City May Hire Firm to Search for Tax Money

Officials here are debating whether to hire a financial bounty hunter in an effort to ensure that the city collects the $8 million in sales tax revenues it expects to receive from the state this year.

Officials such as City Manager Robert (Bud) Ovrom said that the state Board of Equalization often makes mistakes in allocating sales tax revenues to cities, and they believe Downey could be shortchanged. State officials, however, contend that they make few errors in allocations and such a consultant is unnecessary.

At a City Council meeting Wednesday, members agreed to postpone until Jan. 29 a decision on whether to hire the consultant, who, under a proposed contract, would receive an annual fee of $6,000 and 15% of any misallocated sales tax revenues that he identifies and that are returned to Downey by the state.

Fee Questioned

The council agreed to the postponement after objections were raised by Councilman James Santangelo. He questioned whether the consultant, Robert Hinderliter & Associates, would find enough misallocated sales tax money to justify an annual fee of $6,000.

“Hey, I want to see a track record,” Santangelo said in an interview. “If we’re going to pay him $6,000 and he’s going to save us $2,200, what good is he?”

Montebello, Commerce and Monterey Park, three other area cities that have hired Hinderliter, claim he has found more than $200,000 worth of sales tax revenues that were due them but mistakenly allocated by the state to other cities.

In the post-Proposition 13 era, when governments are barred from raising property taxes, the sales tax has become the lifeblood of many municipalities, contributing up to 80% of the revenues of cities in the Southeast Los Angeles County area. Of the 6 1/2% sales tax in Los Angeles County, 5% goes to the state, 1% goes to local cities and 1/2% to mass transit.

State officials said Hinderliter, a former city administrator in Commerce, has the only private company they know of trying to make a living from their mistakes. They are divided in assessing his work.

“We’re an accurate outfit,” said Harry Kanemasu, senior tax auditor with the state Board of Equalization in Sacramento. “I don’t think they (Hinderliter & Associates) are needed.”

Jeffrey Reynolds, chief of research for the state equalization board, acknowledged the state occasionally errs in allocating sales tax money to cities but added, “It doesn’t happen all that often.”

Of Hinderliter’s 15% fee for finding misallocated sales tax revenues, Reynolds said: “I don’t think he’s going to get rich.”

Downey’s Ovrom said he believes the “state isn’t infallible, and their mistakes can cost us a lot of money.” The city receives $20 million in overall annual revenues, of which $8 million is expected this year from the state sales tax.

Ovrom predicted Hinderliter will “more than recover” his annual fee of $6,000. Ovrom said he and other city officials used to check sales tax reports by hand for errors but that Hinderliter uses a computer checking system.

Hinderliter said he pores over quarterly state reports to the cities that identify thousands of individual companies paying sales taxes, as well as the amounts they pay. The companies on the reports are not listed by name, but by codes, which have to be matched to a separate list.

He said he looks for “aberrations,” such as a firm that pays thousands of dollars in sales taxes one month and then takes a sudden dip. Often, company officials will write an incorrect tax code on a report that will result in sales tax revenues mistakenly being distributed to another city, Hinderliter said.

Mistakes can easily happen when state officials are processing thousands of reports, he said.

“They (the state) do a good job,” Hinderliter said, adding, however, that it is a tough job to catch all the mistakes made on sales tax reports submitted to the state by private businesses.

State auditor Kanemasu agreed, saying, “We just take down what the taxpayers give us, and sometimes they make mistakes.”

In Commerce, where the sales tax contributes $11 million of the city’s $13 million in overall revenues, Hinderliter found mistakes that netted the city $38,000 in sales tax money and another $79,000 that now is being reviewed by the state, officials said.

The sales tax needs “constant attention,” said Commerce Finance Director John Mitsuuchi.

In Monterey Park, Hinderliter found more than $80,000 in possible misallocations that are being reviewed by the state, said David Bentz, city director of management services.

“You really don’t find those types of things unless you have someone out in the fields,” Bentz said.

Hinderliter said his major service to cities is preparing a report that identifies where sales tax revenues come from, down to the particular business and locations.

“It’s extremely useful to identify what’s going on in your town,” said Montebello City Administrator Joseph Goeden, who hired Hinderliter. He said the consultant found enough misallocations to more than pay for his annual fee.