Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances S o n o m a C o u n t y Internal Audit A u d i t o r ‐ C o n t r o l l e r ‐ T r e a s u r e r ‐ T a x C o l l e c t o r
Current Year Operator Audits For the Calendar Year Ended December 31, 2014 Delinquent Operator Audits For the Calendar Years Ended December 31, 2010 ‐ 2014 Audit No: 3565 Report Date: September 18, 2015 K. Charan, CPA, CGMA Audit Manager: Kanchan
Audit Supervisor: Damian Gonshorowski, CPA, CGMA Auditor: Keith Auyang, CPA Auditor: Donna Crume Table of Contents
Compliance Audit:
Transient Occupancy Tax
Operator Collections & Remittances
Audit No. 3565
Internal Audit Report Executive Summary......................................................................................................................
Introduction and Background ...................................................................................................... Objectives, Scope and Procedures...............................................................................................
Results..........................................................................................................................................
Recommendations.......................................................................................................................
Appendix A – Schedules of Operators Reviewed
January 1, 2014 to December 31, 2014 ............................................................. Appendix B – Schedule of Delinquent Operators Reviewed........................................................
Appendix C – Prior Year Results and Recommendations............................................................. Appendix D – Management Response.........................................................................................
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Executive Summary
The Internal Audit Division of the Sonoma County Auditor‐Controller‐Treasurer‐Tax Collector’s Office (IA) has completed a compliance audit of collections and remittances of certain entities (operators) subject to the Sonoma County Transient Occupancy Tax Ordinance (TOT). In the course of conducting these TOT audits, it was noted certain operators were not complying with the Business Improvement Area Ordinance (BIA). Our audits identified a total of $65,947 in additional revenue to the County and noted instances of non‐
compliance with the record keeping requirements of the Ordinance. Current Year Operator Audits For the period January 1, 2014 to December 31, 2014, the ten (10) operators audited reported a total of $3.225 million in taxable receipts and paid $290,269 in TOT. Seven (7) of these operators generally remitted TOT and BIA owed to the County in a timely manner and complied with the TOT ordinance, as summarized on Table 1 of Appendix A. Of the remaining three operators, none provided sufficient records for us to complete the audits. Two of these operators, collectively, underpaid BIA by $61,560. Since we used the filed TOT returns which were not able to be audited, it is possible that the BIA liability of these operators as stated is different. Table 2 of Appendix A summarizes the operators who did not provide sufficient records. Table 3 of Appendix A itemizes the amounts of BIA, penalties and interest due from the operators. Delinquent Operator Audits Four (4) additional operators were selected by TOT Administration for audits of calendar years preceding 2014. These operators collectively underreported gross rent by $45,679 and owed $4,139 in TOT tax assessments. See Appendix B for a detailed summary of the audited operators that did not file returns in previous calendar years. Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐ 1 ‐
Introduction and Background
Introduction The Internal Audit Division of the Sonoma County Auditor‐Controller‐Treasurer‐Tax Collector’s Office (IA) has completed compliance audits of the collections and remittances of certain entities, or operators, subject to the Sonoma County (County) Transient Occupancy Tax (TOT). The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing (Standards). These Standards require that we identify, analyze, evaluate, and document sufficient information and evidence to achieve audit objectives. We believe that the evidence obtained provides a reasonable basis for the results and recommendations contained in our audit report. The purpose of this audit report is to furnish management independent and objective analyses, recommendations, and other information concerning the activities reviewed. The audit report is a tool to help management identify and implement improvements. Occasionally, to fulfill its risk management responsibilities, management requests Internal Audit to perform studies, analysis or audits. In responding to these requests we ensure that we do not take on any responsibilities for designing, implementing or operating any part of internal control systems so that our independence in regards to those systems is not impaired. At the request of TOT Administration, we have performed audits of entities