VETO  

Bill No: SB 531

Author: Glazer (D)

Amended: 4/29/19

Vote: 27

SENATE GOVERNANCE & FIN. COMMITTEE: 5-2, 4/24/19

AYES: McGuire, Moorlach, Beall, Hertzberg, Wiener

NOES: Hurtado, Nielsen

SENATE FLOOR: 27-8, 5/16/19

AYES: Allen, Archuleta, Atkins, Beall, Caballero, Chang, Dodd, Durazo, Galgiani, Glazer, Hertzberg, Hill, Hueso, Jackson, Leyva, McGuire, Mitchell, Monning, Moorlach, Pan, Portantino, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NOES: Bates, Grove, Hurtado, Jones, Morrell, Nielsen, Stone, Wilk

NO VOTE RECORDED: Borgeas, Bradford, Roth

ASSEMBLY FLOOR: 48-21, 9/5/19 - See last page for vote

SUBJECT: Local agencies: retailers

SOURCE: Author

DIGEST:

This bill prohibits a local agency from entering into any agreement that results in a rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating within that agency’s jurisdiction.

ANALYSIS:

Existing law:

1. Imposes the sales tax on every retailer “engaged in business in this state” that sells tangible personal property, and requires them to register with the California Department of Tax and Fee Administration (CDTFA), as well as collect and remit appropriate tax at purchase and remit the amount to CDFTA. Sales tax applies whenever a retail sale occurs, which is generally any sale other than one for resale in the regular course of business. The current rate is 7.25%.
2. Allows cities, counties, and specified special districts to increase the sales and use tax, also known as district or transactions and use taxes.
3. Allows CDTFA to collect sales taxes from retailers, deposit the state share in the General Fund, and then allocate the local share of the Bradley-Burns sales tax and any district tax to the appropriate jurisdiction. The Bradley-Burns Uniform Sales Tax Act allows all local agencies to apply its own sales and use tax on the same base of tangible personal property. This tax rate currently is fixed at 1.25% of the sales price of tangible personal property sold at retail in the local jurisdiction, or purchased outside the jurisdiction for use within the jurisdiction. Cities and counties use this 1% tax to support general operations, while the remaining 0.25% is used for county transportation purposes. In California, all cities and counties impose Bradley-Burns local taxes.
4. Specifies the "place of sale" for purposes of the local sales tax. Bradley-Burns sales taxes are allocated to the place of business of the retailer, unless the property sold is delivered by the retailer or his or her agent to an out-of-state destination or to a common carrier for delivery to an out-of-state destination, in which case no tax is collected. CDTFA must consider specific characteristics of the retailer to correctly determine the “place of sale,” and therefore correctly allocate the local share of Bradley-Burns sales tax.
5. Bans cities and counties from subsidizing the relocation of big box retailers and auto malls within the same market area (SB 114, Torlakson, Chapter 781, Statutes of 2003).
6. Prohibits a local agency from entering into an agreement that would result in the payment, transfer, diversion, or rebate of Bradley-Burns local tax proceeds to a retailer if the agreement results in a reduction of revenue that is received by another local agency when the retailer continues to maintain a physical presence and location within that other local agency (SB 533, Pan, Chapter 717, Statutes of 2015).

This bill:

1. Prohibits a local agency from entering into any agreement that results, directly or indirectly, in the payment, transfer, diversion, or rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating or continuing to maintain a place of business that serves as the “place of sale” within the local jurisdiction offering the incentive if it generates sales tax revenue from the sale of tangible property delivered to and received by the purchaser in another jurisdiction.
2. Defines a “place of sale” to mean the retailer’s place of business is determined to be the place at which retail sales are consummated pursuant to existing law.

Background

Counties and cities engage in a wide variety of economic development activities to build their tax bases. Local officials use various tactics to influence where, when, and how the private sector invests capital and improves real property. Local officials sometimes use their economic development powers to induce businesses to relocate to their communities. Economic development incentives local agencies offer range in terms of (1) the level of rebate, (2) how long the retailer receives the benefit, (3) the types of jobs or services the retailer must provide in return, and (4) how long the retailer must promise to stay in the jurisdiction. Some agreements offer over half of the Bradley-Burns revenue generated by the facility, for periods of time ranging from one year to decades. The City of Fresno has recently entered into long-term agreements with Amazon, Nordstrom, and the Gap, and the City of Dinuba has done the same with Best Buy.

