California’s local sales tax rules, rooted in the 1950s, are resulting in 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 first-time rules .
The new report from the California Department of Taxes and Fees shows how California’s local sales tax rules are skewing the fortunes of cities depending on where retail giants like Apple, Best Buy or Amazon.com Inc. decide to establish warehouses or allocate their online sales .
With tensions rising between cities as online shopping exploded, the department examined what would happen if the rules changed. The list of winners and losers would be turned on its head, but not always in an obvious way.
According to the report, affluent Malibu and Palo Alto would win, but so would lower-income communities like Brawley in Imperial County and Sanger in Fresno County. Prosperous Cupertino, home of Apple Inc., would lose, as would rural and low-income Dinuba, where Best Buy Inc. has a warehouse. Most of the state’s largest cities — including San Francisco and Los Angeles — would win big.
One city not named in the report would see a 179% increase in sales tax revenue, while another would lose 82% of what it now receives. Two-thirds of the cities would gain or lose more than 25%.
Overall, 313 of California’s 482 cities would earn more revenue and 28 would lose if the state allocated local sales tax from online sales based on customer location — which is the case in almost every other state — rather than a warehouse’s location or office where the transaction takes place. There isn’t enough data available to show what would happen in 141 smaller cities.
The IRS prepared the report for the League of California Cities, a nonprofit organization trying to negotiate a compromise among its members to change the rules, which would require changing the state constitution.
“It is very difficult to know exactly what the impact of the dollar would be, but we believe this provides useful information to move the dialogue forward,” CDTFA director Nicolas Maduros said in an interview. The department makes no recommendations or takes a political position in the report, he said.
The league is considering the report, Legislative Representative Nick Romo said.
“This data will help inform Cal Cities’ policies regarding the Distance Selling 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 every day.”
At stake is each city’s share of approximately $9.6 billion in annual local sales taxes collected. The money comes from a 1 percentage point increment earmarked for local governments from the 7.25% statewide sales tax. The department collects the tax and distributes it to cities based primarily on where transactions take place, which for online sales is usually the location of the warehouse the item is shipped to or the office where the transaction is made, according to the company is processed.
Texas is the only other state with a similar sales tax regime, where the local portion of sales tax is attributed to the location of the transaction or origin of sale rather than the customer’s location or destination.
Evaluation of winners, losers
The CDTFA provided Bloomberg Tax with the report along with a list of cities and ranges of their potential gains or losses of up to 25%. The department declined to disclose city-specific gains or losses, saying disclosure could lead to determining 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 releasing confidential taxpayer information, the agency said.
A broad mix of small, large, rural, suburban and urban cities would generate revenue if local sales tax was allocated based on the customer’s location, the department noted. Some of the largest cities would each receive at least 25% more annual revenue.
The losers are cities with warehouses or offices for retailers who handle online sales. In this group, the top 15 losers include a handful of cities that have deals with certain retailers to share profits from online sales.
Under the sharing agreements, cities typically agree to return half or more of local sales taxes paid on e-commerce sales in California directly to businesses for decades in the name of economic development. In the case of Apple, Bloomberg Tax found that its deal with Cupertino resulted in one of the world’s richest companies receiving $107.7 million in payments between 1998 and the end of 2022. The small, rural Central Valley town of Dinuba has paid Best Buy $41 million since 2016.
Continue reading: Apple’s local hometown tax deal comes under fire
Cupertino and Dinuba would see revenue drop more than 25% if the rules were changed. The same goes for 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, who has agreements with Home Depot Inc. and Fisher Scientific, according to Bloomberg Tax Coverage.
Amazon doesn’t have sharing agreements with cities, but is creating a cash windfall for some cities with fulfillment centers by designating them as the location for customers’ online purchases statewide, Bloomberg Tax has found. Eastvale in Riverside County has a designated fulfillment center and would lose more than 25% of its revenue, the report said.
Maduros warned that the report, based on the department’s own data and the 2021 credit and debit card transaction data it acquired, is an estimate with several caveats. For example, the credit card information uses zip codes that don’t always line up exactly with city limits. The department used data from the top 200 retailers, which account for 61% of online sales but may not be representative of all retailers. Also, the department’s data is based on tax assignments reported by retailers, which are subject to change if the department determines they are incorrect.
Still, the credit card information fills in gaps in the department’s own data, as it breaks down online and in-person purchases and indicates the location of shoppers. In the absence of a report like this, city leaders have only a general feeling that revenue is increasingly being concentrated in a few cities with warehouses and tax-sharing businesses, and can only guess at the extent of the concentration.
The report is intended to help inform the City League’s Revenue and Taxation Committee and a task force of city managers tasked with recommending rule changes that would resolve discrepancies between cities.
For example, the group might recommend splitting the 1% local sales tax between the place of transaction and the customer. Whatever the outcome, it would require a two-thirds majority in the legislature and the consent of the electorate to amend the state constitution.
The tax department produced 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 cities losing revenue more leverage over the current winners, who have dominated discussions so far.
“I hope that this data will give cities a backbone,” he said. “The tail wags the dog in the League.”
