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HomeMy WebLinkAboutAccountant Report Procedures of Various Operations - Transient Occupancy Tax (TOT)CITY OF PALM DESERT FINANCE DEPARTMENT STAFF REPORT Request: Receive and file the Independent Accountants' Reports on Applying Agreed -upon Procedures of various Palm Desert Operators for compliance with the City of Palm Desert's Transient Occupancy Tax Ordinance for the 2013 and 2014 calendar years. Submitted By: Paul S. Gibson, Finance Director Date: April 28, 2016 Contents: Independent Accountants' Reports on Applying Agreed -upon Procedures of Various Palm Desert Operators for Compliance with the City of Palm Desert's Transient Occupancy Tax Ordinance for the 2013 and 2014 Calendar Years Recommendation By Minute Motion, that the City Council receive and file the Limited Procedures Review of various Palm Desert operators for compliance with the City of Palm Desert's Transient Occupancy Tax ordinance for the 2013 and 2014 calendar year Strateqic Plan Obiective Not applicable. Committee Recommendation The Audit, Investment and Finance Committee received the report at their April 26, 2016 meeting, and it was recommended that it be received and filed by the City Council. Discussion The City of Palm Desert hired the CPA firm of White Nelson Diehl Evans, LLP to conduct audits on Transient Occupancy Tax. Six operators were audited; one operator had no findings, and five had an underpayment during the 2013 and 2014 calendar years. Attached are the six reports and a summary of the auditor's findings. Electronic copies have been provided to the City Attorney's office. In January 2016 operators received a copy of their respective audits and were asked to respond with any concerns within a Staff Report Agreed -upon Procedures - Transient Occupancy Tax Collection April 28, 2016 Page 2 of 2 thirty day period. In the interest of maintaining confidentiality among those operators who wished to respond, it was suggested that instead of speaking during the public Council meeting, a separate meeting be established between the operator and the Finance Director, City Manager, Mayor and Mayor Pro-Tempore, all of whom serve on the Audit, Investment and Finance Commiffee. Fiscal Analvsis Outstanding underpaid tax totals $27,426. Finance is in the process of collecting these funds. Submitted by: Approval: Paul S. Gibson Ju Carthy Finance Director 1 erim 'ty Manager nmo G:\Finance\Niamh Ortega\Staff Reports\Audit staff reports\Audit Staff Reports 2015\SR - Council audit 2013-14 TOT.docx T. O.T. HOTEL AUDIT FINDINGS Period January 1, 2013 — December 31, 2013 Operator # 1 — This company owed the City of Palm Desert $2,497.00 for underpayment of Transient Occupancy Tax but because we did not implement the additional fees requirement per our city attorney advice before July 2015 we agreed to not charge the back TOT owed. Operator #2 — This company owes the City of Palm Desert $19,390.00 for underpayment of Transient Occupancy Tax. Operator #3 — This company owes the City of Palm Desert $69.00 for underpayment of Transient Occupancy Tax. Operator #4 — = This company prior owners owes the City of Palm Desert $1,209.00 to for underpayment of Transient Occupancy Tax. January 1, 2014 - December 31, 2014 Operator #5 — This company owes the City of Palm Desert $6,758.00 for underpayment of Transient Occupancy Tax Operator #6 — There were no findings for this audit. INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED -UPON PROCEDURES City Council City of Palm Desert Palm Desert, California We have performed the procedures enumerated below, which were agreed to by the management of the City of Palm Desert (the City), solely to assist the City in verifying the accuracy of the transient occupancy tax returns submitted by Operator #1 Palm Desert, California 92260, (the Hotel), to the City for the period from January 1, 2013 to December 31, 2013. The Hotel's management is responsible for the preparation and filing of the transient occupancy returns. This agreed -upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the City of Palm Desert. Consequently, we make no representations regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. I. We reviewed the City Municipal Code and related ordinances and resolutions related to transient occupancy tax. No exceptions were noted as a result of this testing. 2. We verified the mathematical accuracy and the timeliness of the transient occupancy reports filed with the City for the calendar year 2013. No exceptions were noted as a result of this testing. 3. We traced the gross revenues reported on the transient occupancy tax returns prepared by the Hotel to gross revenues recorded in the Hotel's accounting records and verified that these were in accordance with the City's ordinance. The results of our testing are as follows: (a) During our review, we noted that pet fees and safe fees were excluded from gross rents on the "Return of Transient Occupancy Tax for Hotels and Others". According to the City's ordinance, the definition of rent would include these charges. Pet fees and safe fees for 2013 totaled $16,930 and $10,817, respectively. This resulted in $2,497 of transient occupancy tax that should have been remitted to the City. However, since the City has not specified this requirement before, there will be no penalties or amounts due for exclusion of these proceeds in TOT calculations for calendar year 2013. The City's management has advised us that, effective immediately, pet fee and safe fees should be included in gross receipts for the calculation of TOT. 28-5 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: _714.9'8.1300 • Fax:-14.9,8. J893 O�ices located in Orange and San Diego Counties 4. We selected a sample of twenty-five individual rental transactions during the review period and for each transaction selected, we verified the tax computations and traced the amounts of rental revenues and transient occupancy taxes collected to the books and records of the Hotel. No exceptions were noted as a result of this testing. 