Comments

1. Purpose of the bill. According to the author, “Current tax law has created an environment that puts the power to allocate local sales tax into the hands of online retailers. These retailers can choose to allocate any and all sales tax revenues to a specific location within the state- be that a warehouse, distribution or sales center. What results is a race to the bottom as local governments offer increasingly generous rebates to these companies, often between 50-85% of the revenues generated, in exchange for locating a warehouse or sales center within their jurisdiction. Private companies profit doubly from these tax-sharing agreements, which allow them to keep both the profits from their retail sales, and the public funds siphoned to them as a rebate. California cities are sending an estimated $1 billion in taxpayer dollars back to giant corporations each year – at a time when state and local governments are scrambling to fund public safety, roads, and affordable housing, and tackle the homeless crisis. The gains from these agreements are doubtful. Though warehouses may generate jobs, they are often grueling, low wage, and without benefits. This bill would prohibit these types of tax-sharing agreements between local governments and private corporations, effectively ending the perverse competition our tax system creates and preserving taxpayer dollars to provide for the public good.”
2. If not this, then what? Cities that focus their economic development efforts on warehouse and distribution centers view these agreements as valuable economic developments tools that create employment and economic activity that can’t be generated any other way. Even if one of these agreements requires a significant rebate back to a retailer, that city still may be better off because they generate more sales tax revenue than if the retailer did not locate their warehouse or distribution in their city. Does the state sufficiently allow for other economic development incentives to provide opportunities for cities seeking continued economic growth, particularly cities with available land and above-average unemployment rates?
3. Hurry up. Since SB 531 does not go into effect until January 1, 2020, this bill would allow existing agreements to continue. Since these agreements range in length, allowing existing agreements to continue would allow some agreements to remain in place for years, and even decades, after the law goes into effect. Local agencies could use this time before the law goes into effect to implement new agreements, or extend existing agreements, that would be against the law after January 1, 2020. Despite this potential loophole, local governments would only have a few months to approve new agreements or replace existing agreements, and it is unclear whether this would provide sufficient time for such negotiations with a retailer to occur. It could also reduce the impact on the local agencies that have relied on these agreements to generate economic activity.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 10/28/19)

California Labor Federation

City of Placentia

City of Rancho Cucamonga

City of Visalia

League of California Cities

OPPOSITION: (Verified 10/28/19)

California Retailers Association

City of Fresno

City of Moreno Valley

City of Perris

County of San Joaquin

GOVERNOR'S VETO MESSAGE:

I am returning Senate Bill 531 without my signature.

This bill would prohibit a local agency from entering into any agreement that would result, directly or indirectly, in a rebate of the Bradley-Burns Uniform Local Sales and Use Tax revenues to a retailer that locates or maintains a place of sale within the jurisdiction of that local agency.

Current use of these tax agreements are limited but also an important local tool that captures additional economic activity, particularly in rural and inland California cities that continue to face significant economic challenges like high unemployment rates. Therefore, completely removing these tax options from local decision makers is the wrong approach.

I do support greater oversight with respect to the use of these tax agreements and have signed Assembly Bill 485, which will increase transparency regarding the economic outcomes that result from these types of agreements. This will allow the state to better understand the nature of the agreements between local jurisdictions and businesses, as well as the challenges and obstacles to inclusive growth.

ASSEMBLY FLOOR: 48-21, 9/5/19

AYES: Aguiar-Curry, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Burke, Calderon, Chau, Chiu, Chu, Cooley, Cooper, Daly, Diep, Friedman, Gabriel, Cristina Garcia, Gipson, Gloria, Gonzalez, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Levine, Limón, Low, McCarty, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Petrie-Norris, Quirk, Quirk-Silva, Luz Rivas, Robert Rivas, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NOES: Arambula, Bigelow, Brough, Cunningham, Flora, Fong, Gallagher, Gray, Kiley, Lackey, Maienschein, Mathis, Medina, Melendez, Patterson, Ramos, Reyes, Rodriguez, Salas, Voepel, Waldron

NO VOTE RECORDED: Carrillo, Cervantes, Chen, Choi, Eggman, Frazier, Eduardo Garcia, Mayes, Blanca Rubio

Prepared by: Jonathan Peterson / GOV. & F. / (916) 651-4119

11/5/19 11:02:10

**** END ****

SENATE THIRD READING

STR Bill Id:SB 531

Author:(Glazer)

As Amended Ver:April 29, 2019

Majority vote

SUMMARY:

Prohibits a local agency from entering into any agreement that results in a rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating within that agency's jurisdiction.

