side of the building, shipped across and

[37:19] and then put on two smaller trucks

[37:21] or local delivery type vehicles,

[37:24] just, there's no storage of any goods, right?

[37:29] So, obviously, across the state,

[37:32] we've got a lot of distribution centers and warehouses,

[37:34] generally not where sales tax gets allocated

[37:37] because their goods are not held in inventory

[37:41] at any point within those facilities.

[37:44] So the other side of that is fulfillment centers.

[37:46] location where goods are stored and inventory ordered or processed and goods are taken from the

[37:52] inventory and shipped to the customer so even and I think within the next slide we get an idea of

[37:59] what this looks like but even if you've got a big building right and you might think oh that's

[38:04] a fulfillment center well not exactly it depends on how are they utilizing that facility so you see on

[38:11] the top of the screen or the picture there. The big box we've seen as we drive around.

[38:19] Very fascinating why I have these in here are some aerial shots. The one on the left side of

[38:25] the screen is the Stockton Municipal Airport and over on the right is March Air Force Base which

[38:31] is located in Riverside County. Pretty fascinating. If you go on Google Maps and just kind of look at

[38:36] any airport that's around you, and I say almost any because, you know, if there's a landing strip long enough for an Amazon plane or a UPS plane, they've probably figured out how to local agencies have probably figured out how to use the land around that airport.

[38:55] I can't build homes there so okay a lot of industrial now we get a lot more distribution centers and fulfillment centers right and so we're kind of distinguishing between those.

[39:06] But it's pretty fascinating if you look around and most notably Amazon has done a fabulous job of figuring out its logistical chain and they've been the largest they are the largest online retailer.

[39:20] We've talked about it with so many clients and why it's such a hot topic after AD 147.

[39:27] Again, that's the implementation of out-of-state online retailers.

[39:32] Depends on now where the goods are located at the time of purchase.

[39:36] And so here, we get this little breakdown.

[39:40] Again, it's still a big, great area, but this hopefully helps bring it in.

[39:44] And in the chart, you'll see location of inventory in that first column, an in-state,

[39:51] a big deal there, when you got the order desk, or kind of where they're taking the orders

[39:59] from the company.

[40:00] And that's in state, it's the jurisdiction where the order is placed. And thereby, that's, you know, where we see these large fulfillment centers getting dollars allocated to those local jurisdictions. When it's out of state, it's then jurisdiction where the inventory is first taken out of inventory.

[40:23] So again, we end up with when it's, you know, could it be, you know, could it be a fulfillment center?

[40:29] It really comes back to how is the business going to use that facility and what's their mechanism or taking orders and having inventory and marrying those two up.

[40:41] The bottom two there out of state, even though we've got the order desk in state, those usually reside into the countywide pools any goods that were out of state and the order desk or the business is out of state, those also get allocated into the pools.

[40:58] why we tried to lay that foundation of having these county-wide pools, what makes it up now when we're talking about online, it makes sense.

[41:08] Bottom of the screen here, AB 147 regulations on out-of-state online retailers, why it was so big, effective April 1, 2019.

[41:19] As you'll probably see when Tim's talking about the county, the city's trends and over time, many of you, if you've been our client,

[41:28] you'll we will have seen these this large increase of pool allocations and all of a sudden now

[41:35] out of state on our retailers required to collect and remit. This was a major shift for us and

[41:41] it definitely helped spike revenues and then we saw it really enhanced during the pandemic

[41:46] when local retailers were closed and pretty much everybody was buying things online that it really

[41:53] drove up revenue from the county wide use tax pool and I would say it helps sustain us through

[41:59] that period.

[42:04] So third up, when does it get allocated? This is really now talking about the cash

[42:08] that comes to all local agencies. You can see here, first of all, at point we've got two monthly

[42:15] advances for the quarter and then the third month is the final payment and what that looks like then

[42:23] As far as timing goes, here on the screen, sales in October, November, December.

[42:31] We start seeing the first advance in the month of December.

[42:35] And many times that comes from those monthly payments.

[42:39] It's kind of, it's helped reinforce by the monthly payments in October and November.

[42:44] So we see revenue in December.

[42:46] Another advance in January and then in February when CDTFA collects all the data

[42:52] they reconcile everything calculate the countywide use tax pool put that

[42:57] into the mixes they have their final true up or cleanup payment and with the

[43:04] cross-system that's where back in 2017 we used to have another monthly

[43:11] a smaller portion, you know, kind of a shorter cleanup after three quarterly advances, three monthly advances.

[43:19] With in 2017, when CDTFA implemented the cross system, they were able to eliminate that extra little monthly payment.

[43:28] So again, getting us a little bit more efficient.

[43:30] So the quarter, the fourth quarter you can see on the grid to the far right October, November, December.

[43:37] You can see those payments coming in, why I've got the shaded areas blocked out for all of our accountants there.

[43:45] You know during the months of July and August, you accrue back your, you normally accrue back your sales tax payments.

[43:53] And the reason is because those cash, that cash in July and August is actually, you know, from the sales activity during the second quarter or the prior fiscal year.

[44:05] So it just kind of helps reinforce why we are doing year end of

[44:10] cool, especially keeping the books open for 60 days to grab

[44:13] those two payments.