5. We reviewed the internal control procedures of the Hotel and determined: (a) how "gross rents" and "uncollected rents" were accounted for and reported to the City, (b) what procedures were in place to identify transient and non -transient guests and (c) how exemptions, including complimentary rooms, were documented and reported to the City. No exceptions were noted as a result of this testing. 6. We reviewed the supporting documentation for exemptions claimed on three of the transient occupancy tax returns in the period under review. The selected reporting periods were: January, February and November 2013. For all three tax returns submitted in the period under review, there were 17 exemptions claimed totaling $25,917. The results of our testing are as follows: Under (Over) Number of Payment of Exemption Amount of Occupancy Claims Exemptions Taxes Exemption claims supported by proper forms and documentation 17 25-917 $ - (a) During our review, we noted that for federal government employees, the Hotel requires the guest to compete and sign the "City of Palm Desert Transient Occupancy Tax Government Employee Exemption Claim" form or provide an equivalent form provided by the government agency. It is the Hotel's policy to check the federal government identification information. However, due to privacy issues, the Hotel does not keep copies of the identification information as a support for the form. 7. We performed additional procedures that we considered necessary to verify the reasonableness of reported revenues of the Hotel operator. There were no additional procedures considered necessary. 8. We inquired how the Hotel handles reservations and payments made online through a third party such as Expedia.com and how the transient occupancy taxes were collected and reported to the City on these transactions. Per our discussion with Hotel management reservations made online through a third party such as Expedia.com are handled as follows: • Guests will book the hotel room through the intermediary e-channels (Expedia, etc.). • Intermediary charges the guest's credit card for the entire stay at the time of purchase. The Hotel has no knowledge of the rate the guest is charged, or whether the Intermediary is charging or disclosing a tax amount to the guest. 7 8. (Continued) • Intermediary sends the reservation to the Hotel through the Hotel's reservation system. • Upon the guest's arrival, the Hotel sets up an incidental folio for the guest. • Upon check out, the guest is billed for the total in the folio for incidentals. Folio does not indicate rate guest paid to Intermediary. • Hotel invoices the Intermediary for room and tax based on agreed upon rates between the Hotel and the Intermediary. • Hotel records revenue billed to Intermediary as room revenue, and tax collected to appropriate tax accrual account. We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the transient occupancy tax returns. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of City Council, management, and others within the City and is not intended to be, and should not be, used by anyone other than these specified parties. I A;&.,, va",d-) &,-,, Irvine, California February 1, 2016 OPERATOR #1 SUMMARY OF FINDINGS FOR PERIOD JANUARY 1, 2013 TO DECEMBER 31, 2013 Gross Rent Occupancy Taxes Procedure (Understatement) (Underpayment) Number Overstatement Overpayment * 3 $ (27,747) $ (2,497) Net Total $ (27,747) $ (2,497) * Amounts do not include penalties of up to 50% and interest of up to 12% of tax due per City Ordinance 3.28.080(b). INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED -UPON PROCEDURES City Council City of Palm Desert Palm Desert, California We have performed the procedures enumerated below, which were agreed to by the management of the City of Palm Desert (the City), solely to assist the City in verifying the accuracy of the transient occupancy tax returns submitted by Operator 2 , Palm Desert, California 92260, (the Hotel), to the City for the period from January 1, 2013 to December 31, 2013. The Hotel's management is responsible for the preparation and filing of the transient occupancy returns. This agreed -upon procedures engagement was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the City of Palm Desert. Consequently, we make no representations regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. We reviewed the City Municipal Code and related ordinances and resolutions related to transient occupancy tax. No exceptions were noted as a result of this testing. 2. We verified the mathematical accuracy and the timeliness of the transient occupancy reports filed with the City for the calendar year 2013. No exceptions were noted as a result of this testing. 3. We traced the gross revenues reported on the transient occupancy tax returns prepared by the Hotel to gross revenues recorded in the Hotel's accounting records and verified that these were in accordance with the City's ordinance. Per our review of hotel's record, gross rents for the calendar year were $3,472,611. This is $12,728 lower that the gross rents reported in the transient occupancy tax returns. See accompanying Attachment 1 for details. 