Provo City

Business License Proposal


Background

Nearly ten years ago, Utah state law was changed by the State Legislature to establish new state standards for how cities can assess business license fees for local businesses.  The law states that the fees charged may equal but cannot exceed the cost of regulating business activity and essentially creates three general classes of license fees which cities can charge. These include:

  • Base Administrative Fees.  These fees can be assessed to recover the City’s direct cost of administering a business license program.  Costs of administering business licenses include staffing, cost of data processing, inspections, mailing, and overhead. 
  • Disproportionate Fees.  The law allows cities to recover the "disproportionate" cost of services provided to businesses in a given business class or businesses located in a geographic area as compared to the services offered to homeowners.  For example, if convenience stores on average generate more police calls per year than a single family owner-occupied home does, then the City can calculate the average cost of a police call, multiply that by the average number of police calls generated by convenience stores stores less the average cost of a police call multiplied by the average annual number of police calls generated by single family owner-occupied homes, and recover that as a business license charge. Disproportionate fees also include the costs of disproportionate regulatory services such as fire inspection costs.
  • Enhanced Service Level Fees.  The law also allows cities to recover the costs of services provided to business in a given business class or located in a geographic area that are offered at a higher level than in other areas.  For example, if the City were to clean streets throughout the city about four times per year, but were to clean them in a downtown area once a week, the City could calculate the cost of those additional 48 street cleaning cycles and divide it out among the business located in that downtown area and recoup that cost as part of the business license fee.

About a year ago, the City received complaints from several business owners that they felt that the license fee being charged was in excess of the regulatory costs associated with the license.  The City hired Lewis Young Robertson and Burningham, a Utah based financial consulting firm, to do an analysis as required by State law to determine whether our license fees were being assessed according to the law. The study was recently amended by Zions Bank Public Finance and the conclusion of the study was that some of our license fees were excessive and that others were significantly under what the law would allow.

In fact, the study found that the City was incurring regulatory costs and providing disproportionate services to the business community in excess of $1.5 million per year while business license revenues were only $550,000 per year.

The Process

The results of the study were provided to the Mayor and Municipal Council who asked the city staff and the consultants to model a variety of options for adjusting license fees to be more in accordance with State law.   After considering a range of alternatives, the Council suggested that the City work toward a cost recovery model that achieved the following goals over a five year phase in period.

 

 

Current Cost Recovery

Proposed Cost Recovery

Base Administrative Costs

100%

100%

Disproportionate Service Level Costs

17%

50%

Enhanced Service Level Costs

0%

0%

Because the law requires that the City treat all businesses within a given class uniformly, City staff is drafting an ordinance which changes business license fees effective new licenses beginning in 2012 and licenses renewed for the year beginning January 1, 2013.  Fees will be phased in over five years.  Some fees will be reduced to comply with the law, and they will be reduced fully in the first year.  Those that will increase will do so gradually over the five year period.

Current license fees range between $150 and $475 per year for most business classes depending on the size of the business.  Renewal fees in the first year of this new structure will run generally from $159 to as high as $5,347 per year depending on the business class.  Highest fees will be for water parks, pawnbrokers, and the largest retail establishments.  Most license fees will be under $600 per year.  Some small and medium sized businesses will see their fees reduced.

Total revenue to the City will increase from $550,000 in the first year to $607,000 as a result of recovering more of the disproportionate costs, and will increase at a similar level in the succeeding four years as the 50% recovery model is phased in.

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