[44:17] Then data and getting down to, yeah,

[44:21] who's not along here. So once all of the payments are remitted,

[44:27] CDTFA, especially with us as a consultant, we are able to

[44:32] CDTFA will send us the data. And what kind of uses this is a

[44:37] big part of what Tim's going to be talking about coming up, but you could see really

[44:42] three different items here. What kind of businesses exist and what might be needed, especially

[44:47] from the economic development side. Did we get everything we should have? This is that

[44:52] audit component where we, as a sales fax, we at HDOs and sales fax consultant really focus

[44:58] us in on to make sure that

[45:02] And then a desire to follow economic trends and forecasting. And really for us and the team that I lead here at HDL every quarter, we do a webinar to go through, we get data and we want to talk about it, really follow economic trends on a bigger scale to try to stay on top as much as we can when it comes to forecasting. So we hold, we at HDL hold the data two different ways.

[45:29] One is cash. That's what actually came in to each agency, Hitchgill General Ledger.

[45:35] Every month, we're able to kind of reconcile back to that. The other is what we call adjusted

[45:41] or economically adjusted. And this is where we take things like double payments or

[45:48] CDTFA audits of businesses. We might get kind of a big burst of a payment, but it's truly applicable

[45:54] to a previous period. In our data, we put it back to when it was earned rather than just when it

[46:00] was received like the cash shows us. And this really then helps us track and follow economic activity

[46:07] a lot closer. So we're so thankful to have adjusted data, especially for forecasting purposes.

[46:15] Now we've got poll question number three. That's right. And it is what does CDTFA stand for? And

[46:24] While we're taking that, I'll just give everybody a pro tip when you're getting ready for a public speaking.

[46:33] A lot of people say things like unique New York, or red leather, yellow leather, or phrases like that.

[46:40] But you can also use what CDTFA stands for as a warm up.

[46:45] Yeah. I love that. I love that. I haven't, uh, haven't specifically done it, but I, yep. Yep. It's a tongue twister for sure. I think we got Craig this morning on it as well.

[47:03] So this one we've hammered home.

[47:05] I love number C, but tobacco and finance just don't coexist.

[47:18] And for me, there might be a county with a department of tariffs and foreign agencies.

[47:26] It's probably more of a state function, so hopefully everybody's got it.

[47:33] Awesome, wonderful. I just saw the results 99%. Good job. Good job.

[47:45] We're getting, we're

[47:46] cruising through the morning. Everybody's had their coffee now, right? That's right. We've got

[47:50] some jokes coming into on the chat, so that's good to Keela and finance administration. That's

[47:59] Yeah, okay, those are some that we save that for the for the budget period, right?

[48:05] That's right. That's a that's a may a may time frame. Okay, so then breaking down the data

[48:12] and I'm going to go through a couple a few more slides here and then turn it over to Tim specifically

[48:16] about Sunnyvale, but breaking down the data when we get it, we focus first on major industry groups

[48:21] and this really helps us bifurcate the economy

[48:24] and really watch those trends on kind of a sub-level

[48:28] rather than just think of,

[48:30] hey, this is what's going on in statewide

[48:32] or even national.

[48:33] I think that's the other part of that helps here with data

[48:36] is we hear national news,

[48:38] especially on something like autos and transportation

[48:40] or new car sales.

[48:42] And then, oh wait, we gotta remember,

[48:44] we're a car country, California.

[48:46] We function differently.

[48:47] Bay Area, Southern California function differently

[48:50] than Central Valley. So we're able to really kind of hone in when we're thinking about the

[48:56] California economy. As a reminder, if anybody's listening and listening to state control or at

[49:02] any point, I believe that we are now, I think we're fifth or sixth largest economy on the globe

[49:09] in the world. And so there's so much there news to be consumed. How do we break it apart and really

[49:18] again here on the data, audit transportation, building construction, some of these are self-explanatory,

[49:23] food and drugs, fuel stations, especially general consumer goods and restaurants, and then that

[49:28] county pool allocation. Right. And then as we go back, our bless to have a history of about 40 years

[49:36] now, our forefathers here didn't just stop at the major industry goes, we do get into kind of subgroups

[49:45] that we call business types and that then really helps us break apart new

[49:50] autos from used autos or you know quick service think you know fast food

[49:56] versus fast casual versus casual dining versus find out.

[50:00] So, we're able to really segregate out and then hopefully help you as local agencies really, really see what's going on. On the auditing side, correcting all the errors, it's a, again, a big piece of what we do. Our goal is to make sure that it gets allocated to where it should have been allocated. We are blessed to have so many local agencies as clients. And we just want to hone in and stay

[50:29] within, hey, where should it have been allocated based on revenue and taxation law?

[50:34] Most notably remember that some returns are still filed by hand.

[50:38] It's funny enough, but, you know, transposition areas happen really quick.

[50:43] And small retailers, even big retailers up until a little while ago, I think Walmart was still filing their statewide returns by hand.

[50:51] Currently 482 cities, 58 counties, 58 countywide pools, so a lot going on there.

[50:57] everybody's got a five-digit jurisdiction number and then also throw in the

[51:03] transactions use tax. That's not even included in these numbers. We've got, I

[51:08] think, now over 300 transactions in use tax with their own six-digit number.