Major Provisions

This bill prohibits a local agency from entering into any agreement that results in a rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating within that agency's jurisdiction. This bill finds and declares that it addresses a statewide concern and therefore applies to contract cities.

COMMENTS:

Policy Consideration. Both the State Auditor and the Legislative Analyst's Office have suggested replacing situs-based allocation with a population based allocation system to reduce incentives for local governments to use their economic development powers to promote retail developments. Specifically, Internet retailers may identify their warehouses or distribution centers as their places of sale when remitting Bradley‑Burns tax, even though they may ship their taxable goods to locations across the state. As a result, local jurisdictions with relatively more warehouses or distribution centers receive Bradley‑Burns tax allocations that are disproportionate to their purchases. This disparity is likely to increase in the future due to the rapid growth of e‑commerce. If adopted, this bill will treat one of the negative consequences of the current allocation system by reducing competition between local agencies, however, in order to address the larger, more underlying problem, broad tax reform is likely needed. Without comprehensive tax reform, and because local agencies will continue to compete using alternative tax incentive tools, the Committee may wish to consider the overall impact this bill will have in curbing the utilization of taxpayer dollars and removing sales tax allocation disparities.

According to the Author:

The author states that, "Current tax law has created an environment that puts the power to allocate local sales tax into the hands of online retailers. These retailers can choose to allocate any and all sales tax revenues to a specific location within the state – be that a warehouse, distribution or sales center. What results is a race to the bottom as local governments offer increasingly generous rebates to these companies, often between 50-85% of the revenues generated, in exchange for locating a warehouse or sales center within their jurisdiction. Private companies profit doubly from these tax-sharing agreements, which allow them to keep both the funding from their retail sales, and the public funds siphoned to them as a rebate. California cities are sending an estimated $1 billion in taxpayer dollars back to giant corporations each year – at a time when state and local governments are scrambling to fund public safety, roads, affordable housing, and tackling the homeless crisis. The gains from these agreements are doubtful. Though warehouses may generate jobs, they are often grueling, low wage, and without benefits. This bill would prohibit tax-sharing agreements between local governments and private corporations, effectively ending the perverse competition our tax system creates."

Arguments in Support:

According to the League of California Cities, "The League's policy states that sales tax agreements involving online retailers should be prohibited going forward because they have the effect of encouraging revenue to be shifted away from numerous communities and concentrated to the benefit of one agency with a portion rebated to a retailer…With the increasing volume of Internet sales, a tremendous amount of sales tax revenue can be concentrated in a retailer's warehouse, sales office or fulfillment center, which makes locating these facilities an enticing prospect for local agencies. An agreement that benefits one agency by shifting the point of sale can come at the fiscal harm to many others.

"SB 531 would prohibit future rebate agreements that result in Bradley-Burns Sales and Use Tax revenue from being shifted away from numerous communities and concentrated to the benefit of one agency with a portion rebated to a retailer."

Arguments in Opposition:

According to the City of Perris, "The City has a population of approximately 73,000 residents, the median age of our citizens is 27.3 years old, our median household income is $54,657 (an increase of 4% from last year), and has a poverty rate of 21.2%. The national poverty rate is 12.3%, based on the U.S. Census Bureau estimates.

"In recent years, the City of Perris has been able to use a particular economic tool available to our community in order to begin the slow climb out of generational poverty. We have done this by leveraging sales tax rebate incentives. Through this development tool, the City of Perris has been able to attract and retain e-commerce centers. These e-commerce centers have provided living wage jobs to families in Perris. The growth in our median household income can be directly attributed to these e-commerce centers.

"In addition, the revenues that come with these e-commerce centers have allowed the City of Perris to provide critical services such as fire and police protection. However, more critically to the quality of life of its residents, these revenues generated by our e-commerce centers have allowed us to provide parks and recreation programs that did not exist before. In fact, we have been recognized by the State Department of Parks and Recreation for our efforts, receiving awards in the last three consecutive years. All of these benefits are threatened by Senate Bill 531."