subject to TOT and plan on providing such assistance in the future. We do not believe that performing these audits constitute assuming responsibility for the design, implementation, or operation of any part of TOT Administration’s internal control system. The TOT Administration selects the entities and agrees to the audit scopes proposed by IA. We would like to thank management and staff for their time, information, and cooperation throughout the audit. Background Overview The assessment and collection of Transient Occupancy Tax (TOT) is authorized under California State Revenue and Taxation Code Section 7280, as an additional source of non‐property tax revenue to local governments. TOT is assessed by operators on transients who occupy lodging facilities (e.g. hotels, motels, campgrounds, or vacation rental homes) in the unincorporated areas of the County for fewer than 30 consecutive calendar days. In Sonoma County, this tax is levied at a rate of 9%, effective October 1, 1993. The Board of Supervisors has established a policy to use 25% of funds raised from TOT for advertising and promotional activities aimed at benefiting County industries that rely upon tourism. As of December 31, 2014, there were approximately 856 operators, registered with the TOT Administration, including hotels, motels, bed & breakfasts, inns, recreational parks, campgrounds, vacation rentals, and property management firms. The total collection of TOT for the calendar year 2014 was $12.3 million, an increase of 13.7% over the preceding year. The Investment and Debt Division of the Auditor‐Controller‐
Treasurer‐Tax Collector’s Office (ACTTC) is responsible for the administration and enforcement of TOT and Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐ 2 ‐
Introduction and Background
works closely with the Permit and Resource Management Department to ensure that all vacation rentals registered by them obtain a TOT certificate. Policies and Procedures Each operator is required to report and remit TOT on a quarterly basis. The TOT Administration sends the TOT return form to all active operators two weeks prior to the end of the calendar quarter, and it requests the gross rent receipts for the reporting period less qualified exemptions in order to calculate the 9% tax due. A qualified exemption is the rents received from a tenant who is a federal, state, or foreign government officer or employee on official business. Penalties and interest are applied if the returns are not filed timely or the tax is unpaid. For late filings, a penalty of 10% of the base tax is calculated for failure to file on or before the last day of the month following the close of the calendar quarter, an additional 10% penalty is assessed for the second month of delinquency. For late payments, interest of 1.5% per month on the base tax is charged from the delinquent date to the date of payment. If payment is not received in full by the first working day of the second month of delinquency, the account is transferred to the Central Collections section of the ACTTC. At this point, Central Collections assists the Investment and Debt Division with collection. A Certificate of Delinquent TOT Lien is filed with the Recorder’s Office by the Investment and Debt Division when payments from an operator become two quarters late. Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐ 3 ‐
Objectives, Scope and Procedures
Objectives The primary objectives of this audit were to determine: 1. Whether selected entities remitted TOT owed to the County in a timely manner and materially complied with the applicable ordinances 2. The amount of TOT owed by selected delinquent entities Scope Current Year Operator Audits IA audited one year of TOT returns for ten (10) entities selected by the TOT Administration. TOT Administration agreed in advance to the scope of the audits. The audit covered the period January 1, 2014 to December 31, 2014. The scope of our work encompassed reviewing records of transactions subject to the TOT as well as interviewing the management and staff of operators responsible for the maintenance of financial and guest management systems. Delinquent Operator Audits Four (4) additional operators were selected by TOT Administration for audits of calendar years preceding 2014. For these entities as well, the scope of our work involved the review of records of transactions subject to the TOT and interview of the operator management and staff. For operators that did not complete a return we calculated the amount of TOT due. Procedures The overall objective of the audits was to determine if the operators’ financial records supported their filed quarterly TOT returns. To accomplish this, we performed a review of the operators’ internal controls over the collection and remittance of TOT, including the entering of guest information in reservation systems, processing and recording of financial transactions and summarizing of financial transactions for the purpose of preparing TOT returns. Operators were expected to maintain records necessary to determine the amount of TOT owed to the County. At a minimum the records deemed necessary for this determination shall be a chronological cash journal showing tax and room rate separately, or other means acceptable to the County Auditor‐Controller‐