4. We selected a sample of twenty-five individual rental transactions during the review period and for each transaction selected, we verified the tax computations and traced the amounts of rental revenues and transient occupancy taxes collected to the books and records of the Hotel. Per City's request, the months of July, August and September were excluded from this procedure. No exceptions were noted as a result of this testing. -1- 28,5 Michelle Drive, Suite 300, In•ine, (A 92606 • TO: '71.1.9-8.1300 • Fax:—14.9-8.7893 ( cry located in Onut�e and Sun 19icgo Counties 5. We reviewed the internal control procedures of the Hotel and determined: (a) how "gross rents" and "uncollected rents" were accounted for and reported to the City, (b) what procedures were in place to identify transient and non -transient guests and (c) how exemptions, including complimentary rooms, were documented and reported to the City. No exceptions were noted as a result of this testing. 6. We reviewed the supporting documentation for exemptions claimed on three of the transient occupancy tax returns in the period under review. The selected reporting periods were: January, April and November 2013. For the three tax returns selected, there were 45 exemptions claimed totaling $61,276. The results of our testing are as follows: Under (Over) Number of Payment of Exemption Amount of Occupancy Claims Exemptions Taxes Government exemption claims supported by proper forms and documentation 16 $ 3,470 $ - Government exemption claims not supported by proper forms and documentation. 11 2,615 235 Non -transient exemption claims not supported by proper forms and documentation. 18 55,191 4,967 45 $ 61.276 $ 5.202 The Hotel was not able to provide support for all non -transient exemptions during the three months tested. Total reported exemptions claimed for non -transients for the year was $212,825, which would be an underpayment of $19,155 for the year. The total amount reported as not being supported in the accompanying Summary of Findings of $215,440 is made up of $2,615 of government exemption claims not supported and $212,825 of non -transient exemption claims not supported. 7. We performed additional procedures that we considered necessary to verify the reasonableness of reported revenues of the Hotel operator. There were no additional procedures considered necessary. 8. We inquired how the Hotel handles reservations and payments made online through a third party such as Expedia.com and how the transient occupancy taxes were collected and reported to the City on these transactions. Per our discussion with Hotel management reservations made online through a third party such as Expedia.com are handled as follows: • Guests will book the hotel room through the intermediary e-channels (expedia, etc) • Intermediary charges the guest's credit card for the entire stay at the time of purchase. The Hotel has no knowledge of the rate the guest is charged, or whether the Intermediary is charging or disclosing a tax amount to the guest. • Intermediary sends the reservation to the Hotel's corporate office. The Corporate office will then enter the reservation to the Hotel's system. • Upon the guest's arrival, the Hotel sets up two folios for the guest. One for incidentals and one for room and tax. The room rate in the folio is the agreed -upon rate between the Hotel and the intermediary. • Upon check out, the guest is billed for the total in the folio for incidentals. Then the Hotel invoices or charges the intermediary's credit card on file, depending on the payment arrangement between the Hotel and intermediary, for the total in the folio for room and tax. • Revenue and related tax are recorded on the Hotel's books every night during the entire stay. -2- We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the transient occupancy tax returns. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of City Council, management, and others within the City and is not intended to be, and should not be, used by anyone other than these specified parties. /�4� ; n I 4;J,& LLP Irvine, California February 8, 2016 -3- OPERATOR #2 SUMMARY OF FINDINGS FOR PERIOD JANUARY 1, 2013 TO DECEMBER 31, 2013 Procedure Number 6 6 6 Net Total Gross Rent (Understatement) Overstatement Occupancy Taxes (Underpayment) Overpayment * $ (2,615) $ (235) (55,191) (4,967) (157,634) (14,188) $ (215,440) $ (19,390) * - Amounts do not include penalties of up to 50% and interest of up to 12% of tax due per City Ordinance 3.28.080(b). Report Period January 2013 February 2013 March 2013 April 2013 May 2013 June 2013 July 2013 August 2013 September 2013 October 2013 November 2013 December 2013 Total Operator #2 Revenue Reconciliation For Period January 1, 2013 to December 31, 2013 Per Hotel's Records Gross Rents Pet Fee Total $ 327,605 $ 401,974 520,923 427,386 243,492 203,367 176,901 186,680 182,441 239,330 266.410 287,170 $ 3,463,679 $ 358 $ 327,963 $ 495 402,469 330 521,253 358 427,744 1,280 244,772 619 203,986 1,227 178,128 583 187,263 561 183,002 1,103 240,433 1,015 267,425 1,003 288,173 8,932 $ 3,472,611 $ Attachment 1 Gross Rents TOT Return 328,087 $ 403,441 521,363 427,744 243,492 203,986 178,116 199,940 183,140 240,433 267,424 288,173 3,485,339 $ Unknown Variances 124 972 110 (1,280) (12) 12,677 138 (1) 12,728 INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED -UPON PROCEDURES City Council City of Palm Desert Palm Desert, California We have performed the procedures enumerated below, which were agreed to by the management of the City of Palm Desert (the City), solely to assist the City in verifying the accuracy of the transient occupancy tax returns submitted by Operator #3 Palm Desert, California 92211, (the Hotel), to the City for the period from January 1, 2013 to December 31, 2013. The Hotel's management is responsible for the preparation and filing of the transient occupancy returns. This agreed -upon procedures engagement was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the City of Palm Desert. Consequently, we make no representations regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. 