FISCAL COMMENTS:

None

VOTES:

SENATE FLOOR: 27-8-3

YES: Allen, Archuleta, Atkins, Beall, Caballero, Chang, Dodd, Durazo, Galgiani, Glazer, Hertzberg, Hill, Hueso, Jackson, Leyva, McGuire, Mitchell, Monning, Moorlach, Pan, Portantino, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NO: Bates, Grove, Hurtado, Jones, Morrell, Nielsen, Stone, Wilk

ABS, ABST OR NV: Borgeas, Bradford, Roth

ASM LOCAL GOVERNMENT: 6-2-0

YES: Aguiar-Curry, Bloom, Boerner Horvath, Ramos, Luz Rivas, Robert Rivas

NO: Lackey, Voepel

ASM REVENUE AND TAXATION: 9-1-1

YES: Burke, Chu, Gray, Mayes, Mullin, Petrie-Norris, Quirk, McCarty, Ting

NO: Brough

ABS, ABST OR NV: Melendez

UPDATED:

VERSION: April 29, 2019

CONSULTANT: Jimmy MacDonald / L. GOV. / (916) 319-3958 FN: 0001249

Date of Hearing: July 8, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

SBPCA Bill Id:SB 531

Author:(Glazer) – As Amended Ver:April 29, 2019

Majority vote.

SENATE VOTE: 27-8

SUBJECT: Local agencies: retailers

SUMMARY: Prohibits a local agency from entering into an agreement that would result in the rebate of Bradley-Burns Uniform Local Sales and Use Tax (SUT) Law (Bradley-Burns) revenues to any retailer in exchange for the retailer locating or continuing to maintain a place of business within the local agency, as specified. Specifically, this bill:

1. Prohibits, on or after January 1, 2020, a local agency from entering into an agreement that would result in the payment, transfer, diversion, or rebate of any Bradley-Burns tax revenue to any retailer in exchange for the retailer locating or continuing to maintain a place of business that serves as the "place of sale" within the local agency's territorial jurisdiction if that place of business would generate revenue, from the sale of tangible personal property (TPP) delivered to and received by purchasers in another local agency, for the local agency under Bradley-Burns.
2. Defines a "place of sale" as the place at which retail sales are consummated pursuant to Revenue and Taxation Code (R&TC) Section 7205, and the regulations promulgated thereunder.
3. Contains findings and declarations that this bill addresses a matter of statewide concern rather than a municipal affair as that term is used in Section 5 of Article XI of the California Constitution. Therefore, this bill's provisions shall apply to all cities, including charter cities.

EXISTING LAW:

1. Authorizes counties and cities, under Bradley-Burns, to impose a local SUT for TPP sold at retail in the county or city, or purchased for storage, use, or other consumption in the county or city.
2. Requires the county or city to contract with the California Department of Tax and Fee Administration (CDTFA) for the administration of the taxes and requires CDTFA, in turn, to transmit those taxes to the city or county.
3. Provides that, for purposes of a local Bradley-Burns sales tax, all retail sales are consummated at the place of business of the retailer, unless otherwise specified.
4. Prohibits a local agency from entering into any agreement that would result in the payment, transfer, diversion, or rebate of any Bradley-Burns revenues to any person when both of the following conditions apply:
   1. The agreement reduces the amount of Bradley-Burns revenue that, absent the agreement, would be received by another local agency; and,
   2. The retailer continues to maintain a physical presence within the territorial jurisdiction of that other local agency. (Government Code (GC) Section 53084.5(a).)
5. Requires any local agency entering into an agreement that reduces the amount of Bradley-Burns revenues that would otherwise be received by another local agency to:
   1. Post the proposed agreement on its internet website for at least 30 days before ratification or approval; and,
   2. Notify the other local agency by certified mail, as specified, at least 60 days before ratification or approval. (GC Section 53084.5(b).)
6. Requires a local agency to post any such agreement on its internet website. [GC Section 53084.5(b)(3).]

FISCAL EFFECT: Unknown

COMMENTS:

1. The author has provided the following statement in support of this bill:

Current tax law has created an environment that puts the power to allocate local sales tax into the hands of online retailers. These retailers can choose to allocate any and all sales tax revenues to a specific location within the state – be that a warehouse, distribution or sales center. What results is a race to the bottom as local governments offer increasingly generous rebates to these companies, often between 50-85% of the revenues generated, in exchange for locating a warehouse or sales center within their jurisdiction. Private companies profit doubly from these tax-sharing agreements, which allow them to keep both the funding from their retail sales, and the public funds siphoned to them as a rebate. California cities are sending an estimated $1 billion in taxpayer dollars back to giant corporations each year – at a time when state and local governments are scrambling to fund public safety, roads, affordable housing, and tackling the homeless crisis. The gains from these agreements are doubtful. Though warehouses may generate jobs, they are often grueling, low wage, and without benefits. This bill would prohibit tax-sharing agreements between local governments and private corporations, effectively ending the perverse competition our tax system creates.

