Business License Tax Update and Fiscal Sustainability

A business license is an annual regulatory permit for the privilege of conducting business within the City. This license is issued after a business has complied with applicable local, state and federal requirements and has paid applicable fees/taxes. The business license is required to be renewed annually. 

The Foster City Municipal Code requires that any person or entity who conducts business in or whose business is based in Foster City, is required to obtain a Foster City Business License. “Business” includes professions, trades, occupations etc. Conducting business in the City without a valid business license can result in penalties and other enforcement actions.  

The City is faced with fiscal challenges with stagnant revenues given the current economic conditions, state take-aways of certain local funds, and aging infrastructure. The City’s 5-Year Financial Plan shows ongoing General Fund structural deficits as budgeted annual expenditures exceed estimated annual revenues. Based on the Financial Plan, the City is anticipating a budget deficit of approximately $39.4 million over the course of the next five (5) years. This includes approximately $17.6 million that is being withheld by the State in Vehicle License Fees. 

In recognition of the fiscal challenges and the City’s commitment to provide uninterrupted services to the community, the City Council directed staff to explore new or additional revenue sources to ensure long-term fiscal sustainability. Specifically, Council directed staff to explore a potential update to the City’s current Business License Tax. While revenues generated from the potential Business License Tax update will not entirely solve the structural deficit, it will provide a consistent and stable revenue stream for the City.  

The City of Foster City’s Business License Tax Ordinance was first adopted in 1972, shortly after the City’s incorporation. Since that time, the Ordinance has been updated only once in 2013. Currently, the minimum Business License Tax is $100 ($200 for General Contractors). The City’s Business License Tax includes a gross receipts component consisting of a fixed business license (gross receipts) tax rate of 75 cents per $1,000, on a business' first $39,196,000 in reported gross receipts (for calendar year 2024).  The taxable gross receipts are adjusted annually for inflation based on the local Consumer Price Index (CPI).  

Nonprofit Organizations as defined under Section 501(c)(3) of the United States Internal Revenue Code and Farmers Markets approved by the City, whether held on public or private property are exempt from Business License Tax. 

The City is projecting economic volatility for several of its key revenue streams that support its General Fund as noted below:  

• Transient occupancy tax (TOT/hotel) revenues in Foster City have improved steadily post pandemic, however, the ability to conduct remote meetings has likely reduced business travel and hotel occupancy rates. TOT revenues continue to trail pre-pandemic levels.  
• Higher interest rates have had multiple impacts as the City's investment income has expanded but so has the cost of service and supplies as well as supply chain disruptions.   
• Development activity within the City has declined due to high interest rates, lack of vacant land, high labor costs and difficulty obtaining bank loans.  
• The continued trend in State mandates places additional burden on existing resources.  
• State withholding millions of dollars in revenues from vehicle license fees (VLF) to San Mateo County cities due to State Budget deficits.  
• Increasing personnel costs due to cost-of-living adjustment (COLA) each year coupled with increasing pension and health insurance costs. 

Approximately 85% of the City’s General Fund budgeted revenues come from taxes. Revenues from Business License Tax currently generate approximately between $1.6 million to $1.9 million annually, constituting about 3% of the City’s $58 million General Fund revenue. These unrestricted funds support essential City services such as maintaining: 911 emergency medical, police, and fire response times and services; clean, safe, and inviting parks and recreation facilities; infrastructure to prevent flooding and other hazards; local streets, pathways, bike lanes, and public sidewalks. All these core vital services provided by the City contribute to making Foster City a great place to live, work and play. 

Over the years, the City has added additional revenues in an incremental and diversified way. The City exercises fiscal stewardship by budgeting conservatively and controlling costs while continuing to provide the essential services our residents and businesses rely on. 

• In 2018, the City increased its transient occupancy tax (TOT) paid by hotel guests from 9.5% to 11% effective January 1, 2019, then to 12% effective July 1, 2019. 
• In 2022, the City adopted new development impact fees on new development projects to ensure that development bears a proportionate share of the cost of capital facilities (such as transportation, public safety, park facilities) necessary to accommodate such development in order to promote and protect the public health, safety, and welfare. 
• In 2023, User Fee Studies that provided a comprehensive assessment of the reasonable costs associated with services provided was conducted. Based on the results of the Study, fees and other charges were increased or new fees were added to recover costs associated with the provision of specific services, thereby reducing the use of General Fund monies for such purposes. 
• Cities are service-oriented organizations that rely on human capital to provide services. In Foster City, personnel costs represent approximately 63% of the FY 23-24 General Fund annual operating budget (excluding Fire personnel which is contracted). Currently, services are being provided by 177 authorized full-time City employees. Staffing levels have remained the same or lower than historic staffing levels as the City in an effort to reduce/maintain costs. 