[51:12] So a lot going on there. Also, city boundaries were not drawn with straight lines.

[51:18] So a north side of the street could be different than the south side of the

[51:21] street or, you know, one block from another. We've got business parks that fall in

[51:26] between different agencies and so auditing gets pretty tenuous and a little bit difficult,

[51:34] but that's what we're here to do.

[51:38] And then number four here, a bit of a myth or isn't that what we pay CDTFA administration

[51:44] for?

[51:46] Yes, but not exactly, because they don't have enough staff to really go through the data,

[51:52] especially at the level of details that we as sales tax consultants do.

[51:57] So, it would be nice if they did, but we're kind of thankful that they don't.

[52:01] It keeps us in business.

[52:04] Then I'm forecasting, and I'll just touch on this really quickly because Tim's going to spend more time.

[52:10] We at HDL on the value, hopefully the value that we provide to our clients.

[52:14] We've got a total database that contains approximately 98% of all statewide data.

[52:19] and gives us a nice big view of everything going on.

[52:22] I lead the team of 17 who review data quarterly.

[52:25] We've got highly experienced

[52:28] a former government fiscal leaders on our principal team

[52:31] who develop and customize each forecast

[52:34] for each of our clients.

[52:36] So really spending that time,

[52:38] not just reading and thinking about what's going on

[52:40] on a big scale like statewide.

[52:42] It's bringing it back down to what does your jurisdiction

[52:46] generate and where's it all coming from.

[52:51] And I think here, yeah, just kind of these were bullet points

[52:55] of how we go about building the forecast.

[52:59] We obviously bottom point here is we adjust

[53:02] for anomalies in one time missing payments

[53:04] or maybe just a kind of a momentary spike

[53:09] in whatever consumers are buying.

[53:11] We know it's gonna come back down.

[53:13] We try to adjust for all those.

[53:16] But at this point, I'm gonna turn, oh, we got one whole question

[53:19] then I'm going to turn over to him officially so yeah so what is the care we're going to go back

[53:25] a bunch of slides now what is the California sales tax rate. The base sales tax rates should

[53:36] I

[53:36] cheat Tim and go all the way back or I would just kind of hope the coffee kicked in.

[53:41] No, I think that's what we get.

[53:50] Or a shooter.

[53:52] Oops.

[53:53] Oh, did you?

[53:53] Oh, Craig, Craig got that one.

[53:56] Yeah.

[53:57] Craig, yeah.

[53:58] Craig's got it now.

[54:00] I don't know if I can do that.

[54:02] Yeah.

[54:03] Facials tax rate.

[54:08] Yeah, we can just wait for those per people to finish responding to this poll.

[54:10] We can handle it.

[54:12] Yeah.

[54:13] Okay.

[54:13] Yeah, it looks like we've also got a question in the chat after adjusting for inflation has sales tax revenue return to pre-COVID levels.

[55:00] Is where I kind of separate because I focus mostly on what's coming into local agencies specifically, especially when it comes to forecasting. So we don't do a lot of retro back to year 2000 inflation adjusted. But I think with the boom that we saw post COVID, we are back in excess of, otherwise, you know, inflation adjusted what we were generating back back in 2000. It's kind of the most notable mark.

[55:28] I

[55:31] jump on there and say that all that question, you know, you can kind of answer it at the aggregate level, but it also depends heavily on your individual conditions of an individual jurisdiction as to how much it's bounced back.

[55:47] You know, it really depends on your sales tax producers, right?

[55:51] Absolutely, yeah, a lot of businesses moved around during the pandemic and post-pandemic,

[55:57] but on a bigger statewide basis, you know, that's kind of where I would speak, but most certainly Tim,

[56:03] depending on your jurisdiction, if you've lost a retailer, you may not be back to where you were.

[56:11] It's not so much because of COVID specifically, it's retail or moved or relocated out of state,

[56:18] which is becoming you know a bigger a bigger piece of it yeah all right so I'll just run

[56:25] through my section here good morning everybody and thanks for joining us just quick overview on

[56:31] Sunnyvale you know we have about 8,000 businesses in the city and the majority of those are small

[56:38] businesses and but we're a full service city and we rely heavily on sales tax it's one of our

[56:44] major general fund revenue sources and it is very volatile in Sunnyvale and I'll talk

[56:51] a little bit about why that is next slide.

[56:58] So how Sunnyvale uses the sales tax data and we do, you know, contract with HDL and

[57:04] meet with them, you know, quarterly and use some of the services that Bobby was talking about.

[57:11] But it's, we don't just end there, we don't just take their information and throw in the

[57:16] a budget and call it a day.

[57:18] We do a lot of work after the fact.

[57:20] So we use sales tax data in a variety of ways.

[57:23] We do do short-term or tactical forecasting.

[57:26] We do long-term forecasting.

[57:28] We actually do 10 and 20-year forecasts.