1. We reviewed the City Municipal Code and related ordinances and resolutions related to transient occupancy tax. No exceptions were noted as a result of this testing. 2. We verified the mathematical accuracy and the timeliness of the transient occupancy reports filed with the City for the calendar year 2013. No exceptions were noted as a result of this testing. 3. We traced the gross revenues reported on the transient occupancy tax returns prepared by the Hotel to gross revenues recorded in the Hotel's accounting records and verified that these were in accordance with the City's ordinance. No exceptions were noted as a result of this testing. 2873 Nlichck Drive, Suite 300, In•uie, CA 92606 - Tcl:-14.978.1300 - I,ax:-14.9-8.-893 091-e� located in Orange and .San Die Counties 4. We selected a sample of twenty-five individual rental transactions during the review period and for each transaction selected, we verified the tax computations and traced the amounts of rental revenues and transient occupancy taxes collected to the books and records of the Hotel. Per City's request, the months of July, August and September were excluded from this procedure. No exceptions were noted as a result of this testing. 5. We reviewed the internal control procedures of the Hotel and determined: (a) how "gross rents" and "uncollected rents" were accounted for and reported to the City, (b) what procedures were in place to identify transient and non -transient guests and (c) how exemptions, including complimentary rooms, were documented and reported to the City. No exceptions were noted as a result of this testing. 6. We reviewed the supporting documentation for exemptions claimed on three of the transient occupancy tax returns in the period under review. The selected reporting periods were: January, February and July 2013. For the three tax returns selected, there were 7 exemptions claimed totaling $38,548. The results of our testing are as follows: Under (Over) Number of Payment of Exemption Amount of Occupancy Claims Exemptions Taxes Exemption claims supported by proper forms and documentation 6 $ 37,783 $ - Exemption claims not supported by proper forms and documentation (A) 1 765 69 7 $ 38.548 69 (A)The Hotel changed ownership effective June 1, 2013. This finding relates to the exemptions claimed for the month of February 2013. 7. We performed additional procedures that we considered necessary to verify the reasonableness of reported revenues of the Hotel operator. There were no additional procedures considered necessary. 8. We inquired how the Hotel handles reservations and payments made online through a third party such as Expedia.com and how the transient occupancy taxes were collected and reported to the City on these transactions. Per our discussion with Hotel management reservations made online through a third party such as Expedia.com are handled as follows: • Guests will book the hotel room through the intermediary e-channels (expedia, etc). • Intermediary charges the guest's credit card for the entire stay at the time of purchase. The Hotel has no knowledge of the rate the guest is charged, or whether the Intermediary is charging or disclosing a tax amount to the guest. 2 8. (Continued) • Intermediary sends the reservation to the Hotel's corporate office. The corporate office will then enter the reservation to the Hotel's system. • Upon the guest's arrival, the Hotel sets up an incidental folio for the guest. • Upon check out, the guest is billed for the total in the folio for incidentals. Then the Hotel bills the intermediary for room and tax based on agreed upon rates between the Hotel and the Intermediary. • Revenue and related tax are recorded on the Hotel's books every night during the entire stay. We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the transient occupancy tax returns. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of City Council, management, and others within the City and is not intended to be, and should not be, used by anyone other than these specified parties. Z)-� oz;,I& e4"wd) LLB Irvine, California February 8, 2016 3 OPERATOR #3 SUMMARY OF FINDINGS FOR PERIOD JANUARY 1, 2013 TO DECEMBER 31, 2013 Gross Rent Occupancy Taxes Procedure (Understatement) (Underpayment) Number Overstatement Overpayment * 6 $ (765) $ (69) Net Total $ (765) $ (69) * - Amounts do not include penalties of up to 50% and interest of up to 12% of tax due per City Ordinance 3.28.080(b). INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED -UPON PROCEDURES City Council City of Palm Desert Palm Desert, California We have performed the procedures enumerated below, which were agreed to by the management of the City of Palm Desert (the City), solely to assist the City in verifying the accuracy of the transient occupancy tax returns submitted by Operator #4 , Palm Desert, California 92260, (the Hotel), to the City for the period from January 1, 2013 to December 31, 2013. The Hotel's management is responsible for the preparation and filing of the transient occupancy returns. This agreed -upon procedures engagement was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the City of Palm Desert. Consequently, we make no representations regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. I. We reviewed the City Municipal Code and related ordinances and resolutions related to transient occupancy tax. No exceptions were noted as a result of this testing. 