Other efforts that the City has undertaken to manage the City budget include:  

• Periodically reviewing the organizational structure and  restructuring as necessary for cost savings and/or improved operational efficiencies and service delivery.  
• Implementing a hiring freeze during the pandemic.  
• Seeking grant opportunities for capital improvement and infrastructure projects.  
• Pursuing grant opportunities to offset staffing costs.  
• Using consultant services to  augment staffing needs.  
• Periodically evaluating & prioritizing capital projects that  need replacement and maintenance and defer/extend non-critical projects.  
• Renegotiating contracts wherever possible.   
• Leveraging the use of technology in City Operations.  
• Taking positions on legislation that will adversely impact City revenues and operations.  

A regressive business license (gross receipts) tax requires all businesses to pay at the same Business License Tax rate regardless of the value of the taxable gross receipts that each individual business reports. Regressive tax rates cause a business’ average Business License Tax burden to decrease as higher taxable gross receipts are reported. In other words, businesses that report lower taxable gross receipts pay a disproportionate share of the Business License Tax burden when compared to larger businesses.   

A progressive business license (gross receipts) tax involves a tax rate that increases (or progresses) as taxable gross receipts increase. It imposes a lower tax rate on businesses that report lower taxable gross receipts and a higher tax rate on those businesses that report higher taxable gross receipts. A progressive business license (gross receipts) tax is usually achieved by creating tiered business license (gross receipts) tax rate that group businesses into various tiers with varying tax rates based on taxable gross receipts that they report. 

At the City Council meeting on Monday, July 15, the City Council approved placing a measure on the November 5, 2024 general municipal election ballot amending the business license tax. The proposed model is a tiered rate structure that involves a tax rate that increases (or progresses) as taxable gross receipts increase. It imposes a lower tax rate on businesses that report lower taxable gross receipts and a higher tax rate on those businesses that report higher taxable gross receipts.  The proposed model includes a tiered gross receipts rate structure of $0.75 to $3.00 rate with a maximum tax of $250K.

The chart below demonstrates some potential models: 

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Business License Tax is an unrestricted revenue that is a part of the General Fund and can be used for any City purpose. If voters approve a ballot measure to update the Business License Tax, revenues would be generated annually depending on the Business License Tax model.

The revenues can be used to fund any other service and program supported by the General Fund, including maintaining: 911 emergency medical, police, and fire response times and services; clean, safe, and inviting parks and recreation facilities; infrastructure to prevent flooding and other hazards; local streets, pathways, bike lanes, and/or public sidewalks. 

Comparing revenues and expenditures of different cities can be difficult because cities vary according to the needs and priorities of their constituents and the nature of the local economy, as well as the service and financial responsibilities of the city. Full-service cities are responsible for funding all of the major city general fund-supported services such as police, fire, library, parks and recreation, and planning. In some California communities, a special district provides fire services with property tax revenue that would otherwise go to the city.  

Foster City also does not charge certain taxes to businesses and residents that are commonly imposed in other cities. The City has no Utility Users Tax (UUT), a tax some cities impose on electricity, fuel and telephone services, and it also has no locally imposed sales tax, which many cities have enacted to support their General Fund.   

“Gross  receipts” as defined in Foster City Municipal Code generally refers to the total revenue and other receipts of a business from the sale of goods and services.  A number of items are specifically excluded from the definition of “Gross Receipts” in the Municipal Code.  For a complete definition and list of exemptions, refer to Section 5.08.050 of the Foster City Municipal Code here.

Business license taxes are based on income producing activity.  An apportioning taxpayer may reduce its total receipts from its operation by a percentage that reflects the proportion of the cost of in-city to out-of-city activity.  A business may deduct the percentage of gross receipts deemed to be directly attributable to income producing activities conducted outside of the City of Foster City.  Businesses seeking apportionment may wish to consult with a tax advisor. 

Here is the breakup of various revenue sources that make up Foster City’s budget. For additional information, please refer to the City’s Annual Budget.

If you are conducting business in multiple jurisdictions, you will need to contact each jurisdiction to determine if a business license is required.  It is important to know that most California cities and counties have a Business License Tax ordinance.  However, each city and county has its own tax rate, structure, and requirements. Check with the appropriate city or county for their Business License Tax information. 

Under all three models being considered, it is estimated that 1,174 Foster City businesses will pay only the minimum tax. This is currently $100, or $200 for General Contractors. The minimum tax would increase annually based on the SF Bay Area CPI-U. 