Treasurer‐Tax Collector of summarizing the Operator’s monthly or quarterly revenue, supported by room registrations (including the name and address of the transient), a calendar of advance registrations, copies of forms used to claim exemption from the tax, and pre‐numbered payment receipts showing payment for occupancy which state the room rate separate from the amount of tax paid and which may, with reasonable effort, be identified with the revenue summary. In instances where the operator did not maintain records as stated above, all guest transactions within the period under audit were selected and tested. If the operator maintained records as stated above, a sample of transactions within a specific time period were selected and tested. Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐ 4 ‐
Results
Results Our audits identified a total of $65,947 in additional revenue to the County. Current Year Operator Audits For the period January 1, 2014 to December 31, 2014, the ten (10) operators audited reported a total of $3.225 million in taxable receipts and paid $290,269 in TOT. Seven (7) of these operators generally remitted TOT and BIA owed to the County in a timely manner and complied with the TOT ordinance, as summarized on Table 1 of Appendix A. All of the remaining three (3) operators did not maintain records as required by the Ordinance and two of them under remitted TOT and owed penalties and interest. As a result, we are unable to determine the degree to which these three operators complied with the Ordinance. Operators Not in Compliance with the Ordinance  Inspirato and Jenner Hospitality were unable to provide adequate records to substantiate their filed TOT returns. Based solely on their filed TOT returns, we determined that Inspirato and Jenner Hospitality owed $48,925 and $12,635 in BIA respectively.  Bodega Coast Inn failed to comply with our numerous request for records. As a result we were unable to perform the audit and are not able to provide any assurance over its TOT returns. Operators Generally In Compliance with the Ordinance  Japanese Farmhouse underpaid TOT in the amount of $248 by failing to include cleaning fees in the taxable receipts reported to the County.  Stults, Mary Lou overpaid $613 in TOT, primarily due to including refundable security deposits in the reported gross rents.  The TOT returns filed by Jenner Inn, Northwood Lodge, Anvil Vineyard and Ranch, Wallace Creek Vineyards and Clara’s Country Estate appear to be accurate based on the results of the audit work we performed The Internal Audit staff needed to spend a significant amount of time organizing the records provided by the operators before they could be audited. We also found it necessary to assist the operator in obtaining records that would substantiate the returns. For example, we identified banks statements and income tax returns as alternative support when the operators’ internal records were not sufficient. Due to the operators’ records not being in order, excessive Internal Audit staff time was spent and the operators required excessive time in gathering records from outside sources. Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐ 5 ‐
Results
Delinquent operator audits Four (4) additional entities were selected that did not file TOT returns for the calendar years preceding 2014. These operators collectively underreported gross rent by approximately $45,679 and owed $4,138 in TOT tax assessments.  Sonoma Sanctuary engaged in transient lodging during the period January 1, 2010 to December 31, 2012 but did not register with the County nor file TOT returns. Its TOT liability for the period is $2,721.  Hilton Properties underreported gross rents by $13,166 and underpaid TOT by $1,212 for the period October 1, 2012 to December 31, 2014.  Sweet Tangerine at Hardin Gardens improperly deducted processing fee from the gross receipts it reported for the period January 1, 2013 to December 31, 2014, resulting in underpayment of TOT by $206.  Wyatt Road Wine Country Cottage did not engage in transient lodging during the audit period and thus does not owe TOT. However, it was in violation of the Ordinance for not filing quarterly TOT returns. Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐ 6 ‐
Recommendations
Recommendation No. 1: Over and under payments, as identified in Appendix A and Appendix B, should be settled with respective operators as appropriate. Management Response: Agree Recommendation No. 2: TOT Administration should take steps as outlined in the TOT ordinance to determine and assess the tax, interest and penalties for all operators that failed to cooperate with the audits. Management Response: Agree Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐ 7 ‐
Appendix A – Schedule of Operators Reviewed
The following table details the operators that provided sufficient records to complete their audit: Table 1: Schedule of Audited Operators Providing Sufficient Records County of Sonoma