2. We verified the mathematical accuracy and the timeliness of the transient occupancy reports filed with the City for the calendar year 2013. No exceptions were noted as a result of this testing. 3. We traced the gross revenues reported on the transient occupancy tax returns prepared by the Hotel to gross revenues recorded in the Hotel's accounting records and verified that these were in accordance with the City's ordinance. During our review, we noted that pet fees and room damage income were excluded from gross rents on the "Return of Transient Occupancy Tax for Hotels and Others". According to the City's ordinance, the definition of rent would include these charges. Pet fees and room damage income for 2013 totaled $3,097 and $4,200, respectively. This resulted in $657 of transient occupancy tax that should have been remitted to the City. -1- 28^3 Michelle Drill-c, Suite 300, tn-uie, CA 92606 • Tel:-14.9-8.1300 • Fax: �14.9"&. 893 O j)icer located in Orange and .San Diqu Counties 4. We selected a sample of twenty-five individual rental transactions during the review period and for each transaction selected, we verified the tax computations and traced the amounts of rental revenues and transient occupancy taxes collected to the books and records of the Hotel. The Hotel changed ownership and Operator #4 the owner during the period under review, said that they no longer have access to the Operator #4 Desert Property Management System and, therefore, cannot provide the Guest List and or Daily Revenue Reports. Therefore, we were not able to perform this review. 5. We reviewed the internal control procedures of the Hotel and determined: (a) how "gross rents" and "uncollected rents" were accounted for and reported to the City, (b) what procedures were in place to identify transient and non -transient guests and (c) how exemptions, including complimentary rooms, were documented and reported to the City. Due to the change in ownership, we were not able to perform this procedure. 6. We reviewed the supporting documentation for exemptions claimed on three of the transient occupancy tax returns in the period under review. The selected reporting periods were: February, March and December 2013. For all three tax returns submitted in the period under review, there were 4 exemptions claimed totaling $18,874. The results of our testing are as follows: Number of Exemption Claims Government exemption claims supported by proper forms and documentation 1 Non -transient exemption claims supported by proper forms and documentation. 1 Non -transient exemption claims not supported by proper forms and documentation. (A) 2 4 Under (Over) Payment of Amount of Occupancy Exemptions Taxes $ 10,250 $ - 2,492 6,132 552 $ 18.874 $ 552 (A) Per review of the documents, we were able to verify that the guest stayed for more than 31 days. However, the Hotel did not obtain a signed "Transient Occupancy Tax Over 31 Days Exemption Form" from the guest. In order to qualify for an over 31 day exemption, this form must be completed in full by the operator and signed by the guest, prior to occupancy. Absent such obligatory agreement, guest is deemed to be a transient subject to the City's transient occupancy tax. 7. We performed additional procedures that we considered necessary to verify the reasonableness of reported revenues of the Hotel operator. There were no additional procedures considered necessary. 8. We inquired how the Hotel handles reservations and payments made online through a third party such as Expedia.com and how the transient occupancy taxes were collected and reported to the City on these transactions. Due to the change in ownership, we were not able to perform this procedure. -2- We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the transient occupancy tax returns. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of City Council, management, and others within the City and is not intended to be, and should not be, used by anyone other than these specified parties. Irvine, California February 1, 2016 -3- OPERATOR #4 SUMMARY OF FINDINGS FOR PERIOD JANUARY 1, 2013 TO DECEMBER 31, 2013 Gross Rent Occupancy Taxes Procedure (Understatement) (Underpayment) Number Overstatement Overpayment * 3 $ (7,297) $ (657) 6 (6,132) (552) Net Total $ (13,429) $ (1,209) * Amounts do not include penalties of up to 50% and interest of up to 12% of tax due per City Ordinance 3.28.080(b). INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED -UPON PROCEDURES City Council City of Palm Desert Palm Desert, California We have performed the procedures enumerated below, which were agreed to by the management of the City of Palm Desert (the City), solely to assist the City in verifying the accuracy of the transient occupancy tax returns submitted by Operator #5 Palm Desert, California 92260, (the Operator), to the City for the period from January 1, 2014 to December 31, 2014. The Operator's management is responsible for the preparation and filing of the transient occupancy returns. This agreed -upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the City of Palm Desert. Consequently, we make no representations regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. 1. We reviewed the City Municipal Code and related ordinances and resolutions related to transient occupancy tax. No exceptions were noted as a result of this testing. 