[57:32] And then we also use it as part of our economic development

[57:36] efforts and just to monitor overall community economic health

[57:39] sales tax can tell you a lot about what's

[57:41] going on in your business community,

[57:43] what what's happening in your city in terms of how people are you know how many

[57:50] people are shopping within the city what's the activity where the you know most

[57:55] active neighborhoods are you know developments that that where you're

[58:00] getting a lot of economic activity. We use it when we're doing specific plan

[58:05] development like we look at say else tax what's a specific plan going to

[58:09] generate or do we want to be careful for a specified area that we maintain a sales tax

[58:15] based through the specific plan in that area. And then we also use it for business attraction

[58:20] and retention. So it tells us a lot about what's happening with individual businesses.

[58:25] Next one, Craig.

[58:29] So we have a set of policies that guide our sales tax forecasts and actually

[58:33] all of our revenue forecasting and these are all you know council policies and we spend a lot of

[58:42] time with our council really trying to remain disciplined in our revenue forecasting but we do

[58:50] try to based all of our revenue forecasts on good detailed information about historical

[58:57] performance and I'll get into that a little bit but that's also combined with judgment right revenue

[59:02] forecasting isn't just about, as finance people, I know we all have this desire to have

[59:07] everything, you know, tie out, and it has a, you know, a supporting documentation.

[59:14] And, but that's not really, you know, when you get into the forecasting world, that's not

[59:18] really what we're doing.

[59:19] What we're doing is making more subjective forecasts, especially over the long term, where we're

[59:25] thinking about what's going on in the city, and sales tax helps us do that.

[59:31] And so these policies also help us do that.

[59:34] We're required to use 10 years of data when we're doing forecasting.

[59:38] We're one of the big things I'll get into a little bit is about how we handle one time revenues versus ongoing revenues.

[59:45] And sales tax even has components that are sort of one time in nature and understanding those is important.

[59:52] Next slide, please.

[59:52] All right, so this is how for Sunnyvale Sales 10X is distributed.

[59:58] You can see the, the, oh,

[1:00:00] 0.125 cents that is collected. Next slide.

[1:00:07] So here's a little bit. Bobby talked a little bit about the categories. And this is a little bit about how we analysis and analyze our different categories. And you can see here, this is a 13 quarter history and and credit hdl for producing this, this kind of graphical information for us. But you can see our largest, you know, the largest percent of our sales tax comes from the business and industry.

[1:00:32] category, and you can see how volatile that is and how it behaves, you know, throughout

[1:00:39] economic cycles. And one of the questions that came up in the chat is, you know, how

[1:00:46] can there's been some news lately from a couple of jurisdictions where there's been either

[1:00:53] misallocations or CDTFA has come in and audited and is requiring a reallocation and even

[1:00:59] a repayment of sales tax and that can be that's a real risk for jurisdictions and one of the ways

[1:01:08] you can hedge against that is to really understand the businesses that are in each one of these

[1:01:14] categories and why things are peaking and you know where the volatility is coming from so

[1:01:22] I'll get into that a little bit more about how we do that but these are our categories and we

[1:01:27] spend a lot of time, and here is where you can also really see what's going on with state and

[1:01:33] county pools, which has been changing drastically. Next slide.

[1:01:41] All right, so here's a little bit of

[1:01:42] a longer look, and here you can really see the volatility in the business and industry category,

[1:01:48] where it was really at a peak way back coming out of the great recession, and then, you know,

[1:01:56] So, you know, has come down pretty quickly or pretty significantly.

[1:02:03] I will, you know, commenting on what's happened with sales tax as a return to pre-COVID levels.

[1:02:09] For Sunnyvale, sales tax has been effectively flat for most of my career in Sunnyvale.

[1:02:17] If you look over all the years, if you go way back to the .com bubble, you know, our sales

[1:02:23] tax was floating around, you know, 32 million a year, and we're still hovering around 30,

[1:02:31] 32 million a year. So really it's up and down, but it's really hasn't grown over all that time,

[1:02:39] and as Bobby indicated, it's sort of been, you know, the taxable base has been eroding, you know,

[1:02:45] and so that's a lot of what's going on within my own jurisdiction. Next slide.

[1:02:50] Yeah, even on that point, if Craig, if you go back, you can see it's even the last two slides have been very, they've got their own story within that.

[1:03:00] Sure, here on the major industry groups, the far left is 2Q20. That's the depths of the pandemic of when all businesses shut down right and revenue at, you know, even restaurants and fuel stations kind of, you know, dropped off and then the growth that we've seen, the dramatic growth locally that you've seen.

[1:03:19] But as you touched on, so volatile for business and industry that kind of peaked out there in 2022, if you go back or go to the next slide there, Craig, you can see that high mark on B and I.

[1:03:35] for a city of Sunnyvale back in 2012.

[1:03:38] And kind of, okay, what was going on there?

[1:03:40] It was we were coming out of the great recession

[1:03:43] and kind of a return or a flock to where you're located, right?

[1:03:48] So the middle of the heart of Silicon Valley,

[1:03:51] and wow, that really did.

[1:03:53] Those businesses buying equipment and other things,

[1:03:55] generating so much sales tax.

[1:03:56] And now that's really cooled off and come down.

[1:04:01] It's fascinating to kind of think about the stories that are included with these graphs.