1. This bill is supported by the League of California Cities, which notes:

This measure is consistent with policies developed by the League as part of a comprehensive multi-year review of issues related to the collection and distribution of Bradley-Burns Sales and Use Tax. The League's policy states that sales tax agreements involving online retailers should be prohibited going forward because they have the effect of encouraging revenue to be shifted away from numerous communities and concentrated to the benefit of one agency with a portion rebated to a retailer. SB 531 only applies prospectively and does not:

• Interfere with any existing agreement negotiated prior to the bill's effective date;
• Interfere with the ability of a local agency to offer economic development incentives with its own revenue; and
• Change the existing rules for determining the place of sale.

With the increasing volume of Internet sales, a tremendous amount of sales tax revenue can be concentrated in a retailer's warehouse, sales office or fulfillment center, which makes locating these facilities an enticing prospect for local agencies. An agreement that benefits one agency by shifting the point of sale can come at the fiscal harm to many others.

1. This bill is opposed by the California Retailers Association, which notes:

When deciding where to locate a new business location, retailers conduct a significant amount of research to determine where the best locations are. Often times, cities or counties will provide tax incentives to help encourage a retailer to locate one of these centers in their jurisdiction. Cities and counties do this because they understand that this is a small investment that provides high return. When a retailer locates in an area, the city or county immediately benefits in numerous ways. More jobs are provided to those living in the area, and more tax revenue is brought in for the city. These centers generally provide longevity in the local area that far outlasts the initial tax incentive.

We believe that local jurisdictions should maintain the autonomy to make decisions that are best for themselves when it comes to incentivizing retailers to develop in their areas. These local jurisdictions are the experts on their individual areas and know how to best address the needs of their communities. We believe that this bill is a one-size-fits-all approach that removes the ability of cities and counties to make decisions that they feel are best.

1. Committee Staff Comments:
   1. An overview of existing law: The CDTFA administers Bradley-Burns, which authorizes counties to impose a local SUT. The tax rate is fixed at 1.25% of the sales price of TPP sold at retail in the county, or purchased outside the county for use within the county. Current law authorizes cities to impose a local SUT rate of up to 1%. The city SUT rate is "credited" against the county rate so that the combined rate does not exceed 1.25%.

Of the 1.25%, cities and counties use 1% to support general operations. The remaining 0.25% is designated by statute for county transportation purposes and restricted to road maintenance or the operation of transit systems. Counties receive the 0.25% tax for transportation purposes regardless of whether the sale occurs in a city or in the unincorporated area of the county. In California, all cities and counties impose Bradley-Burns local taxes at a total uniform rate of 1.25%.

• 1. Place of sale – allocation of Bradley-Burns revenues: Local tax allocation is based on whether the transaction is subject to sales tax or use tax. The transaction is subject to sales tax if the retailer's place of business in California participates in the sale and title to the goods passes to the customer in California. Unless both of these conditions are met, the use tax applies.

The local sales tax is allocated to the place of sale. If a retailer has only one place of business in California, all California retail sales in which that place of business participates occur at that place of business. If a retailer has more than one place of business in this state participating in the sale, the place of sale is where the principal negotiations occur.

If an out-of-state retailer does not have a permanent place of business in California other than an inventory of TPP, the place of sale is the city, county, or city and county from which delivery or shipment is made. Finally, if the retailer has a permanent place of business in this state in addition to inventory, but the sale is negotiated out-of-state with no participation by the retailer's permanent place of business in this state, the place of sale is the city, county, or city and county where the TPP is delivered.