2. We verified the mathematical accuracy and the timeliness of the transient occupancy reports filed with the City for the calendar year 2014. For calendar year 2014, the Operator was late in submitting their transient occupancy tax returns for four out of the twelve months. Penalties and interest were paid by the operator. However, as noted on procedure 3, we were not able to verify accuracy of the gross rents reported on the transient occupancy tax returns, therefore, we were not able to verify the accuracy of the penalties and interest paid since we were not able to verify the accuracy of the tax on which the penalties and interest are based on. 28^3 'Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: '14.978.1300 • Fax: �14.978.�893 Offllrs located in Ornn�e and San Digo Connties 3. We traced the gross revenues reported on the transient occupancy tax returns prepared by the Operator to gross revenues recorded in the Operator's accounting records and verified that these were in accordance with the City's ordinance. The Operator is a management company for condominium units (units) that are available for short-term rentals. The management company does not maintain an accounting system. A majority of the units are reserved through Booking.com and Expedia. Guests that want to stay at the units will reserve their stay through Booking.com and Expedia. Guests enter in all necessary information on the website in order to reserve their unit including payment information. When Booking.com and Expedia receive a reservation, the management company receives this information directly by email. The management company will note all the pertinent information such as name, address, dates of arrival, etc. For Booking.com reservations, the management company will charge the guest a one night stay up front as a deposit. Booking.com receives an 18% commission for each reservation booked through their website. They invoice the lodge on a monthly basis based on the reservations from the previous month that did not cancel. For Expedia reservations, instead of charging the guest, the management company charges Expeida's virtual credit card at most 5 days prior to the guests' arrival. Expedia sends the lodge a report each month of all the charges made to the card, which represents the revenue for the previous month. Another way guests can make reservation is by calling the management company directly. They will respond to ads that are posted on online sites (such as Craigslist) regarding units that are available for short-term rentals. When guests reserve in this manner they provide the management company all pertinent information over the phone including payment information. The management company charges one night up front. We noted that the system in place to track the customer information and reservations is very informal as this is not tracked in a computer system, only by hand. The management company was not able to produce records regarding revenues from reservations made by phone. As a result, we were only able to obtain support for a portion of the Operator's monthly revenues. The Operator does not maintain an accounting system; therefore the only support for revenue we were able to obtain was through their online third party reservation systems. We were not able to obtain support for reservations that were booked directly with the Operator. See Attachment 1. 4. We selected a sample of twenty-five individual rental transactions during the review period and for each transaction selected, we verified the tax computations and traced the amounts of rental revenues and transient occupancy taxes collected to the books and records of the Operator. Per City's request, the months of July, August and September were excluded from this procedure. We were not able to perform this procedure due to the Operator's limited accounting system. 5. We reviewed the internal control procedures of the Operator and determined: (a) how "gross rents" and "uncollected rents" were accounted for and reported to the City, (b) what procedures were in place to identify transient and non -transient guests and (c) how exemptions, including complimentary rooms, were documented and reported to the City. The management company does not maintain an accounting system. A majority of the units are reserved through Booking.com and Expedia. Guests that want to stay at the units will reserve their stay through Booking.com and Expedia. Guests enter in all necessary information on the website in order to reserve their condo including payment information. When Booking.com and Expedia receive a reservation, the management company receives this information directly by email. 5. (Continued) The management company will note all the pertinent information such as name, address, dates of arrival, etc. For Booking.com reservations, the management company will charge the guest a one night stay up front as a deposit. Booking.com receives an 18% commission for each reservation booked through their website. They invoice the lodge on a monthly basis based on the reservations from the previous month that did not cancel. For Expedia reservations, instead of charging the guest, the management company charges Expeida's virtual credit card at most 5 days prior to the guests' arrival. Expedia sends the lodge a report each month of all the charges made to the card, which represents the revenue for the previous month. Another way guests can make reservation is by calling the management company directly. They will respond to ads that