Cupertino Reserving $56.5 Million to Repay Tax From Apple Sales

Apple Inc.'s hometown of Cupertino is preparing to set aside $56.5 million to repay California sales tax revenue it may have received improperly from in-state sales of iPhones, Macbooks, and other products.

The Cupertino City Council’s plan to tap into reserves to create the repayment fund is the latest step for the city following its announcement in April that state tax officials have determined it is receiving the tax money improperly under a revenue sharing agreement it has with Apple. Council members will consider the plan at a meeting Oct. 10, according to an agenda on the council’s website.

The California Department of Tax and Fee Administration is scrutinizing the agreement Apple has had with Cupertino since 1998. Under the deal, Apple designates all online sales to Californians as taking place in Cupertino, allowing the city to collect all local tax levies. Cupertino then gives 35 cents of every dollar to the company. Apple has received $107.7 million under the arrangement, according to city records.

Cupertino is one of a handful of cities being examined. The tax department is also examining San Jose’s revenue from a tax sharing agreement it has with eBay Inc., and the rural city of Dinuba’s collectionsfrom an agreement it has with Best Buy Inc. With millions of dollars at stake, lawmakers representing Cupertino and San Jose asked Gov. Gavin Newsom in August to support a change in state law that would block reallocations from any jurisdictions in Santa Clara County until 2035.

Cupertino staff confirmed in a memo for council members that the state tax department is reaching back to April 2021 to reallocate revenue from the city to other jurisdictions. The tax department’s determination isn’t final, but creation of the fund helps the city prepare for an uncertain outcome. The council has already decided it will appeal the final determination. If the outcome is in the city’s favor, it can release the funds to use for other purposes, the memo read.

Part of Apple’s agreement with the city appears to require the electronics giant to repay the $20 million it has received since April 2021, which would cover part of the total the city may owe. Apple also bears the cost of administrative proceedings with the state related to the dispute and must cooperate in efforts to avoid reallocation of revenue away from Cupertino, according a 2013 amendment to its agreement.

The city is also continuing to say that future sales tax revenue would drop 73% a year if the state prevails, according to the memo.

Although Cupertino officials don’t name Apple in discussions of the matter, citing taxpayer confidentiality rules, the iPhone manufacturer is the city’s largest source of sales tax revenue through the tax-sharing agreement.

At issue in the state’s disputes with Cupertino and the other cities is who gets a 1 percentage point increment of the total sales tax consumers pay. State law requires that this local portion of the sales tax flows to the jurisdiction where the transaction takes place. By assigning all online sales in California to Cupertino, Apple sends all local tax proceeds to the city.

But the CDTFA’s position is that the location of a retailer’s sales depends on human participation. The department’s regulations and guidance state that the storage location where an item is picked, packed, and shipped is often the only place of business that participates in an online transaction. The location of automated online processes like servers and website hosting don’t count as participation.

Once the tax department issues its final decision, the city can appeal administratively within the department. If the city disagrees with that outcome it can appeal to the state Office of Tax Appeals, an independent body of administrative law judges. Beyond that, the city could take its case to state court.

If the state prevails, the tax department would redistribute the money from Cupertino to other jurisdictions where it determines the sales took place, such as the locations of the warehouse from which iPhones or Macbooks were shipped to customers.