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Daily Tax Report: State

Apple, Best Buy Tax Perks Reined In Under California Bill

May 16, 2019, 7:40 PM

Deals that allow California cities to give millions of dollars each year in sales tax revenue to online retailers that locate warehouses or sales centers within their boundaries would be banned under a bill passed in the Senate.

S.B. 531 by Sen. Steve Glazer (D) targets a practice among some cities to give a portion of the sales tax that consumers pay back to major companies including Apple Inc., QVC Inc., and BestBuy.com LLC. Cities would be allowed to keep existing deals in place, but would be barred from entering into new ones.

Glazer said retailers are unfairly leveraging a 1 percentage point share of the state’s 7.25% sales tax that cities receive based on the location of a sale, and not the location of the customer. They negotiate with cities to receive a share of that revenue when choosing where to locate their warehouses or designate their statewide sales.

“This results in a rigged process driving cities to accept increasingly onerous tax sharing agreements in exchange for online retailers building or locating in their jurisdiction,” he said.

The Senate passed the bill May 16 by a vote of 27-8. It now moves to the Assembly, where it must pass by Sept. 13 to reach the desk of Gov. Gavin Newsom (D). He hasn’t taken a position on the bill.

Hundreds of Millions

A Bloomberg Tax investigation found that some cities agree to give about half of their 1 percentage point share back to retailers every year for decades. About 10% of the state’s 482 cities are using the deals, giving hundreds of millions of dollars back to retailers annually.

An agreement between QVC and the city of Ontario could mean $112 million for the retailer over 41 years. Cupertino gives Apple 35% of its sales tax revenue from sales to businesses in California, and retail sales at its two stores in the city. The city has said the amount Apple receives is confidential.

The cities—some of them economically distressed—negotiate the deals to lure warehouses and call centers for retailers racing to meet demand from online shoppers. In some cases they’ve been used to keep existing jobs in town.

City officials say the agreements are one of few economic development tools they have left following the legislature’s repeal of other long-standing incentives, and that they generate additional tax revenue even with some of the money going back to the companies. But some city officials oppose the deals, saying they only benefit the retailers while pitting the cities against each other.

‘Profiteers’ Play Role

Glazer and Sen. John Moorlach (R) were also critical of consultants who profit from negotiating the deals between cities and retailers. A Bloomberg Tax investigation found one lawyer who could receive $20 million for brokering three deals.

“Bloomberg News just did a big story on the profiteers that have used [the tax rules] to manipulate arrangements with cities and taken profits for themselves,” Glazer said. “It was a great expose. I am certainly interested in trying to stop that.”

Moorlach was the only Republican to vote for the bill. Sen. Melissa Hurtado was the sole Democrat to vote against it. She represents Dinuba, a city in California’s Central Valley that has a 40-year agreement to share revenue with Best Buy.

The California League of Cities and the California Labor Federation support the bill. The California Retailers Association, and the cities of Fresno and Perris, oppose it.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Karen Saunders at ksaunders@bloombergtax.com