are posted online sites (such as Craigslist) regarding units that are available for short-term rentals. When guests reserve in this manner they provide the management company all pertinent information over the phone including payment information. The management company charges one night up front. We noted that the system in place to track the customer information and reservations is very informal as this is not tracked in a computer system, only by hand. 6. We reviewed the supporting documentation for exemptions claimed on all twelve of the transient occupancy tax returns in the period under review. For all twelve of the tax returns submitted in the period under review, there were 82 exemptions claimed for a total of $90,741. All exemptions claimed by the Operator were for non -transient guests. However, the Operator only obtained a signed "Transient Occupancy Tax Over 28 Days Exemption Form" from three of the non -transient guests. Guests that do not sign an Exemption Form are deemed to be transients and subject to transient occupancy tax. Total exemptions that the Operator was not able to provide supporting documents was $75,091, total tax of which is $6,758. 7. We performed additional procedures that we considered necessary to verify the reasonableness of reported revenues of the Operator. Due to the Operator's limited accounting records, we were not able to determine if additional procedures were necessary. 8. We inquired how the Operator handles reservations and payments made online through a third party and how the transient occupancy taxes were collected and reported to the City on these transactions. Per our discussion with Operator reservations made online through Booking.com are handled as follows: • Guests will book the room through Booking.com and Expedia. • Booking.com and Expedia provides the Operator with the reservation information. • For Booking.com, the Operator will charge the guests credit card for one night stay once the Operator receives the reservation. Three days prior to guest's arrival, the Operator will charge the guest for the remaining balance. • For Expedia, the Operator will charge Expedia's virtual credit card at most 5 nights prior to the guests' arrival. 3 t.. 8. (Continued) • On a monthly basis, Booking.com invoices the Operator for 18% of all reservations that were booked through their site, excluding any reservations that were cancelled. • On a monthly basis, Expedia sends the Operator a report of all the charges made to the virtual credit card for the previous month. • Revenue and related occupancy tax are recognized upon guest's arrival. We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the transient occupancy tax returns. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of City Council, management, and others within the City and is not intended to be, and should not be, used by anyone other than these specified parties. ZLx1 tLaUd) LG/ Irvine, California February 1. 2016 4 OPERATOR #5 SUMMARY OF FINDINGS FOR PERIOD JANUARY 1, 2014 TO DECEMBER 31, 2014 Gross Rent Occupancy Taxes Procedure (Understatement) (Underpayment) Number Overstatement Overpayment * 6 $ (75,091) $ (6,758) * - Amounts do not include penalties of up to 50% and interest of up to 12% of tax due per City Ordinance 3.28.080(b). N M l() 000 00 B c0 CD CDN y (M n N N t0 n M tt00 O N N E C q R to v v N M LO v O u V O m C C �p Q C � EA fA M O LO Co 0) O O N O n Cl) O M 7 co O O) n O) co M f0 M O H N n 0o N N O 0) M O) t0 M C� 00 LO 0 M O CD C 0000 000 coo co co M CO ; fD N o m O (7 ul v). N <0 coM n W N N C c r- W 0 00 O ee�� M O n 1A M CO M 1 n 0 O 0000 O 0 to ID 0 M l0 n M M w V O N 1n M n n O M M M M N M Q U') 7 m N C N m Q' O Fn v9 0 O E 0 0 N O) N 0 to O O O pp O O pp M l() V1 n v W N O O N V O T st N j C co N �D V) O m l0 0 n n n f'�1 00 l0 00 O1 lD t0 O N Cl) a rn 0 CL a rn K 0 W 0:u c o 1n p m 0 CL a a C � Q V � CD C) � N V > O y W 0 i i i c m n O °- m o Ln t ,� Om� �cc c�� m t� C6 o ~ o cu m 3 a 0 u9 u9 0 o � LL (0 N O O N a O �n n 00 O O �n N M 0 M 0) N l0 N IA O �Ii 00 �2 N N r� ~ m mO O. CL N x Q, W Ci y O N (� O d9 O N LO CO(p to N N N CY) 0 0 n� N O ma E n o n ao cq n S rn n M o N h H 0 N C, i tnD- 00. V It cy O) O n NCL N M 0 0 as oo E (� aE) b% t0% N C °) E 0 o v o o 0 0 m o a m O �-� '' 0 0 N a Z, N o 0 0 o O N d O1 O rn 0 M 3 E '- ', > 3 E-0 E E E GI A L Q 0 Q 75 CIO O j U C LL Q a 0 O d _ O y 0= Lm Z O H 0) CD N Q VV, INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED -UPON PROCEDURES City Council City of Palm Desert Palm Desert, California We have performed the procedures enumerated below, which were agreed to by the management of the City of Palm Desert (the City), solely to assist the City in verifying the accuracy of the transient occupancy tax returns submitted by Operator #6 Palm Desert, California 92260, (the Hotel), to the City for the period from January 1, 2014 to December 31, 2014. The Hotel's management is responsible for the preparation and filing of the transient occupancy returns. This agreed -upon procedures engagement was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the City of Palm Desert. Consequently, we make no representations regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. 1. We reviewed the City Municipal Code and related ordinances and resolutions related to transient occupancy tax. No exceptions were noted as a result of this testing. 2. We verified the mathematical accuracy and the timeliness of the transient occupancy reports filed with the City for the calendar year 2014. No exceptions were noted as a result of this testing. 