To get an idea of what can happen after an audit from Municipal Auditing Services (MAS), look no further than an April 2013 lawsuit filed by Stanton-based Hospitality Enterprise Management, otherwise known as 007 Showgirls.
The lawsuit came after MAS was contracted to review business licenses and unpaid fees in Stanton, a city west of Anaheim. As a result of that audit, Stanton officials asked 007 Showgirls for additional business license fees, according to the lawsuit. And each of 007 Showgirls’ dancers was asked to pay $369 for a business license and $94 per year for each subsequent year; then they would have to pay separate fees for every location at which they danced.
“Through MAS, the city has announced that it will charge the fees for each location even if the dancer only dances there once,” according to the lawsuit.
Hospitality Enterprise Management dropped its lawsuit against MAS and the city, but the case provides some insight into how audits of unpaid business license fees can have unexpected consequences.
And in Morro Bay, many business owners, artisans, and even non residents have expressed frustrations and confusion with MAS’ recent audit.
“I think that this audit, it uncovered a lot of people that don’t have licenses—for one thing,” said Colette Came, owner of Came Security Alarm, which has offices in Morro Bay and San Luis Obispo. “And it also ruffled a lot of feathers after the way they did it.”
Came, for example, said MAS mistakenly assumed she hadn’t paid four years’ worth of business license fees. She first cleared up the issue by phone, but later received a notice in the mail asking her to pay about $1,200 in back license fees, then another $148 for when she was the business’ sole proprietor. MAS effectively double billed her, Came said, and in both cases it was wrong.
“We’ve always been paid up,” she said, noting that she was able to work with the city and clear up the mistake. “We’ve never had any penalties.”
MAS declined to comment for this story. Director of Audit Kevin Weignant directed New Times’ questions to the city.
Recently hired Morro Bay City Manager David Buckingham said MAS was contracted to audit the past four years and will stay on board for another three years. In the first phase, the company contacted existing business license holders to determine whether any additional fees were owed. Over the remainder of its contract, MAS will search for businesses that are operating in or from outside Morro Bay without proper licenses. The city expects to find about $1.6 million in owed license fees, of which MAS will draw a 40 percent fee (about $640,000).
“Tax collection, while perhaps not very pleasant, is one of the things that governments do,” Buckingham said, adding that the city had to cut its small batch of auditors in recent years. “The city has not effectively done this for six or seven years, and for the 10 years before that, it was doing it but perhaps not very effectively.”
Under the terms of its contract, MAS is paid a percentage of the revenue it collects, a practice that has come under fire elsewhere. And other cities have dealt with backlash from local businesses as well. In February, the city of Alameda discontinued its business license audit program through MAS and issued a public apology to the local business community “for the way in which the Business License Tax Audit was conducted.”
Asked if the fee-based payment method might hamper MAS’ ability to objectively pursue taxes from businesses, Buckingham adamantly disagreed.
“I would not agree that they are being or can be subjective in their processes,” he said. “They absolutely must follow the Morro Bay business license code, and they also have to follow state of California codes and auditing codes in the work that they’re doing.”
Buckingham noted that any business is allowed to appeal MAS’ conclusions. The city had received about 10 appeals, he said.
However, the city did pull back on past collections after blowback from the first phase of auditing. Local musicians and artisans took to social media—using the handle, “Stop the Morro Bay Artist Tax”—to air fears that they would be taxed per gig, plus an additional fee for each member of a musical group.
“There’s been a lot of chatter out there,” musician Billy Foppiano told city councilmembers at a Nov. 6 special meeting. “That’s why we’re here, because we just want to get the facts, and we want Morro Bay to thrive.”
At that meeting, councilmembers directed city staffers to review the city’s municipal code and tax rate structure and make revisions over the next few weeks. They also approved an amnesty period—which will end March 13, 2015—that allows businesses to pay back taxes without penalties, and businesses that paid penalties are entitled to refunds. The city also agreed to reduce license fees for businesses that draw less than $12,000 in gross annual receipts.
Councilmembers acknowledged that the city could have made the changes up front and provided better public education.
“It’s not perfect,” Councilwoman Christine Johnson said. “But we’re making some really strong improvements tonight.”
Morro Bay Chamber of Commerce Executive Director Kelly Wells told New Times, “I think that the local business community spoke loudly and clearly, and the city heard them.”
Senior Staff Writer Colin Rigley can be reached at firstname.lastname@example.org.