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HomeMy WebLinkAboutLimited Procedures Rvw - TOT - 2010 and 2011 CITY OF PALM DESERT - i FINANCE DEPARTMENT STAFF REPORT Request: 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 2010 and 2011 calendar year. Submitted By: Paul S. Gibson, Finance Director Date: January 24, 2013 Contents: Limited Procedures Review of Various Palm Desert Operators for Compliance with the City of Palm Desert's Transient Occupancy Tax Ordinance for the 2010 and 2011 Calendar Year Recommendation , 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 2010 and 2011 calendar year Committee Recommendation The Audit, Investment and Finance Committee received the report at their January 22, 2013 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 Diehl, Evans & Company, LLP to conduct audits on Transient Occupancy Tax. Five operators were audited; one operator had no findings, and four had an underpayment during the 2010 and 2011 calendar year. Attached are the five reports and a summary of the auditor's findings. Electronic copies have been provided to the City Attorney's office. On September 28, 2012 operators received a copy of their respective audits and were asked to respond with any concerns within a 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 befinreen the operator and the Finance Director, City Manager, Mayor and Mayor Pro-Tempore, all of whom serve on the Audit, Investment and Finance Committee. i Staff Report Limited Procedures Review & Transient Occupancy Tax Collection January 24, 2013 Page 2 of 2 Fiscal Analvsis Underpaid tax totals $10,396. To date, $7,758 has been received from three operators, and $2,638 remains outstanding. Submitted by: Approval: aul S. Gibson, Finance Director ohn Wohlmuth, City Manager nmo C1TY COUNCILACTtON APPROVED DF,NTF,D RECEIVED `� Fj �P�_ OTHER MEETINGDATE l—��/-�0/.� . ^ AYF,S: �_�o�,�"T��,or- Al h�er-� ��Gr-n i K NOES:1.a�n� ABSCNT: ' --r ARSTAlN: VF,RIFIIi,D [3Y: Origin�tl on Filc with City Cicr�ic's fficc G:\Finance\Niamh Ortega\Staff ReportsWudit staff reportsWudit Staff Reports 2012\SR-Council audit 2010-11 TOT.docx T.O.T AUDIT FINDINGS Period January 1, 2010 — December 31, 2010 Operator#1 —This company owes the City of Palm Desert $1,821.00 for underpayment of Transient Occupancy Tax. Operator#2—This company owes the City of Palm Desert $2,638.00 for underpayment of Transient Occupancy Tax. Periods January l, 2010 — December 31, 2010 & January 1, 2011 - December 31, 2011 Operator#3 —There were no findings for this 2 year audit. Operator#4—This company owes the City of Palm Desert $12,498.00 for underpayment of Transient Occupancy Tax, per appeal and adjustment meeting held on October 19�n and under our Palm Desert Municipal Code Sect: 3.28.100, new adjusted amount due $1,385.00. January 1, 2011 - December 31, 2011 Operator#5 —This company owes the City of Palm Desert $4,552.00 for underpayment of Transient Occupancy Tax. _ . . 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 pperator#1, Palm Desert, Califot'nia 92260, (the Hotel), to the City for the period from January 1, 2010 to December 31, 2010. 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. l. 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 2010. We noted that the exemption report for August 2010 did not foot properly resulting in a $300 overstatement of deduction for exemption. This resulted to a $27 overpayment of transient occupancy tax. 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. We noted differences between the gross revenues per the Hotel records and the gross revenues reported in the transient occupancy report. Total difference for the entire period under review was $20,558, resulting to $1,848 underpayment of transient occupancy tax. See Attachment 1 for detailed schedule. - 1 - 2$?�:�t�clielle 1�r.ive,Suixe 300. Irn-ine.,(�:1 92t;06 •'Ic1: ?1-4.9�8.1300 • l�'a�: %14.9�8,�893 Ofjices lo�ated in Ora��e ancd SL�ia L)iegn G'oarrttier 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, March and December 2010. For the three tax returns selected, there were 13 exemptions claimed totaling $13,762. 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 13 � 13.762 $ - 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 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. • 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. ��� �Y�,�.� .�'-� �i.a� L�P Irvine, California August 10, 2012 - 3 - Attachment 1 Operator#1 Revenue Reconciliation For Period January 1, 2010 to December 31, 2010 Gross Rents per Gross Rents Over(Under) Over(Under) Hotel's Accounting per TOT Reported Payment of Report Period Records Reports Revenues Taxes January $ 194,400 $ 193,117 $ (1,283) $ (115) February 214,485 213,080 (1,405) (126) March 309,027 305,766 (3,261) (293) April 251,940 248,375 (3,565) (321) May 140,594 139,489 (1,105) (99) June 87,626 86,567 (1,059) (95) J uly 91,468 90,296 (1,172) (105) August 77,793 77,273 (520) (47) September 79,406 78,441 (965) (87) October 108,278 106,745 (1,533) (138) November 147,538 145,838 (1,700) (153) December 136,365 133,375 (2,990) (269) Total $ 1,838,920 $ 1,818,362 $ (20,558) $ (1,848) OPERATOR#1 SUMMARY OF FINDINGS FOR PERIOD JANUARY 1, 2010 TO DECEMBER 31, 2010 Gross Rent Occupancy Taxes Procedure Finding (Understatement) (Underpayment) Number Reference Overstatement Overpayment * 3 a $ 300 $ 27 3 a (20,558) (1,848) Net Total $ (20,258) $ (1,821) * - 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, 2010 to December 31, 2010. 