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EBay Agreement With San Jose Blunts Covid-19 Related Tax Losses

April 10, 2020, 8:46 AM

San Jose’s agreement to share some of its local sales-tax revenue with eBay Inc. wouldn’t have happened if some state lawmakers had their way, but now it’s helping the Silicon Valley city close a multimillion-dollar hole in its budget from the coronavirus pandemic.

All California transactions conducted on eBay are taxed as if the sale was made in San Jose under a 15-year revenue sharing agreement between the online auction platform and its home town reached last year, shortly after Gov. Gavin Newsom (D) vetoed a bill that would have prohibited such deals. The state in February forwarded $7.3 million to San Jose as its share of the added local sales tax raised from October through December, the first effective quarter of the agreement, City Manager David Sykes said during an April 7 presentation to the City Council.

The eBay agreement for the current fiscal year, which ends June 30, will add $15 million to $20 million to the city, making up a big chunk of the forecasted $45 million budget shortfall. The sales tax revenue received under the agreement “may be a source of new ongoing revenue,” Sykes said in a memo to the council.

The eBay revenues “could potentially cut that not exactly in half but close. It’s a good dent there,” Councilmember Raul Perales said during the council’s marathon meeting, adding he is “obviously really excited that it looks like that money is something we can count on.”

A $110 Million Revenue Drop

The revenues for San Jose come as it and other cities are dealing with the fallout from the shelter-in-place that began on March 17 to slow the spread of Covid-19. That order has kept people from going out to restaurant and stores and reduced receipts from conventions and hotels.

San Jose is forecasting a $110 million drop in revenues this fiscal year and next. That’s an 8.6% drop from 2019-2020 and compares to the 2.9% drop during the 2007-8 recession and 2.6% during the dot-com bust.

The city isn’t sure how much eBay proceeds will go toward closing next fiscal year’s $65 million anticipated hole, Sykes said. The next year begins July 1. “But whatever amount will be added will help with that shortfall.”

The city estimates the sales tax-sharing agreement is worth about $440 million over 15 years. It’s unlike other agreements reached between a few dozen California cities and companies including Apple Inc. and Staples Inc. because it has no strings attached—eBay is not expected to provide jobs or increase its investments in the city in exchange for the payments.

The company assigns the full 1 percentage point local share of the state’s 7.25% sales tax to San Jose rather than distribute it among cities where sellers or customers are located. San Jose returns 30% of increased revenue above $5 million to eBay, and the company gains simplicity of tracking sales tax in only one city instead of the more than 400 California cities that have differing tax rates.

The California League of Cities and some state lawmakers criticized the San Jose and other agreements for concentrating revenue in one city at the expense of others.

“Good for San Jose although this type of ‘finance’ is odd in that buyers assume their sales tax all goes to the state and local governments,” said Annette Nellen, professor and director of the master’s in state taxation program at San Jose State University.

Shelter in Place Helps eBay

eBay is in a mandatory quiet period before reporting earnings on April 29 and spokeswoman Ashley Settle on Thursday declined to comment on any financial or sales information.

Small businesses moving inventory for sale onto the online marketplace may prove favorable for the company, several analysts have said in recent reports. And purchasers seeking out items on eBay could translate into additional sales tax revenue to San Jose, Perales said.

Consumers also are turning to eBay for puzzles, hair color, nail clippers, and do-it-yourself projects such as home brewing as they shelter in place, Jordan Sweetnam, eBay senior vice president and Americas market general manager, said in a blog post. Santa Clara County’s current order to people to remain at home unless for essential activities such as grocery shopping is scheduled to end May 4.
-- With assistance from Laura Mahoney in Sacramento

To contact the reporter on this story: Joyce E. Cutler in San Francisco at jcutler@bloomberglaw.com

To contact the editors responsible for this story: Bernie Kohn at bkohn@bloomberglaw.com; Jeff Harrington at jharrington@bloombergtax.com

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