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City of Morro Bay Business License - Realtors

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It is quite publicly known that the City of Morro Bay has elected to take an anti-business stance by hiring a collection firm with a reputation for aggressively and perhaps improperly pursuing and punishing small businesses through business license audits. While the Scenic Coast Association of Realtors®appreciates and understands the need for municipalities to manage their financial affairs, the manner the City has elected to do so is an affront to its historical practices and appears to be without the support of its own code and the laws of the state of California.

Our legal counsel has identified the following legal deficiencies in their letter to the City. Please join us in opposing the efforts of the City of Morro Bay to illegally collect this tax and our work to create a mutually beneficial alternative tax or licensing structure.

Improper Interpretation of Chapter 5 of the Morro Bay Municipal Code (“MBMC”)

As you are aware, Chapter 5 of MBMC regulates the licensing and taxation of those operating a business within the City, particularly real estate brokerages, their employees, and now, apparently, their contractors.

MBMC Section 5.08.170, applicable to real estate, provides a multipart test to determine if a real estate professional is subject to the licensing/tax scheme. In relevant part, this section provides a three part test as follows:

Every person in the real estate business who […] [1] sells or offers to sell or buys or offers to buy, or who rents or leases or offers to rent or lease any real estate, or who collects or offers to collect rents for any real estate [2] and who is subject to regulation by the State of California Real Estate Board [3] and who operates within the city, shall pay an annual business license fee in accordance with the Business License Rate Schedule.

It is our understanding that the City has taken the position thatanyactivity in the city by a licensed person would subject them to the licensing/tax scheme. We respectfully disagree with this overbroad interpretation and, apparently, willful ignorance of the three part test. While Chapter 5 does define indicia of “doing business” in the City (MBMC Section 5.04.070), it fails to specify or indicate what “operating” within the City would entail. Failure to define this concept has lead the City to believe that anyone who has a business that may market to or have a relationship with a resident in the City would be subject to the licensing/tax scheme. We find this interpretation repugnant to common sense and a pronouncement of the City that it intends to overreach its authority to the detriment of those who unwittingly drop a leaflet in the mail to one of the City’s residents.

Additionally, the final paragraph of Section 5.08.170 provides a conflicting and vague inclusion of further requirements, which, properly viewed, do not override the multipart test of the first paragraph and appear only to address timing of the tax once the elements of the test are found. In relevant part, that paragraph attempts to draw in activity that derives no revenue in the following language, “For each real estate broker, […] salesman or agent […] provided that said salesman or agent provides at least one listing.”

As the City should also know, it is quite possible for a real estate agent, attorney, CPA, marketing agency, internet based physician, GOOGLE, AMAZON, APPLE, and other non-resident professionals to reach a broad market of individuals and businesses without leaving the comfort of their desk, be it in the City of San Luis Obispo or the City of New York. Any regulation that purports to regulate tenuous connections to Morro Bay such as marketing efforts (MBMC Section 5.04.070) or a listing without a sale or any indicia of economic activity in the City (see MBMC Section 5.08.170, second paragraph) is overreaching and lacking in the nexus (substantial activity) to levy a tax.

Regulatory vs. Tax; Improper Tax

California residents have made it quite clear that the imposition of new taxes must be put on the ballot with the passage of Proposition 218 and its companion Proposition 26. While a municipality is free to regulate and charge fees for activities within its legally permitted purview, such fees, e.g., a business license fee, must be for a regulatory service and not a disguised tax. In clear contradiction of this allowance, Section 5.04.020 states that Sections 5.04, 5.05, and 5.12 are enacted for revenue purposes and not regulator. As the City clearly identifies in the MBMC and that businesses are required to pay based on a Business LicenseTaxRate Schedule, we do not endeavor to evaluate whether Chapter 5 is or could properly be instituted outside the requirements of Propositions 218 and 26.

