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Walmart.com Reaps Up to $65 Million in California Local Tax Deal

Dec. 11, 2020, 9:45 AM

Walmart.com will soon start splitting an estimated $155 million in California sales tax revenue over the next 25 years with the city of San Bruno, home to the retail giant’s e-commerce headquarters.

The deal, a bonanza for both the city and Walmart.com, adds the retail giant to more than a dozen companies— including Apple Inc., Best Buy Inc., Nike Inc., and Home Depot USA Inc.—that have divvied up tens of millions of dollars in sales tax revenue a year with California municipalities. The agreements are a source of tension between cities angling for tax revenue, and are subject to stricter disclosure rules put in place this year after they were highlighted in a series of Bloomberg Tax stories.

All California transactions conducted on Walmart.com USA LLC, including purchases from third-party sellers using Walmart Marketplace, will be assigned to San Bruno, a city of 42,000 near San Francisco International Airport. Walmart.com’s 271,000-square-foot building there houses offices, not a fulfillment center.

“If someone buys a toaster in Fresno or a microwave in Visalia that transaction will actually occur on the equipment and the resources that are located here in the city of San Bruno,” City Manager Jovan Grogan told the City Council when he presented the agreement in October. The city “will be what’s called the situs of the sale and receive that sales tax.”

Gov. Gavin Newsom (D) vetoed a 2019 bill that would have banned such agreements, but signed another requiring more public disclosures about them.

San Bruno expects the deal to increase sales tax revenue by $6.2 million a year and help make up for taxes lost during the pandemic. For 25 years, the city will give 35% of the first $3.5 million back to Walmart.com and will split revenue evenly after it tops $3.5 million, averaging out to a 58%/42% split between the city and the company, Grogan said. Revenue could go higher as Walmart.com works to gain market share from rival Amazon.com, city officials said during public discussions of the agreement.

Walmart.com, headquartered in San Bruno since 2012, approached the city to negotiate the deal, which doesn’t require the company to add to the 2,000 people who already work at the office building.

“San Bruno is the primary office for http://walmart.com in California which provides approximately 2,000 highly-skilled jobs,” Walmart spokesperson Anne Hatfield told Bloomberg Tax in an email. “This agreement will benefit San Bruno families by generating several million dollars of new tax revenue for the city every year.”

The agreement , which was approved by City Council Oct. 27, means the first tax boost to the city will come early next year from fourth-quarter sales, City Attorney Marc Zafferano said in an email Thursday.

Like Other Retailer Deals

Walmart.com’s agreement with San Bruno is like one eBay Inc. reached with San Jose in September 2019. Both cities said the U.S. Supreme Court’s 20 Wayfair decision giving states more authority to tax remote sales, together with a 2019 California law requiring marketplace facilitators to collect sales tax from customers who make purchases on their platforms, spurred the agreements.

Under San Jose’s agreement, all California transactions on eBay’s platform are assigned to that city. The city is giving eBay 30% of what’s collected above $5 million, which could add up to $150 million over 15 years. City officials said the agreement won’t bring new jobs to San Jose but will generate unexpected revenue and help eBay with the difficult task of collecting online sales and use tax for the first time.

Bloomberg Tax

All of the deals between cities and retailers leverage a 1 percentage point share of the 7.25% state sales tax that is allocated to cities based on the location of the sale. In Walmart.com’s case, it has agreed to assign the full 1 percentage point local share to San Bruno rather than distribute it among cities where sellers or customers are located.

The deals, which typically last for decades, go into effect once the companies assign California sales to a specific jurisdiction. Most of the cities hinge their deals on location of a warehouse or sales office in their boundaries and the promise of more jobs.

Even though San Bruno will give about 42% of its total revenue from Walmart.com sales back to the company, the amount the city keeps will increase overall sales tax revenue by 50%, Grogan said. The agreement will help make up a projected 18% drop in sales tax revenue due to falling sales at local brick and mortar stores during the Covid-19 pandemic, he said.

The arrangements have critics. Consumers and taxpayers are the losers under tax subsidy agreements like Walmart.com’s, said Greg LeRoy, executive director of Good Jobs First. The nonprofit group tracks state and local tax breaks aimed at economic development, including a 2004 project that found $1.2 billion in subsidies to Wal-Mart.

“It’s a perverse outcome in the long march toward fixing sales tax collections associated with e-commerce,” he said. “This further distorts where badly needed local sales tax goes.”

San Bruno City Council members acknowledged they could be criticized for giving a tax break to one of the world’s largest retailers, but said the deal protects the city from possibly losing revenue from one of its two largest employers. The other is Youtube.com.

“Walmart had the option to pay their state tax in any locality of their choice,” Vice Mayor Michael Salazar said. “If we were to say ‘No, we don’t want to give you a tax break,’ then they could just as easily say, ‘OK, then we’ll set up shop elsewhere, and that’s where we’ll pay our taxes and possibly get a better deal from them.’”

San Bruno’s agreement is more favorable to the city than many of the 16 other deals city officials reviewed before recommending the council adopt it, council member Linda Mason said. It lets the city keep more than half of the revenue, is longer than most of the other deals, and prohibits Walmart.com from negotiating a similar deal with another city for five years.

City Attorney Marc Zafferano said Walmart.com’s presence in the city since 2012 sets it apart from deals in other cities meant to lure businesses in.

“Some members of the public might feel that agreements like these are unfair when they’re pitting cities against each other and it’s sort of a race to the bottom,” he said. “That’s not the case here.”

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

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com

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