3. We traced the gross revenues reported on the transient occupancy tax returns prepared by the Hotel to gross revenues recorded in the Hotel's accounting records and verified that these were in accordance with the City's ordinance. No exceptions were noted as a result of this testing. 4. We selected a sample of twenty-five individual rental transactions during the review period and for each transaction selected, we verified the tax computations and traced the amounts of rental revenues and transient occupancy taxes collected to the books and records of the Hotel. Per City's request, the months of July, August and September were excluded from this procedure. No exceptions were noted as a result of this testing. -1- 2875 Michelle Drive, Suite 300, In -Inc, CA 92606 • Tel: 114.9-8.1300 • Fax: —14.978.7893 Qgic's located in Orange and San Diego ('aunties ,*M. - 5. We reviewed the internal control procedures of the Hotel and determined: (a) how "gross rents" and "uncollected rents" were accounted for and reported to the City, (b) what procedures were in place to identify transient and non -transient guests and (c) how exemptions, including complimentary rooms, were documented and reported to the City. No exceptions were noted as a result of this testing. 6. We reviewed the supporting documentation for exemptions claimed on three of the transient occupancy tax returns in the period under review. The selected reporting periods were: February, September and December 2014. For the three tax returns selected, there were 227 exemptions claimed totaling $124,999. The results of our testing are as follows: Number of Exemption Claims Exemption claims supported by proper forms and documentation 227 Under (Over) Payment of Amount of Occupancy Exemptions Taxes $ 124.999 $ During our review we noted that for federal government employees, the Hotel requires the guest to compete and sign the "City of Palm Desert Transient Occupancy Tax Government Employee Exemption Claim" form. It is the Hotel's policy to check the federal government identification information. However, due to privacy issues, the Hotel does not keep copies of the identification information as a support for the form. 7. We performed additional procedures that we considered necessary to verify the reasonableness of reported revenues of the Hotel operator. There were no additional procedures considered necessary. 8. We inquired how the Hotel handles reservations and payments made online through a third party such as Expedia.com and how the transient occupancy taxes were collected and reported to the City on these transactions. Per our discussion with Hotel management reservations made online through a third party such as Expedia.com are handled as follows: • Guests will book the hotel room through the intermediary e-channels (expedia, etc). • Intermediary charges the guest's credit card for the entire stay at the time of purchase. The Hotel has no knowledge of the rate the guest is charged, or whether the Intermediary is charging or disclosing a tax amount to the guest. • Intermediary sends the reservation to the Hotel's corporate office. The corporate office will then enter the reservation to the Hotel's system. • Upon the guest's arrival, the Hotel sets up an incidental folio for the guest. • Upon check out, the guest is billed for the total in the folio for incidentals. Then the Hotel bills the intermediary for room and tax based on agreed upon rates between the Hotel and the Intermediary. • Revenue and related tax are recorded on the Hotel's books every night during the entire stay. -2- 9. We reviewed the internal control procedures of the Hotel to determine how food and beverage included in room rate is accounted for. We reviewed the allocation of room rate between rent revenue and food and beverage revenue. The hotel offers several packages where meals are included in the guest room rate. The guest is charged the tax at the room rate amount. Internally the hotel allocates a portion of the room rate to food and beverage (account 350054). Package rates are set up with certain package codes in the Hotel's system so the system will know how much to allocate. Allocations in the package code changes due to seasons, vendors, or groups. The amounts are allocated to their general accounts during the night audit process. The Hotel's system does this automatically. The total daily revenue report shows the total food and beverage allocation for the day, however, the report does not individually identify which guests received the food and beverage allocation and how much, therefore, we were not able to trace food and beverage allocation per guest. For the calendar year 2014, when the hotel prepared the transient occupancy tax return for the months of January through May, the Hotel included the balance of account 350054 to the gross rent revenues. This changed after the State audited the Hotel for sales tax and was told that the food and beverage portion should be subject to sales tax and not transient occupancy tax. Therefore, starting June the food and beverage portion was not included in the revenues subject to transient occupancy tax. Total food and beverage allocation reported in the transient occupancy tax returns for the months of January through May was $96,896 and corresponding tax was $8.721. We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the transient occupancy tax returns. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of City Council, management, and others within the City and is not intended to be, and should not be, used by anyone other than these specified parties. Irvine, California February 1, 2016 -3-