While we do find the City put the business license tax on the ballot in 1988, we do not find any voter authorized changes to the now unlawful tax as extended and increased by the City Council. We do, however, find that in no less than three recent meetings of the City Council, the business license tax was unlawfully changedwithoutthe vote of the City residents (Reflected in City Council Minutes dated October 14, 2014, October 28, 2014, and November 6, 2014). Although we have not conducted a search of the entire history of the City’s unlawful tax rate change practices, if the recent meetings are representative, then the City has likely assessed and collected the tax improperly and without authority many times over. By way of example and not limitation, on October 14, 2014 the City Council changed, without voter approval, the following elements of the tax:

“MOTION: Councilmember Smukler moved approval of Motion #2 with an adjustment replacing “establishgross receiptsthreshold” with “establishrecommendedthreshold”. The motion was seconded by Councilmember Nancy Johnson and carried unanimously, 5-0.”

“MOTION: Councilmember Smukler moved to direct staff to initiate a code and master fee schedule update for business licenses that includes process, definitions, flat vs gross rates, employees, etc. as well as include a strong stakeholder participation component. The motion was seconded by Councilmember Nancy Johnson and carried unanimously, 5-0.”

Additionally, we do not believe that the City has strictly followed the requirements of the CPI adjustment provision found in MBMC Section 5.04.50, which requires an adjustment each year based upon a March to March average. By way of example, information provided by the City to our office indicates that no adjustment occurred in the 2010-2011 fiscal year; however, an adjustment of varying percentages for each tax category did occur for the 2011-2012 fiscal year, without apparent tie to the designated CPI. For instance, the unlawful tax imposed on California licensed brokers increased by 3.15%, on salesmen by 3.226%, and on each employee by 4.348%. Not only are each of these measures inconsistent, they are not tied to the public data we find indicating CPI increases of less than 3% for this period.

Finally, we do not find that the City has adopted, by June 3oth of each year, the adjusted tax as required by Section 5.04.50. The 2013/2014 Master Fee Schedule appears to have been adopted a week late on July 9, 2013 by Resolution No. 41-13 (other resolutions relating to the fee schedule were not readily obtainable online, but we anticipate a similar pattern in other years).

We are preparing a separate Public Records Act request to gather further information about the City’s unlawful practices and to determine if action should be instituted torefundimproperly levied and collected taxes, as well as corresponding penalties and interest.

Statute of Limitations

The Scenic Coast Association of Realtors is under the impression that the City is attempting to collect fees, taxes, penalties, and interest retroactively to 2009. As the MBMC fails to identify a statute of limitations for collection of taxes levied by Chapter 5, assuming the licensing/tax scheme had been properly instituted, we would object to the collection of any back fees beyond the commonly instituted three years.

Appeal Process

While the City’s stance on the licensing/tax scheme has not been business friendly, as we are sure the City is painfully aware, MBMC Section 5.04.210isa business friendly provision and provides for the right to appeal the licensing/tax schemedirectly to the City Council. In the event that the City elects to pursue this unlawfully levied tax, the constituent members of the Scenic Coast Association of Realtors intend to and will exercise their individual rights to this process. In addition, the Scenic Coast Association of Realtors will endeavor to ensure that all businesses targeted by this unlawful tax are fully apprised of their rights.

Proposal for Compromise

The Scenic Coast Association of Realtors and its constituent members are not insensitive to the need for the City to derive revenue from those who truly engage in business operations within its borders. As such, if the City will agree to forego further attempts to collect sums allegedly owed for years prior to 2015, the Scenic Coast Association of Realtors will not pursue the information and remedies referenced above, or encourage their members to move all but required agents and personnel to surrounding business friendly cities, or encourage all businesses and contacts they have within the City to file for refunds of payments for years where taxes were improperly increased without reference to the CPI; all actions they are prepared to take in the event the City does not abandon their current hostile and unlawful course. Instead, theywill cooperate and join with the Cityin crafting a licensing and compliance system that is rationally related to economic activity within the City and its efforts to provide a more friendly business atmosphere.

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