[1:04:07] Yeah, and that's why it's important to understand your business community because you need to,

[1:04:11] you know, those peak years, they were tied to, in business and industry, they were tied to, you

[1:04:18] know, a single sales tax producer. And when we looked at that, you know, what they were selling,

[1:04:25] how their business model was working, we said there's some risk there that you know there

[1:04:31] were some questions around how it was being reported, what was the actual point of sale and I can't

[1:04:37] get into details because of you know confidentiality reasons but what I can tell you is what we did

[1:04:43] was when we were doing our forecasting we took that out of our forecasts we said we don't want to

[1:04:50] count on this because we don't know when it's going to go away and we have to build service delivery

[1:04:55] on those revenues. So that's an example of where we were taking that in as one

[1:05:00] So, there are ways that you can really use the analysis and the detail, you know, to help your forecasting next slide.

[1:05:10] And here you can see, you know, sort of what's been happening with brick and mortar versus online. And it's really, you know, the pandemic really changed the picture. And it was just a very big difference in how it was behaving. And, you know, county pools and online sales,

[1:05:31] they kind of cut both ways, right? You get revenue from sales, you wouldn't otherwise get

[1:05:38] because, you know, the businesses are not in your city. However, you get a smaller piece of it,

[1:05:44] right? So it kind of, you know, it really is a mixed bag of how it works for you.

[1:05:52] But in any case, it is what it is, right? So we have to understand it and be able to forecast it,

[1:06:00] in a really use it in a way that helps us.

[1:06:05] One of the reasons on our economic development efforts

[1:06:10] we're always trying to get in sales tax producers

[1:06:13] is because not only does that produce sales tax

[1:06:15] as brick and mortar sales tax,

[1:06:17] but it helps you with your pool allocation, right?

[1:06:20] You're a bigger percentage of the county-wide pool

[1:06:22] when you have more sales tax producers.

[1:06:24] So, next slide.

[1:06:28] All right, so we have another poll question,

[1:06:32] which generates more sales tax in Sunnyvale, online or more.

[1:06:39] And we were just there, so hopefully you can see.

[1:06:46] And I think we can keep going so we can get to some questions here, Craig.

[1:06:50] So here's how we forecast.

[1:06:53] And so let's see.

[1:06:57] So let me get into a little bit about the philosophy around long term forecasting.

[1:07:01] A lot of people get hung up on how accurate are you?

[1:07:05] Like I regularly get the question, well, when you do a 20-year forecast, how accurate

[1:07:11] is that?

[1:07:11] How do you really know what's going to happen 10 years from now, but you don't, right?

[1:07:15] That's not the point.

[1:07:16] The point isn't to be really precise.

[1:07:19] The point is to answer the question, can you sustain your current expenditure base, given

[1:07:25] and what you would assume is a pretty moderate

[1:07:28] or reasonable growth in your revenue sources.

[1:07:33] Sales tax we rely on, but we also look at it

[1:07:36] as a basket of our top four or five general fund revenues.

[1:07:40] So we don't only look at individual revenue behavior,

[1:07:43] we look at those revenues as a group,

[1:07:46] because sometimes property tax might move up,

[1:07:49] sales tax might move down, one exceeds your projections,

[1:07:53] One doesn't meet your projections, but on a whole you're still okay and you're making adjustments as you go.

[1:08:01] What we're currently in budget as a lot of you are and we're starting to look at our revenue forecasting.

[1:08:08] There's not really enough data at this point in the year to give really good forecasts.

[1:08:13] But one of the questions we're asking about sales taxes has the base changed.

[1:08:18] You know, we've got we've had inflation. We've had prices go up. Are those prices going to come back down though even with inflation slowing right so has the base changed we're really trying to understand that right now next slide.

[1:08:37] So another thing we look at closely is sales tax per capita so we're trying to understand like where where are we missing and this gets starts getting into the economic development piece.

[1:08:49] And I, you know, a lot of this stuff I'm talking about today, you know, maybe it doesn't apply directly to your city or your jurisdiction.

[1:08:58] But I think it applies in general. And one of those, one of the important things I think is to really have a good relationship with your business community.

[1:09:07] I am fortunate to have an economic development unit

[1:09:11] in the city manager's office who maintains a lot of,

[1:09:16] you know, relationships with city,

[1:09:17] with the business community.

[1:09:19] They spend a lot of time going to, you know,

[1:09:22] events, joining bit, you know,

[1:09:24] going to business groups, working with developers coming in,

[1:09:28] trying to attract, you know, talking to brokers,

[1:09:32] you know, to try to attract the right time type of businesses

[1:09:35] is for the development that's going on in the city.

[1:09:39] And this is a tool that they look at,

[1:09:41] and our council looks at, they say,

[1:09:42] where are we in terms of our per capita sales tax

[1:09:46] compared to our neighbors?

[1:09:48] And you can see we're not, you know,

[1:09:49] we don't have a lot of brick and mortar sales tax

[1:09:53] in Sunnyvale, we don't have them all,

[1:09:55] we don't have that type of stuff.

[1:09:57] And that's really been a focus for us

[1:09:58] in our downtown.

[1:10:00] Councilman, over the last 10, 20 years, it's really trying to bring business into our downtown. That's going to help generate revenue and move this number, you know, move us up this chart here. Next slide. It's him. I can definitely see this chart, you know, trying to so many finance professionals, even if they don't have the same demographics as any else. You get council members who are also looking at other cities and how come they are doing better? How come they generate more revenue? And this is a great way to put that. Keep that in perspective.