Transient Occupancy Tax
For the period of January 1, 2014 to December 31, 2014
Taxable
Receipts
Reported
Entity
Taxable
Receipts
Per Review
Tax
Paid
Tax
Per Review
Over (Under)
Paid
Jenner Inn
Northwood Lodge
Wallace Creek
Japanese Farmhouse
Clara's Country Estate
Stults, Mary Lou
Anvil Vineyard & Ranch
$ 81,511 $ 81,511 $ 7,336 $ 7,336 $ ‐
225,500
225,500
20,295
20,295
‐
‐
‐
‐
‐
‐
38,273
41,035
3,445
3,693
(248)
61,050
61,150
5,495
5,495
‐
36,352
3,272
2,659
613
190,228
190,228
17,121
17,121
‐
Total Audited Operators
$ 632,914 $ 599,424 $ 56,964 $ 56,599 $ 365
The table below lists the operators that did not provide sufficient records to complete their audit: Table 2: Schedule of Operators with Insufficient Records County of Sonoma
Transient Occupancy Tax
For the period of January 1, 2014 to December 31, 2014
Entity
Taxable
Receipts
Reported
Tax
Paid
Jenner Hospitality
Inspirato
Bodega Coast Inn
$ 461,489
1,133,064
997,714
$ 41,534
101,976
89,795
Total Non‐Audited Operators
$ 2,592,267
$ 233,305
Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐ 8 ‐
Appendix A – Schedule of Operators Reviewed
The following schedule itemizes the operators that did not remit the correct amount of BIA: Table 3: Schedule of Operators under Remitting BIA: County of Sonoma
Tourism Business Improvement Area Assessment
Taxable
Receipts
Reported
Entity
Inspirato
a
Jenner Hospitality
$
b
a
b
Total
Penalty
Total Interest
Over (Under)
Paid
1,740,333 $ 34,807 $ 6,961 $ 7,157 $ (48,925)
461,489
$
Tourism
BIA
Assessment
9,230
1,846
1,559
(12,635)
2,201,822 $ 44,037 $ 8,807 $ 8,716 $ (61,560)
Taxable receipts reported covers the period of July 1, 2013 through March 31, 2015; total interest is the amount due through September 30, 2015
Taxable receipts reported covers the period of April 1, 2014 through December 31, 2014; total interest is the amount due through September 30, 2015
Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐ 9 ‐
Appendix B– Schedule of Delinquent Operators Reviewed The following table summarizes the audited operators that did not file returns in previous calendar years: County of Sonoma
Transient Occupancy Tax
Taxable
Receipts
Reported
Entity
Sonoma Sanctuary
2010
2011
2012
Total Delinquent Operator Review
Hilton Properties
2012
2013
2014
Total Delinquent Operator Review
Sweet Tangerine
Wyatt Road Wine Country Cottage
Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Over (Under)
Paid
1,568 $
26,953
1,706
‐ $
‐
‐
141 $
2,426
154
(141)
(2,426)
(154)
$
‐ $
30,227 $
‐ $
2,721 $
(2,721)
$
3,106 $
9,452
12,751
1,892 $
16,953
19,630
253 $
851
1,148
170 $
1,526
1,767
82
(675)
(619)
$
25,309 $
38,475 $
2,252 $
3,463 $
(1,212)
22,166
20,169
22,850
21,771
1,995
1,815
2,057
1,959
(62)
(144)
42,335 $
44,621 $
3,810 $
4,016 $
(206)
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐ $
‐ $
‐ $
‐ $
‐
67,644
113,323
6,062
10,200
(4,139)
2013
2014
Grand Total Delinquent Operator Review
Tax
Per Review
‐ $
‐
‐
$
Total Delinquent Operator Review
Tax
Paid
$
2013
2014
Total Delinquent Operator Review
Taxable
Receipts
Per Review
$
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Appendix C – Status of Prior Year Recommendations Recommendation No. 1: We recommend that amounts over or under paid, as identified in the Schedule of Operators Reviewed, be refunded or collected from the operators as appropriate. Status: Implemented TOT Administration collected or refunded all amounts identified, totaling $40,427 in TOT plus additional penalties and interest. Recommendation No. 2: For delinquent operators who did not respond to repeated requests for records, we recommend that management take steps to compel compliance with the TOT ordinance. Status: Partially Implemented Of the three operators identified as not providing records, one filed amended returns and paid TOT, penalties and interest. One operator was unable to provide records due to the records being confiscated. One operator provided incomplete records and based upon those incomplete records is participating in a payment program to satisfy the TOT. Recommendation No. 3: We recommend that TOT Administration include an insert in the Quarterly TOT returns sent to operators, or use other means, to clarify and reinforce sections of the ordinance that operators commonly have questions about or that audits have identified as common noncompliance items, such as exemptions and resort fees. Status: Implemented An insert is included in the Quarterly TOT returns mailing that covers frequently asked questions, clarification and reinforcement of sections of the ordinance and registration for an email update of news and reminders. This began in March 2015. TOT Administration also is planning an educational tax bill insert for FY 2015‐16 that will be included with the secured property tax bills. Compliance Audit: Transient Occupancy Tax Operator Collections & Remittances Audit No: 3565 Page ‐11‐
Appendix D – Management Response
Compliance Audit:
Transient Occupancy Tax
Operator Collections & Remittances
Audit No: 3565
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