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 occupancytax. 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 2010. 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 - � �$-� ti�tic:helle I>tive,5uite 300,Ir�-inc�,(:.:1 92G0G •'1'c.l: ?14.9?8.1300 • f;at: ",'14.9;'8.�893 , Of/ice.r located in Orrriz�e and Sarr Dre�o Coirntze,�• 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: March, May and December 2010. For the three tax returns selected, there were 81 exemptions claimed totaling $30,673. 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 54 $ 20,177 $ - Exemption claim for non-transient with improper documentation (a) 1 5,980 538 Exemption claims with improper, incomplete or not supported by documentation 26 4,516 406 81 $ 30,673 � 944 (a) The Hotel did not have a signed "Transient Occupancy Tax Over 31 Days Exemption Form" for all non-transient guests for the year. The total additional exemptions claimed (not included above) for the year for non-transient guests was $18,843 resulting to an underpayment of occupancy tax of$1,694. 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 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. - 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. �.� :�'��.�' ,�`�,.�-e-� ��� �,� Irvine, California August 10, 2012 - 3 - OPERATOR#2 SUMMARY OF FINDINGS FOR PERIOD JANUARY 1, 2010 TO DECEMBER 31, 2010 Gross Rent Occupancy Taxes Procedure (Understatement) (Underpayment) Number Overstatement Overpayment * 6 $ (10,496) $ (944) 6 (18,843) (1,694) Net Total $ (29,339) $ (2,638) * - 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#3, Palm Desert, California 92260, (the Hotel), to the City for the period from January 1, 2010 to December 31, 201 l. 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. l. 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 years 2010 and 2011. 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 fifty 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 tilichellc I�i•.ice,Suite 300, Ir�;inc:,(�A. 92G0G •`.1 c1: ?14.9?8.1300 • F�at: %14.9�8.?893 C,ffice.�iii�aled in Or:r�r�e c�srd 5�,.�n DiFt;n C;o��ritrf:� 5. We reviewed the internal control procedures of the Hotel and determined: (a) how "gross rents" and "uncollected rents" were aceounted 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 six of the transient occupancy tax returns in the period under review. The selected reporting periods were: January, February and April 2010 and January,November and December 2011. For the six tax returns selected, there were 55 exemptions claimed totaling $69,585. 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 55 $ 69,585 $ - 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 front desk. The front desk 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 at the time of departure. - 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 August 10, 2012 - 3 - _. _ - __ __ _ _ __ . . 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, 2010 to December 31, 2011. 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 years 2010 and 2011. 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 City Ordinance 3.28.020D, the definition of"Rent" includes any unrefundable rental deposits. During our review of revenues, we noted that cancellation fees were excluded from taxable revenues reported in the transient occupancy tax returns. Per inquiry with Hotel management, they were not aware that the revenues subject to transient occupancy tax includes cancellation fees. Hotel management represented that in future tax returns, they will make sure that cancellation fees are included in ta�able rents. Total revenues from cancellation fees in 2010 and 2011 are $7,310 and $8,083, respectively. This resulted to underpayment of transient occupancy tax of $658 and $727 in 2010 and 2011, respectively. - 1 - 28?� titidlel.le.I��-ive, Suite 30l), Irvine,(�r1 92G06 •'1"cl: %1-4.9?8.130O •l�al: "14.9�8.�893 Office.�lr�alcd i�t Ora�r�e;xxd.S��rrr Die�c� (:i�z�ntie.�• 4. We selected a sample of fifty 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. During our review, we noted that for purposes of identifying transient and norr-transient, the Hotel counts the check-in and check-out days as two separate days of occupancy. Therefore a guest that stayed for 30 nights only is considered by the Hotel as staying for 31 occupancy days and therefore, is considered a non-transient. Per inquiry with Hotel management, they weren't aware that they were calculating occupancy days incorrectly. Hotel management represented that they will start calculating occupancy day as equal to one night of stay. 6. We reviewed the supporting documentation for exemptions claimed on six of the transient occupancy tax ret�urns in the period under review. The selected reporting periods were: January, February and December 2010 and January, February and March 2011. For the six tax returns selected, there were 36 exemptions claimed. All exemptions claimed were for non-transient guests (including guests that stayed for 30 nights only, as explained in procedure No. 5). We noted that the Hotel does not require non-transient guests to complete the required exemption form. Absent such completed exemption form, guests are deemed to be transient and subject to the City's transient occupancy tax. Per inquiry with Hotel management, they weren't aware that they were supposed to complete the forms and represented that they will start using the forms in the future. Total exemptions claimed for 2010 and 2011, all of which are for non-transient guests, are $50,994 and $72,483, respectively. Transient occupancy taxes related to these exemptions are $4,590 and $6,523 for 2010 and 2011, respectively. 