Sales Tax Sleuths Help Cities Find Missing Dollars

When Lloyd de Llamas was Monterey Park’s city manager, he says, he did not have the expertise, the time or the staff to devote to an arcane but important job: sales tax analysis.

The same was true of Robert Hinderliter, who was administrator of the City of Commerce until 1983. “I had this chore, and I found it was not easy. I thought: How come nobody does this for a living?”

Now Hinderliter and de Llamas, who left his job with Monterey Park in 1987, are sales tax detectives.

Armed with cross directories, telephone directories, computer printouts and records from the state’s tax Board of Equalization, the two former city managers, as Hinderliter, de Llamas & Associates, track errors in reporting and distributing sales tax revenues to cities throughout California.

Pore Over Records

In their Claremont office, they pore over coded accountings of the quarterly sales tax records for every business in a community. They try to determine whence products are shipped, where inventories are stored and where sales are made.

This tedious task, the two men say, can be vital to the financial health of their clients, about 62 cities in the state, including 16 in the San Gabriel Valley. In some cases the sales tax revenues have been mistakenly allocated or incorrectly reported.

Sales taxes and related taxes, called use taxes, are the bread and butter of many cities’ revenues, accounting in some cases for as much as 40% of them. Use taxes are paid by out-of-state companies, such as mail order stores, which do business in California.

Statewide, the factor of error with sales and use taxes is slim.

Of the 900,000 businesses (including 20,000 out-of-state companies) that pay California local sales and use taxes, errors occur with perhaps no more than 1%, de Llamas said.

Similarly, Larry Micheli of the state Board of Equalization’s business taxes division, said that in a random sample of 100 sales tax accounts, one account might be incorrect.

Throughout the state, the board has 30 district offices and also offices in Chicago, New York and Houston that keep track of large firms doing business in the state.

Still, the errors statewide sometimes can mean as much as $5 million a year, de Llamas says. So, he says, mistakes can have significant bearing on a city’s finances. In some cases, when de Llamas is successful, he can find an additional $10,000 to $500,000 in annual revenues for a community.

Recently, de Llamas, who works on a contingency and percentage basis, said he uncovered $250,000 for Redlands.

Sometimes, he said, mistakes happen simply because of a wrong address being recorded and no one catching the error.

In Redlands he found 30 businesses whose addresses had changed because of a series of annexations there. But about half of those businesses were not recorded as being based in Redlands, so the city was not getting its fair share of tax dollars.

Redlands, with 55,000 residents, took in $4.4 million in sales tax in 1988-89. So the $250,000 that de Llamas discovered is a substantial windfall, according to City Manager John Holmes. “We’re really thrilled,” he said, adding that his staff may never have discovered the mistake.

“Big cities can afford to have a sales tax specialist on their staff. Little cities can’t,” said Hinderliter.

One of the difficulties that cities face in reviewing reports sent them by the state, Hinderliter said, is that the information is presented in code, partly to ensure confidentiality of businesses’ sales tax records. When de Llamas and Hinderliter are hired by a city, they are given permission to look at these records.

The two men and their eight-member staff use computer programs that decode and analyze the tax data.

Another Company

One other consulting firm in the state also deals principally with finding sales taxes errors. Municipal Resource Consultants has a staff of 10 at offices in Westlake Village and Madera.

“My basic position on (these consultants) is neutrality,” said the equalization board’s Micheli. “The board provides the same information to both the cities and the consultants. (Cities) could easily set up their own computer programs.”

But, said John Austin of Municipal Resource Consultants, “it’s cheaper for smaller cities to hire us than to do it themselves.” The firm was started in 1978 by Allen W. Charkow, who served as finance director for Fresno and Garden Grove. In the two years since Charkow has made the business a full-time one, his client list of communities has grown from nine to 60.

“We thought we were working ourselves out of a job,’ said Charkow. “But there is such a turnover with businesses, along with closings, movings, and consolidations. There is always a state of flux that seems to make errors occur.”

Errors tend not to be made by local retailers, de Llamas said, but instead by industries and corporations.

In a large corporation headquartered outside California and doing business in 30 to 40 states, de Llamas said, there is considerable room for error.

Mistakes in reporting of use taxes are found in larger cities such as Los Angeles and San Francisco.

For example, a firm could be headquartered in New Jersey with an administrative office in Los Angeles and its sales office in the San Gabriel Valley. The key to determining which city should receive the tax from a particular business, de Llamas said, is based on where the sales office is located.

The accounting office in New Jersey might file its use tax forms by listing its office simply as Los Angeles. All the use tax money would be credited to Los Angeles.

“If you’re in a New Jersey firm, it’s all Los Angeles to you,” de Llamas said. The distinction between Monterey Park and Los Angeles can become lost, and thus Monterey Park gets shortchanged on the amount of tax it receives.

Besides finding mistakes, the consultants perform a diagnostic function. De Llamas said he tries to provide data answering such questions as: “Are city councils and city managers taking steps that are actually generating more in sales taxes?”

Also, through the use of computerized graphs, the consultants help cities discover what proportion of sales tax is coming from specific types of businesses and how to solve problems. “South Pasadena is a classic case,” de Llamas said. “They’ve got to do something about their economic development, but they also have environmental goals.”

Tracking Trends

In Pasadena, de Llamas did a geographic analysis, looking at the Old Town area to see the difference in sales tax generated by general retailers versus eating and drinking establishments. Says Pasadena’s Finance Director Mary Bradley: “We were able to see more detailed trends on who was the leading sales tax producers. We were able to see businesses that were growing and ones that are shrinking.”

Pasadena, she said, also was better able to analyze how sales taxes related to the number of square feet occupied by a retail outlet. This kind of information, she said, is valuable for city leaders who are trying to decide what types of businesses they want to cultivate and attract.

“We just don’t have the computer facilities for this sort of thing,” said Dianne Gershuny , assistant city manager and finance director of Los Altos, population 28,000.

With the help of sales tax analysis, she said, Los Altos officials improved their budget estimate for sales tax revenues. A recent estimate, she said, was less than 1% off. “In prior years, we considered it pretty good if it were 5% off,” she said. The difference of 4% improvement may not seem that dramatic but, she said, more accurate projections helps her city improve its ability to budget and plan.

For Monrovia’s city manager, Jim Starbird, it has been easier and cheaper to rely on an outside sales tax consultant. “It really helps keep you on the pulse of the business community,” Starbird said.

In Pasadena, an audit by Hinderliter and de Llamas “found maybe $100,000 worth” of erroneously allocated sales taxes, Bradley said. “One hundred thousand dollars a year is nothing to be sneezed at. That could, say, really help the police force.”

But, de Llamas said, he isn’t successful in every case. “I’ve got one city in the San Gabriel Valley and I’ve been looking around there for three months, and we haven’t found dime one.” Still, he said, he hasn’t given up.