01-07-2003 - Business License Fees for Video Arcades0
City of West Covina'
Memorandum
AGENDA
Item No
Date:
TO: Andrew G. Pasmant, City Manager
FROM: Toni Bachman, Director of Finance
SUBJECT: Business License Fees For Video Arcades
RECOMMENDATION:
F-1
1/7/03
Uphold and maintain the current business license structure for Video Arcades and waive
penalties related to payments of back taxes due under the Municipal code for business license
and permit fees by Nickel! Nickell.
DISCUSSION:
This item is placed on the agenda in response to public comments received from a representative
of Nickel! Nickel! and direction from the City Council at the December 3, 2002 City Council
meeting. Correspondence from Nickel! Nickel! has been forwarded to the City Council under
separate cover.
Nickel! Nickel! is an arcade business that charges patrons a $2.95 admission fee and provides
various video and other arcade games for fees. They operate arcades in eight southland cities,
including West Covina. , They have approximately 110 pay game machines with fees ranging
from one nickel to six nickels ($.05 to $30), as well as approximately 30 free games at their
West Covina location. They began operation in West Covina in August 2000 andIhave operated
without a business license since then, despite repeated efforts from staff to have them comply
with the business license code.
At the September 27, 2000 City Council meeting, a representative from Nickel! Nickel! spoke
before the Council indicating that the license fee was not fair compared to similar businesses or
other businesses located within his.shopping center. The City Council directed the Finance staff
to investigate the assertions and report back to the City Council. An item was placed on the
October 17, 2000 City Council agenda that discussed the City''s business license rate along with
a comparison of businesses within the. City as well as the arcade licensing stnictures in
surrounding cities. The City Council received the report and took no action to change the tax
stricture.
Business license staff subsequently followed up with the business to try to bring them into
compliance and eventually had the City Prosecutor send them a notice to comply on September
7, 2001. A law firm representing Nickel! Nickel! filed a claim against the City on September 14,
2001 claiming damages based on the business license fee assessed by the City. The claim was
denied by the City Council on November 5, 2001. The business owner was notified on July 30,
2002 of the claim denial. Further efforts by business license staff to collect back taxes have
resulted in the City Prosecutor giving the business a deadline of .December 17, 2002 to pay back
taxes and penalties totaling $31,316.40, of which 50% is late fees. That amount was for calendar
years 2000,2001, and 2002 and also included the 60% Business Improvement Tax for 2000 and
2001. This amount is just an estimate'since Nickel! Nickelhas not provided the information
necessary to calculate the taxes and permits fees due to the City as required under the Municipal
Code. The City has requested that they provide us with the information necessary to accurately
calculate the taxes and fees due for 2000, 2001 and 2002. The City has also offered to waive late
fees as a compromise to the business.
As an arcade business, Nickel! Nickel! falls under the video games category of the City's
business license schedule. As such, they have the option of paying $563 for the first $50,000 of
gross revenues plus 1 % of revenues in excess of $50,000 (basically 1 % of total gross revenues);
or $28.50 per machine. Under both options, the business must also pay a $30 game of skill
Permit fee per machine (this is a permit fee, not a business license tax). ' This tax and fee
structure has been in place in the City for many years.
Although Nickel! Nickel! initially applied for a business license as a video arcade, they asserted
that their operations were different from most video arcades which charge $.25 - $1.00 per play.
Nickel! Nickel! charges an admission fee of $2.95 plus $.05 - $.30 per play. They also provide
free play games. Two businesses that charged admission fees that were previously located in the
City, Club Disney and Discovery Zone, were similarly assessed under the miscellaneous
business license category and paid 1% of gross revenues, which is similar to one of the options
under the video games category. There is one other video arcade located within the City. They
charge $.25 - $1.00 per play and pay the business license fee under the video game category plus
the.$30 permit fee for games of skill. While Nickel! Nickel! has a different pricing strategy, the
use is essentially the same as the other arcade: a business based on pay video games with a small
party room for, group events. Staff therefore believes that Nickel! Nickel! is appropriately
categorized under the video game category. In their latest correspondence, Nickel! Nickel! has
requested that they be placed in the amusement shows category or that the City create a new
category for family. entertainment centers.
ALTERNATIVES:
1. Detennine that the current tax structure is not appropriate and direct staff to' present a
lower tax structure. Caution. should, be taken that should the City determine to lower the
business license structure for one type of business, other business owners may determine
.that a similar reduction would be appropriate for their business types.
2. Create a new category, Family Entertainment Center, and establish a tax structure as
determined appropriate.
FISCAL IMPACT:
Upholding the current tax and fee structure would result in back taxes and permit fees, from.
Nickel! Nickel! of $40,000 - $15,000 to the City, depending on information provided by them for
the years outstanding. Staff also recommends waiving the penalties for 2000, 2001 and 2002.
The City currently receives approximately $2,500 from business license taxes in the video games
category and an additional approximate $4,000 for the pen -nit fees; for total revenue of $6,500.
This amount does not include any revenue from Nickel! Nickel! . Based on: 140 machines,
revenue from Nickel! Nickel! would be $3,900 from the business -license (if they chose the per
machine, option) and $4,200 for the permit fee. Total license and fee revenue for video games
under the current structure should- be approximately $14,600. Any adjustment to the license and
fee structures would have a corresponding effect on this revenue amount.
Prepared by:
Tom Bachman
Director of Finance