Sunset Hills city attorney questioned on reclassification of business license

‘It was a win for everybody,’ Furrer says of reclassification

By Mike Anthony

A former member of the Sunset Hills Finance Committee is questioning City Attorney Robert E. Jones’ advice that led to the reclassification of a company’s business license, which will cost the city tens of thousands of dollars in tax revenue.

Mike Hogan, who served on the Finance Committee from June 2012 until he resigned this spring, contends New Balance Athletic Shoe Inc., 3636 S. Geyer Road, should pay taxes based on its gross receipts.

However, Jones advised city officials that based on New Balance’s “business model,” the amount of taxes the company pays the city should be calculated on a square-footage basis, not gross receipts.

While some aldermen questioned the loss of tens of thousands of dollars in tax revenue as a result of the reclassification of the business license, Mayor Mark Furrer said at a recent Board of Aldermen meeting that he fully supported Jones’ advice.

“… This is a case where common sense trumped an outdated ordinance …,” he said.

But Hogan, who formerly served as a corporate vice president and controller for the Monsanto Co. and as chief administrative officer and chief financial officer for the Sigma-Aldrich Corp., contends that under the definition of “merchant” in the city’s code of ordinances, New Balance should pay taxes based on its gross receipts.

In an Aug. 26 letter to Jones, Hogan requested the city attorney provide the rationale and specifics about his decision.

In a Sept. 3 email to Hogan, Jones wrote, “Mike, I have not received your letter yet, but (Ward 1) Alderman (Richard) Gau gave me a copy of it. I am sorry, but I cannot perform legal research or provide an opinion at the request of a resident. I must be directed by the mayor and/or the board to do so.”

Given Jones’ “nonresponse,” Hogan told the Call he planned to address the Board of Aldermen on the issue Tuesday night — after the Call went to press.

At the Aug. 12 board meeting, some aldermen questioned Jones about how he came to recommend reclassifying New Balance’s business license, noting the city’s 2014 budget included anticipated tax revenue from the company.

Ward 4 Alderman Pat Fribis said, “And since the change came mid-year, I did ask (City Clerk) Laura Rider this, and she did tell me that for this year it would be a $35,000 difference and for 2015, (a) $69,000 difference …”

Gau asked, “Has there ever been a reclassification to that significant amount, though?”

“To that significant amount, probably not. I’m not aware that we’ve ever had a business licensee pay those kind of taxes,” Jones said, adding that specific amounts should not be discussed because they are confidential.

Jones said he was contacted by New Balance representatives in February “when they indicated that they did not think that they were actually a merchant under the city’s code and, instead, an office.

“The (New Balance) representative proceeded to explain what the business model was, a call center with employees that handled customer relations-type calls and also computer terminals, including servers, that handled orders for Internet sales …”

In reviewing the city code, he continued, “I felt that the, I guess, the nexus that we had with their sales were based upon the computers that were located in Sunset Hills. So based upon that particular set of facts, I felt that they should be charged as a merchant …”

After meeting with New Balance representatives in June, Jones changed his opinion. Those representatives, he said, confirmed computer orders are accepted, “but there was no transfer of money in Sunset Hills. There was no transfer of product in Sunset Hills … The argument would be that the touching of this transaction on the servers was minimal, at best …”

Jones continued, “… The representatives explained that this particular tax was higher than any other location that they had in the United States by tens of thousands of dollars on a monthly basis, and that they believed that it was really, truly an office use. And that if they had to move their servers to eliminate any possible hint of a sales transaction in the city of Sunset Hills that they would do so …

“So looking at what appeared to be a request by New Balance, which seemed reasonable under the circumstances, after they explained a little bit more about their business model, I looked again at the case law. I looked again at the statutes that enable our ordinances. I looked at our ordinances — tried to decide whether there was a way to amend our ordinances to speak more clearly to this type of a transaction … and I couldn’t really come up with any way to do that that didn’t, in my opinion at least, create a situation where other merchants might question the application of the ordinance to them. So under the circumstances, I advised the city that it made sense to honor their request to reclassify their license to a square-footage operation.”

Furrer said, “And I might add, this is a case where common sense trumped an outdated ordinance, and thanks to Bob, we’ve retained New Balance as an employer in Sunset Hills — probably will have additional employees coming to Sunset Hills — on an issue that shouldn’t have even occurred had they not inadvertently classified themselves incorrectly when they applied for their license.”

Gau asked, “So that any business that is on gross receipts that has Internet sales can now — I’m going to reduce that amount by the Internet sales amount? Because we’re basically saying your Internet sales are not included in your gross receipts.”

Jones replied, “Well, I would have to look at it on a case-by-case basis …”

Asked if New Balance “threatened” to break its lease in Sunset Hills, Furrer said, “They weren’t that hard, but certainly they would have done it over the issue. And certainly in the short run, for a nominal amount they could have physically relocated the servers to Fenton — pay Fenton $25 and we would have gotten nothing. The compromise that Bob helped reach not only kept them in Sunset Hills, but they are looking at expanding in Sunset Hills. And the money we got is frankly more than they probably should have paid …

“Basically we were trying to hold somebody’s feet to the fire for an ordinance that was written before the Internet was even a dream. So I mean, I couldn’t be more pleased by what Bob came up with for the city. We all benefited, and they’re looking at expanding in the market. So basically it was a win for everybody.”

But Ward 1 Alderman Dee Baebler contended it was a loss of tens of thousands of dollars for the city.

Furrer disagreed, saying, “It wasn’t a loss because it hadn’t started to accrue any payments yet, Dee.”

“… We were sure enough when they signed the lease. We had a legal opinion …,” Baebler said, adding that the anticipated revenue from New Balance was included in the city’s 2014 budget.

Furrer said, “Well, we can change it back and they’ll move to Massachusetts. I mean there’s no doubt about that …”

Baebler requested that in the future the Finance Committee be apprised of such significant changes in tax revenue.

Jones said, “… And that’s a fair request. I apologize. If that’s what we should do in the future, I will be sure that it comes before the Finance Committee.”