[1:10:29] of when trying to answer those questions when you're at a council meeting, right, and you get it, it's a, yep, we're not structured quite the same way, but if you don't know that, then you don't have that answer ready to go.

[1:10:42] Yep, that's right.

[1:10:44] All right, so what I was started talking about economic development services, you know, we have a deputy city manager who runs our economic development department.

[1:10:53] or not department, but program and one economic development manager, and they really do a few things.

[1:11:03] They, like I said, assist development, businesses through the development process,

[1:11:08] either businesses that are existing or not.

[1:11:11] They act as sort of a conduit to city departments.

[1:11:18] So, you know, why am I being charged this fee or what's the basis for this fee or how do I get this done or

[1:11:25] hey, what's going on with the parking over here, right?

[1:11:28] They help connect those businesses and get those responses.

[1:11:33] And then they really are relationship focused and you know, they spend a lot of time with the business community

[1:11:42] but they also look at the development that's happening citywide, our general plan, our specific plan, and try to understand how we can maintain a diverse business community because your business community is incredibly important to your to success.

[1:11:56] And one of the one of the most notable things that's occurred in our economic development realm recently is applied materials, which is a significant, you know, member of our business community.

[1:12:09] has initiated a project to build a really big innovation center in Sunnyvale.

[1:12:17] That's going to keep them here for a long time.

[1:12:21] And one of the things that they talk about is the relationship with the city.

[1:12:28] It's a whole basket of things.

[1:12:30] They talk about the universities locally and the talent that's here in Silicon Valley.

[1:12:34] but they also talk about the relationship with the city,

[1:12:38] and we've really cultivated that relationship,

[1:12:41] and it pays off to do that, next slide.

[1:12:46] So how does economic development use sales tax information?

[1:12:52] I talked about, it really tells a lot of stories, right?

[1:12:57] I always talk, when I'm talking to our council,

[1:13:01] it's not just about the numbers,

[1:13:02] it's the story that the numbers are telling,

[1:13:05] and getting down into the individual information,

[1:13:09] it can be a really nice view into your business environment.

[1:13:12] What's going on with restaurants?

[1:13:14] What's going on with hotels?

[1:13:15] What's happening with tech business?

[1:13:18] What's happening in your community?

[1:13:22] It also can tell you when a business is starting to feel some distress.

[1:13:26] And you can go and reach out directly to that business

[1:13:29] and say, hey, you know, everything going okay?

[1:13:33] what's happening with you you know and they they will we will do that and have

[1:13:37] conversations and see how we might be able to support them and retain them and

[1:13:43] then it also you know having good data helps you to communicate to your

[1:13:48] council why you need some retail and not a hundred percent just housing

[1:13:53] development right like we we developed a lot of affordable housing a lot of

[1:13:57] housing that's a big piece of what we do but we also have to have businesses you

[1:14:03] know, along with that so that that housing has, you know, services available to

[1:14:07] ahead. And so that's a really important piece. Next slide. Yeah. Tim, on that, on that

[1:14:14] front right, that business outreach is so interesting because when businesses are

[1:15:00] And with so much mixed use, I think this goes to your second point there, Tim, is, you know, when you've got a lot of housing, and I see one of the questions that'll be good one for us at the end here, with so much housing is there's people. Well, yeah, people, people want things, people need things and, you know, services is a big piece of that and how then can the city maximize both pieces and not just get so locked in on one side. So yeah, it's, it's huge. Yeah.

[1:15:30] So get into and the question was, you know, can we continue to rely on sales tax right as we have in the past and I think the answer to that is we evaluate that every year, but we we know I think the shorter answer is we don't, you know, bank on any single revenue source, you know, we really look analyze it as a group.

[1:15:58] And we haven't been able to count on the growth that we might have otherwise, that we've

[1:16:03] seen, say in property tax, you know, any, everybody's seen growth in property tax

[1:16:08] revenue, right? But, but you really can't, you know, sales tax is much more volatile and

[1:16:13] much more susceptible to disruptive technologies changing the business, you know, model.

[1:16:19] So can I rely on it?

[1:16:23] I think we can continue to rely on some solid base and that's how we approach it.

[1:16:28] And then we say, okay, this is where the volatility lives is just above this number.

[1:16:33] But that's sort of how we approach it.

[1:16:36] The other thing we use is what are called geo areas.

[1:16:39] And this is geographic areas.

[1:16:40] And this is, you know, a snip of the ones we analyze in Sunnyvale.

[1:16:46] and these are various sections of the city where we like to look at them individually and understand what's happening in those geo areas with our sales tax and our businesses.

[1:17:01] And so one cut of the data is the business categories and type. Another way to slice the data is by geographic area and this is where we know where to make investments.

[1:17:12] And it's it's a way to where we know like maybe in a certain area of our city, we're missing like restaurants and, you know, and other retail that would be helpful versus, you know,

[1:17:25] you know, some areas of the city where there's plenty of that. So it really does, it really does help us.