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 front desk. The front desk 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 at the time of departure. We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the txansient 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. /,cG,/'�i�..�`.�...1 �,�-�%I�x-�'��--' ��:.� LGf Irvine, California August 10, 2012 - 3 - OPERATOR#4 SUMMARY OF FINDINGS FOR PERIOD JANUARY 1, 2010 TO DECEMBER 31, 2011 Gross Rent Occupancy Taxes Procedure (Understatement) (Underpayment) Number Overstatement Overpayment * 3 $ (15,393) $ (1,385) ( (123,477) (11,113) Net Total $ (138,870) $ (12,498) * - 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 Hotel), to the City for the period from January 1, 2011 to December 31, 201 l. 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 occupancytax. 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 2011. 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. - 1 - 28'a:�ii.chellc I�7-�vc; tiui.te 300. Irnine, C<1 92G0G •'1'c.l: ?1-�.9?8.130Q• f�as: ?14.9,8.?893 C�ice�loczzi�ed ira Oranga a�ad..S,nn.l�rego Coziretie.c 3. (Continued) a. The HotePs accounting records are maintained on 28-day cycles. Per inquiry, with Hotel's management, they run a query of the revenue posted to the general ledger for rooms and resort facility charges for the month. This query is downloaded to excel and information is summarized. Based on this summarized information, management prepares the transient occupancy tax returns. To verify the accuracy of the query reports, we combined all query reports used to prepare the transient occupancy tax returns for the period January 1, 2011 to December 31, 2011 and recalculated revenues using the Hotel's 28-day periods. Then we compared the total per each 28-day reporting period to the Hotel's accounting records. Per our reconciliation, total revenue reported for the period January 1, 2011 to December 31, 2011 was understated by $50,574 resulting in an underpayment of transient occupancy taxes of$4,552. See Attachment 1 for a detailed schedule. 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. The reports generated by the Hotel to prepare the transient occupancy tax returns are based on preliminary numbers. Any adjustments, if any, made in the accounting records subsequent to filing of the tax returns are not reported as adjustments to subsequent tax returns filed. 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: April, June and August 201 1. For the�three tax returns selected, there were 463 exemptions claimed totaling $245,844. 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 (A) 463 $ 245.844 $ - 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. - 2 - 6. (Continued) (A) The Hotel does not retain documentation that the room was paid for directly by the federal government. Therefore, we were not able to verify that the room was paid for directly by the federal government as required by Section 3.28.040 A2 of the City's ordinance. 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. 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. L�/�� �7�1� �-J ���.�� LL,�' Irvine, California August 10, 2012 - 3 - Attachment 1 Operator#5 Revenue Reconciliation For Period January 1,2011 to December 31,2011 Gross Rents per Facilitiy Charges per Gross Rents Over(Under) Over(Under) Hotel's Accounting Hotel's Accounting Total per Query Reported Payment of Report Period Records Records Revenues Reports Revenues Taxes 12/3/11-12/30/11 $ 1,922,892 $ 80,826 $ 2,003,718 $ 1,989,949 $ (13,769) $ (1,239) 11/5/11-12/2/11 2,532,100 88,795 2,620,895 2,604,913 (15,982) (1,438) 10/8/11-11/4/11 2,553,244 73,894 2,627,138 2,633,292 6,154 554 9/10/11-10/7/11 ' 1,914,378 96,878 2,011,256 2,002,323 (8,933) (804) 8/13/11-9/9/11 1,074,366 95,646 1,170,012 1,196,962 26,950 2,426 7/16/11-8/12/11 1,803,181 133,950 1,937,131 1,941,868 4,737 426 6/18/11-7/15/11 1,597,640 164,667 1,762,307 1,744,365 (17,942) (1,615) 5/21/11-6/17/11 2,259,714 127,933 2,387,647 2,372,815 (14,832) (1,335) 4/23/11-5/20/11 3,021,909 129,540 3,151,449 3,156,463 5,014 451 3/26/11-4/22/11 4,597,743 228,443 4,826,186 4,827,731 1,545 139 2/26/11-3/25/11 3,998,028 220,113 4,218,141 4,163,834 (54,307) (4,888) 1/29/11-2/25/11 2,810,656 120,955 2,931,611 2,948,388 16,777 1,510 1/1/11-1/28/11 2,622,622 105,982 2,928,604 2,942,618 14,014 1,261 Total $ 32,908,473 $ 1,667,622 $ 34,576,095 $ 34,525,521 $ (50,574) $ (4,552) OPERATOR#5 SUMMARY OF FINDINGS FOR PERIOD JANUARY 1, 2011 TO DECEMBER 31, 2011 Gross Rent Occupancy Taxes Procedure Finding (Understatement) (Underpayment) Number Reference Overstatement Overpayment * 3 a $ (50,574) $ (4,552) Net Total $ (50,574) $ (4,552) * - 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).