The City Council took action at its July 15 meeting to place a BLT increase on the November general election ballot. Any increases to the Business License Tax must be approved by a majority of Foster City voters at the November 5, 2024 election. 

Feedback may also be emailed to fiscalsustainability@fostercity.org 

See the bottom of this page for past meeting materials. 

The City also held three informational Town Halls on the subject. Watch the videos here. 

Public Safety

The City is committed to maintaining rapid emergency response times, and preserving police patrols in neighborhoods and business areas to help prevent crimes and burglaries and keep residents and their property safe.

The Foster City Police Department’s authorized staffing levels are for 39 Sworn Police Officers, as well as 16 support staff, including Community Service Officers. The City has historically been rated among the safest cities in California and the nation. However, broader trends in property crime and commercial burglaries have not left the City untouched. The Police Department responded to over 26,000 calls for service in 2023, a slight increase overthe prior year.

Foster City contracts with the San Mateo Consolidated Fire Department for fire and emergency medical response. Those calls for service have increased approximately 10% per year over the last several years, and approximately 65% of fire calls are for medical emergencies.

Streets, Roads and Infrastructure

Foster City was built in the mid-1960s, and some of its oldest infrastructure components (typically underground pipes, as well as the Corporation Yard buildings) date back to that era, which requires ongoing maintenance to assure reliability and safety. The City maintains 120 miles of streets and roads and 4 bridges. The most recent study of the condition of the City’s roads rated them as the best maintained in San Mateo County, and among the best in the Bay Area.

The Foster City Lagoon, a unique feature of the City, functions as a drainage detention basin and is designed to successfully withstand a storm of 100-year return frequency or a storm of such severity that it is likely to occur only once each century, providing maximum drainage security for Foster City. 

Foster City also maintains the levee along the Bayfront, which provides protection from flood hazards and storms. The Federal Emergency Management Agency (FEMA) conducted a coastal flood hazard study in 2014, which determined that roughly 85% of the City’s levee system did not meet FEMA requirements. The City recently completed a $95 million upgrade to the levee.

What is Our City’s Budget?

The City’s General Fund budget for fiscal year 2023-24 is $58.3 million. This General Fund is the primary funder of many of the basic services of the City, including much of the Public Safety, Parks and Recreation, Public Works and other departments.

The City is projecting economic volatility for several of its key revenue streams that support its General Fund. While transient occupancy (hotel) tax revenues in Foster City have improved steadily since the COVID-19 pandemic, the expansion of video conferencing in lieu of in-person meetings has likely reduced business travel and therefore hotel occupancy. These revenues continue to trail pre-pandemic levels.

Higher interest rates have had multiple impacts as the City's investment income has expanded but so has the cost of service and supplies as well as supply chain disruptions.

While the City has seen recovery for most of its key revenues that were impacted by the COVID-19 pandemic, transient occupancy tax (TOT) revenues are still expected to only reach $4.15 million by the end of the current fiscal year, which is still behind its $4.39 million level in FY 2018-19.

As of March 31, 2024, the  estimated deficit for the current fiscal year is $3.93 million.  From fiscal year 2023-24 through FY 2027-28, the financial plan indicates an annual structural deficit of $5.58 million, $6.62 million, $8.53 million, and $8.87 million, and $9.82 respectively.

What is an Example of a Revenue Measure to Maintain Service Levels?

The Business License Tax Ordinance was last updated in November 2013 with approval of Foster City’s voters. The current tax rate is 0.075% charged against a firm’s annual Gross Receipts, with a cap on how high the tax may rise.

One option under consideration for the City is to revisit this measure to update how it is applied to businesses of varying sizes and other factors. The current Business License Tax generates approximately $1.7million in annual revenue for the General Fund.

Any such measure would have to first be referred to the ballot by a super-majority vote of the City Council, and then approved by a majority vote of City voters.

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Previous discussions at City Council Meetings:

• Monday, July 15, 2024 6:30 PM: Placing a measure on the November 5, 2024, General Municipal Election Ballot amending the Business License Tax
• Monday, May 20, 2024 6:30 PM: Report on Business License Tax Update
• Monday, February 05, 2024 6:30 PM: Informational Report on the Preliminary Analysis of the City’s Current Business License Tax (BLT) Structure, Various BLT Methodologies and Comparison to Other Cities.
• Monday, October 16, 2023 6:30 PM: Preliminary Report on Potential Business License Tax Ordinance Amendment and November 2024 General Election Ballot Measure.