[1:17:32] I will say the other interesting thing about sales tax and geo areas is sometimes I talked about businesses and

[1:17:40] distress, but it can connect to land use. So we had a particular retailer who is now completely

[1:17:47] out of business, but they were an electronics retailer, and they became subject to the changing

[1:17:54] world of electronics and computers, right? Brick and mortar electronics have been struggling

[1:18:01] for a while now, you know? And so we watched that particular retailer's sales tax declining year after

[1:18:09] year after year we knew there wasn't much we could do about that but we knew that they had a very

[1:18:15] large property that they were operating out of with a huge parking lot in the middle of an

[1:18:21] industrial zone area and so we were already thinking well in advance of their liquidating that property

[1:18:28] who might be able to take that land use and and turn it into a productive land use so you can

[1:18:33] you can really use this data to help predict some of your land use issues and other things that are

[1:18:38] happening in the city. Next slide. And I want to make sure we leave time for questions

[1:18:42] so I'll wrap up here shortly.

[1:18:46] So in this particular, I just want to give you a simple example,

[1:18:50] especially if a one-time revenue is when a construction project comes in, we reach out to them and

[1:18:55] ask them to record their sales tax in Citadel, right, or these tax. So they, they recorded

[1:19:00] there. We get a little bump, but we don't include that in our base. We treat it as one-time

[1:19:06] revenue and those efforts by our economic development group generated $1.1 million in sales tax revenue in

[1:19:13] 2022. So it's not a small number in Sunnyville. It's something that's well worth our time

[1:19:19] to reach out to those businesses. This particular picture is the headquarters. I actually think

[1:19:26] they're moving here. They have moved already, but this is from a few years back for 23 and me, which

[1:19:32] is the genetic testing company. They came, they moved to Sunnyvale. We worked with them to record,

[1:19:38] you know, the business tax, the taxes that were generated from that project, and that really

[1:19:44] makes a difference for us. So, next slide. And we've got another poll question.

[1:19:51] So, and we're wrapping up here, I think that concludes my slides. So, which of the following was

[1:19:59] of the greatest...

[1:20:09] I would just to thank you, Minister Obama and I just thank you for your kind of outstanding

[1:20:18] understanding he's a very nice guy and I really thank you very much to Mr.

[1:20:19] Harris and have a interviews for all of the citizens of the community.

[1:20:20] Any questions? Let's take a look at the next president's question.

[1:20:22] Next.

[1:20:22] Just to thank you for your kind of solid understanding, and I would like to thank you

[1:20:23] for your kind of approved meeting.

[1:20:24] I've had a great time with the office.

[1:20:25] Yes, I have the appropriate summons.

[1:20:26] So I had some heated comments about the work that, like, it took a very nice view on

[1:20:29] as a finance director at a city in Orange County.

[1:20:33] But it's like, we've got property tax and sales tax

[1:20:35] as are one and two as far as revenue generator

[1:20:40] that you're gonna rely on it in some form or fashion,

[1:20:44] whether it be using the data

[1:20:46] and as you were talking about with economic development

[1:20:48] is how do you restructure locally

[1:20:51] or it's a mechanism to getting a local add on tax

[1:20:58] measure pass to generate more revenue for the bottom line, right? It's kind of, it's going to be one way or another for the future.

[1:21:07] And so using the data really does help with one side of that picture, before having to go to the voters to see if you can get a measure pass from one of them.

[1:21:21] Well guys, I don't see any questions coming in. I do have one person who's having an issue with polls. We're done. I'll have to reach out to you separately.

[1:21:28] Yes, the meeting will be available and see us on the website tomorrow, along with a copy of PowerPoint if you don't already have it already.

[1:21:38] But guys, do you see any questions, Bobby? Do you have any other questions? Anything you could think of that could you pass along?

[1:21:43] Oh, given given the item.

[1:21:45] Excluded from sales tax in California. Is it fair to say that they are a tax on the poor versus property taxes?

[1:21:52] Did you guys get that?

[1:21:53] Yeah, it's a great question philosophically.

[1:21:59] When it comes to taxes and who's taxed versus who's not taxed,

[1:22:04] is it a bit regressive versus, you know,

[1:22:07] proportional to income or how we, you know,

[1:22:11] would consider poor versus not as poor.

[1:22:16] That's, yeah, it is flat, you know,

[1:22:22] So although those that are buying a $200,000 car are going to pay the same sales tax rate

[1:22:29] as somebody buying a $7 Starbucks, or a 50-inch TV.

[1:22:37] So in that regard, I hate to say it is what it is, but it is also, if you buy something

[1:22:45] more expensive, you're going to pay more tax.

[1:22:48] So it's a little bit proportional that way, but yeah, Tim, I don't know if you have more thoughts on that.

[1:22:55] That feels on people to be.

[1:22:57] Yeah, no, that's a good question.

[1:23:00] I think about that all the time, you know, even with things like you utility users tax, right?

[1:23:06] I do think sales tax is somewhat regressive, right?

[1:23:10] It does impact as a percentage of somebody's income, somebody on the lower income scale more than it does on the higher income scale.

[1:23:17] income scale. I don't have a good feel for, you know, how to fix that, but I do think

[1:23:27] it does, it does tend, it is fair to say that it is, it is on a real aggressive side

[1:23:32] of tax policies. But I have to pump that one to a future webinar session.

