E-Commerce Realities Could Mint New California Sales Tax Winners

California’s local sales tax rules, rooted in the 1950s, create significant losses for two-thirds of the state’s cities and bonanzas for fewer than 30 in the e-commerce era, according to a state report that quantifies the impact of the rules for the first time.

The new report from the California Department of Tax and Fee Administration shows how California’s local sales tax rules skew the fortunes of cities depending on where retail giants like Apple, Best Buy, or Amazon.com Inc. decide to locate warehouses or assign their online sales.

With tension between cities intensifying as online shopping has exploded, the department examined what would happen if the rules were to change. The list of winners and losers would be upended, but not always in obvious ways.

Prosperous Malibu and Palo Alto would gain, but so would lower-income communities like Brawley in Imperial County and Sanger in Fresno County, according to the report. Affluent Cupertino, home to Apple Inc., would lose, but so would rural and low-income Dinuba, where Best Buy Inc. has a warehouse. Most of the state’s biggest cities—San Francisco and Los Angeles among them—would win big.

One city, unnamed in the report, would experience a 179% increase in sales tax revenue, while another would lose 82% of what it gets now. Two-thirds of cities would gain or lose more than 25%.

Altogether, 313 of California’s 482 cities would get more revenue and 28 would lose if the state distributed local sales tax from online sales based on where the customer is—which is what happens in nearly every other state—instead of the location of a warehouse or office where the transaction takes place. Not enough data is available to show what would happen in 141 smaller cities.

The tax department prepared the report for the League of California Cities, a nonprofit attempting to broker a compromise among its members to change the rules, which would require amending the state constitution.

“It’s very hard to know exactly what the impacts would be down to the dollar, but we think this does provide useful information to further the dialogue,” CDTFA Director Nicolas Maduros said in an interview. The department isn’t making recommendations or taking a policy position in the report, he said.

The league is reviewing the report, legislative representative Nick Romo said.

“This data will help inform Cal Cities’ policy around remote sales tax,” Romo said. “Our goal is to build a resilient consensus on reforms to ensure the sales tax can continue to support the critical public services that Californians depend on each and every day.”

At stake is each city’s share of about $9.6 billion in local sales tax collected annually. The money comes from a 1 percentage point increment earmarked for local governments out of the 7.25% statewide sales tax. The department collects the tax and distributes it to cities primarily based on where transactions take place, which for online sales is typically the location of the warehouse where the item gets shipped or the office where the company says the transaction gets processed.

Texas is the only other state with a similar sales tax setup, where the local sales tax portion is assigned to the location of the transaction, or origin of the sale, rather than the location of the customer, or destination.

Assessing Winners, Losers

The CDTFA provided the report to Bloomberg Tax along with a list of cities and ranges of their possible gains or losses up to 25%. The department declined to release city-specific gains or losses, saying disclosure could lead to identifying which companies are involved based on the locations of their offices or warehouses. The disclosure would violate the Revenue and Taxation Code’s prohibition on release of confidential taxpayer information, the agency said.

A broad mix of small, large, rural, suburban, and urban cities would gain revenue if local sales tax were allocated based on the customer’s location, the department found. Some of the biggest cities would each receive at least 25% more annual revenue.

The losers are cities with warehouses or offices for retailers that process online sales. In this group, among the 15 biggest losers are a handful of cities that have agreements with specific retailers to share the windfalls they get from online sales.

Under the sharing agreements, cities typically commit to send half or more of the local sales tax paid on e-commerce sales in California right back to the companies, for decades, in the name of economic development. In Apple’s case, Bloomberg Tax has found that its deal with Cupertino has resulted in one of the world’s richest companies getting $107.7 million in payments between 1998 and the end of 2022. The small, rural Central Valley city of Dinuba has paid Best Buy $41 million since 2016.

Read more: Apple’s Local Tax Arrangement With Hometown Comes Under Fire

Cupertino and Dinuba would see a revenue drop of more than 25% if the rules changed. So would Perris, which has sharing agreements with Home Depot and Ferguson Plumbing; San Bruno, which has an agreement with Walmart.com; Shafter, which has an agreement with Williams-Sonoma Inc.; and Tracy, which has agreements with Home Depot Inc. and Fisher Scientific, according to Bloomberg Tax coverage.

Amazon doesn’t have sharing agreements with cities, but creates a windfall for some cities with fulfillment centers by designating them as the location of online purchases from customers around the state, Bloomberg Tax has found. Eastvale, in Riverside County, has a designated fulfillment center, and would lose more than 25% of its revenue, the report found.

Maduros cautioned that the report, based on the department’s own data and 2021 credit and debit card transaction data it purchased, is an estimate with several caveats. For example, the credit card data uses ZIP codes, which don’t always neatly align with city borders. The department used data from the 200 largest retailers, which accounts for 61% of online sales but may not be representative of all retailers. Also the department’s data is based on tax allocations reported by retailers, which may change if the department determines they’re incorrect.

Still, the credit card information fills in holes in the department’s own data because it’s broken down by online and in-person purchases and specifies the location of the purchasers. In the absence of a report like this one, city leaders have only a general sense that revenue is increasingly concentrated in a few cities with warehouses and tax-sharing deals and can only guess the extent of the concentration.

The report is meant to help inform the city league’s Revenue and Taxation Committee and a task force of city managers assigned to recommend rule changes that would address any discord between the cities.

The group could recommend, for example, splitting the 1% local sales tax between the location of the transaction and the customer. Whatever the outcome, it would require a two-thirds vote of the Legislature and voter approval to amend the state constitution.

The tax department prepared the report after Gov. Gavin Newsom (D) vetoed a bill in 2021 that would have required retailers with more than $50 million in annual online sales to report where their customers are located. Sen. Steve Glazer (D), who authored the failed measure, said the report should give the cities that are losing revenue more leverage over the current winners that have been dominating discussions so far.

“I hope this data will give the cities a backbone,” he said. “The tail is wagging the dog at the League.”