[1:23:37] There you go.

[1:23:38] Getting to more of the Phil's Office of State of Taxation in New York.

[1:23:43] Well, anyways, I know another question.

[1:23:45] Yes, you see it. You saw it in the chat. Yeah, if a sales tax measure has passed, does the tax pay within the city same as for the Brady Burns?

[1:23:55] Bradley Burns. Yeah, so that's a great question. We're talking about the local add on transactions tax list there. And it functions a little differently than the way that Bradley Burns functions.

[1:24:08] And I just saw that come in now for vehicles, specifically, it functions completely different.

[1:24:14] And that is another 101 series onto itself, but in simple form, wherever the car is purchased. So from that dealership, the local Bradley burns will stay in that city.

[1:24:29] But if the jurisdiction that, let's say, you the carburetor live in has a local add on tax, the car dealerships will collect that and remit it to the city that you live in because of the fact that it is it's applied there.

[1:24:45] so that one is kind of different. One is where you bought the car, the other is where you live and

[1:24:52] the tax rate that you live in. You will pay the total tax rate for that jurisdiction and hopefully in

[1:24:59] simple

[1:25:00] The total tax that would have otherwise been generated by unlicensed street vendors. I think for me, the majority of those would be food service, most likely. And on that line, it's probably not, you're not losing very much, if anything. Because again, that, that food, hot component versus, versus cold. But, yeah, I would say for most jurisdictions, it's going to be rather, rather small and not real.

[1:25:29] material to your bottom line.

[1:25:36] Let me see the bottom of construction sales tax.

[1:25:41] What's that?

[1:25:43] Oh, I didn't see that one.

[1:25:45] For construction sales tax, does the city of where they're doing the work, have the authority,

[1:25:52] have a construction company report sales tax, if they are based in a different city of jurisdiction?

[1:25:59] So when it comes to construction, new construction,

[1:26:03] and sales tax related to the construction of that building.

[1:26:07] It is actually a separate process.

[1:26:10] You heard Tim, I think maybe mentioned that they worked with the company to keep the sales tax there in Sunnyvale.

[1:26:15] It's the sales tax related to the build of the building and the items and the materials that are going in.

[1:26:24] When we do that, and again, probably even another good webinar there,

[1:26:28] is it's a matter of the developer, whoever's building the building, working with CDTFA to get a sales tax remitting number for that job site specifically.

[1:26:46] And then when goods come from out of state, remember that most buildings and construction are going to be concrete from a local concrete plant.

[1:26:55] it's going to be wood for the physical structure, but really thinking of the equipment and other

[1:27:00] materials, air handlers, elevators, and other things that might be going into that building.

[1:27:05] If that's coming from out of state, then we can actually get it not going into the county-wide pool

[1:27:11] going to the jurisdiction specifically, but the construction process is a completely separate

[1:27:17] permit with CDTFA versus kind of the normal retail permit. So I just kind of

[1:27:24] keep that in mind and feel free to reach out on that one specifically. If

[1:27:28] anybody has a question, feel free to reach out to our team and we'll be

[1:27:32] happy to go in deeper and even walk through specific projects if needed with

[1:27:37] you.

[1:27:40] I think Bobby, we had another question where if somebody's not

[1:27:43] business not filing taxes, what's the best approach? Yeah, the good good approach

[1:27:48] there is as I made mentioned before contacting your local CDTFA office and letting them know

[1:27:56] first working through I would say your sales tax consultant if it happens to be HDL,

[1:28:02] we'll dig through the data just to make sure lots of times businesses that we think would be

[1:28:08] generating a lot of revenue they don't and so they're kind of deep in our data at a very small rate

[1:28:13] but make sure that really not filing and then reach out to local CDTFA office have them do the

[1:28:20] business outreach and enforcement of revenue and taxation code is the best way to go there.

[1:28:30] And there was a question about contractor and subcontractors and construction, you know, tax reporting

[1:28:35] there. Yeah. So then it's wrong. Same topic of construction. How would it work when the main

[1:28:43] contractor, subcontracts the work for large building facilities. So when, and remember,

[1:28:51] so kind of roll back the element of a contractor, right, or having a construction project, the

[1:29:03] city can't force the contractor to set up that new permit. It's a voluntary process. And then,

[1:29:10] And once they do any it all falls under whether it's the the main developer or subcontractors falls under all of all of that permit so.

[1:30:00] And the city, what's best for both parties? And having that line of communication, getting them to voluntarily say, yes, we'll track it and remit any sales tax that we can to the city. Then that communication continues from your developer or main contractor to its subs and making sure everybody's reporting and communicating. So I would say communication is the biggest piece there. Versions that enforcement because it is voluntary.

[1:30:30] Well, say no, if nothing else, I really want to appreciate. I mentioned you guys.

[1:30:33] appreciate your time in putting this session together and having it today and answering all these

[1:30:38] great questions that we've been getting. And I appreciate everyone else's time out there

[1:30:41] that have been listening in and learning about sales taxes today. Stay tuned for our next session

[1:30:47] In December, we're hoping to produce Assembly Brock from GFOA National.

CSMFO Webinar - Sales Tax 101 [please see AGENDA for copy of Power Point]

Agenda

Transcript