• 1. Let's make a deal: The rather complicated sourcing rules described above have given many retailers a powerful negotiating tool vis-à-vis local governments. For example, a large online retailer without a place of business in the state may decide to open a distribution center in California to facilitate same-day or expedited deliveries. Before deciding where to open this distribution center, which will serve as the retailer's "place of sale" for Bradley-Burns purposes, the retailer can negotiate with an array of cities to see which is willing to rebate the largest percentage of any new Bradley-Burns revenues back to the retailer. Many cities have reportedly offered large corporations over one-half of their new revenues in such negotiations, in the hopes of bringing jobs and economic development to their regions. Retailers are the obvious beneficiaries of such arrangements. It is less clear, however, whether cities similarly benefit given the nature of the jobs created and the revenues siphoned from essential public services. The biggest losers, however, are the many local agencies throughout California that previously received Bradley-Burns use taxes from the retailer's sales based on where the products were shipped.
  2. What would this bill do? This bill would, very simply, prohibit any local agency from entering into an agreement that would result in the rebate of Bradley-Burns revenues to any retailer in exchange for the retailer locating or continuing to maintain a place of business within the local agency. This prohibition would only operate prospectively, on and after January 1, 2020. Thus, all rebate agreements entered into before that date would continue in force. The author contends that this prohibition is necessary because California cities are already "sending an estimated $1 billion in taxpayer dollars back to giant corporations each year – at a time when state and local governments are scrambling to fund public safety, roads, affordable housing, and tackling the homeless crisis."
  3. This all seems familiar: In 2007, the Legislative Analyst's Office published a report on the allocation of local sales tax, which focused on agreements between cities and private businesses involving diversions of local sales taxes to lure businesses to remain or move into a particular jurisdiction. The report concluded that the use of such financial incentives does not result in a net benefit to a broader economic region within the state, but rather simply shifts existing sales tax from one jurisdiction to another at the cost of government resources that could be used for other purposes.
  4. Nice work if you can get it: Retailers are not the only parties seeking to benefit from sales tax sharing agreements. In 2015, the California Fair Political Practices Commission (FPPC) responded to a letter from the City of Long Beach regarding a tax sharing agreement advanced by a consultant. The consultant proposed an unnamed corporation locate its sales operations in Long Beach in exchange for a portion of the local sales tax generated from the corporation's sales and a 20% "finder's fee" for the consultant. The FPPC's reply noted that Government Code Section 1090 precludes cities from entering into a sales tax sharing agreement with a corporation that results in a financial gain for a consultant who advises and assists the city on such matters.
  5. Double referral: This bill was double referred to the Assembly Committee on Local Government, which passed this bill on 6-to-2 vote on June 19, 2019. Please refer to the Assembly Committee on Local Government's analysis for additional information.

REGISTERED SUPPORT / OPPOSITION:

Support

California Labor Federation

City of Placentia

City of Rancho Cucamonga

League of California Cities

Opposition

California Retailers Association

City of Fresno Mayor Lee Brand

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

Date of Hearing: June 19, 2019

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Cecilia Aguiar-Curry, Chair

SBPCA Bill Id:SB 531

Author:(Glazer) – As Amended Ver:April 29, 2019

SENATE VOTE: 27-8

SUBJECT: Local agencies: retailers.

SUMMARY: Prohibits a local agency from entering into any agreement that results in a rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating within that agency’s jurisdiction. Specifically, this bill:

1. Specifies that, on or after January 1, 2020, a local agency shall not enter into any form of agreement that would result, directly or indirectly, in the payment, transfer, diversion, or rebate of any Bradley-Burns sales and use tax revenue to any retailer in exchange for the retailer locating or continuing to maintain a place of business that serves as the place of sale within the territorial jurisdiction of the local agency if that place of business generates revenue, from the sale of tangible property delivered to and received by the purchaser in another jurisdiction, for the local agency.
2. Defines “place of sale” to mean the place at which retail sales are consummated, as specified.
3. Contains findings and declarations that this bill addresses a matter of statewide concern rather than a municipal affair; therefore, it applies to all cities, including charter cities.

EXISTING LAW:

1. Imposes the sales tax on every retailer “engaged in business in this state” that sells tangible personal property, and requires them to register with the California Department of Tax and Fee Administration (CDTFA), as well as collect and remit appropriate tax at purchase and remit the amount to CDTFA.
2. Allows cities, counties, and specified special districts to increase the sales and use tax, also known as district or transactions and use taxes.
3. Allows CDTFA to collect sales taxes from retailers, deposit the state share in the General Fund, and then allocate the local share of the Bradley-Burns sales tax and any district tax to the appropriate jurisdiction.
4. Bans cities and counties from subsidizing the relocation of big box retailers and auto malls within the same market area.
5. Prohibits a local agency from entering into an agreement that would result in the payment, transfer, diversion, or rebate of Bradley-Burns local tax proceeds to a retailer if the agreement results in a reduction of revenue that is received by another local agency when the retailer continues to maintain a physical presence and location within that other local agency.

FISCAL EFFECT: None

COMMENTS:

1. Bradley-Burns. The Bradley-Burns Uniform Sales Tax Act (Act) allows a local agency to apply its own sales and use tax on the same base of tangible personal property. This tax rate currently is fixed at 1.25% of the sales price of tangible personal property sold at retail in the local jurisdiction, or purchased outside the jurisdiction for use within the jurisdiction. Cities and counties use 1% of the tax to support general operations, while the remaining 0.25% is used for county transportation purposes. In California, all cities and counties impose Bradley-Burns local taxes.

The Act specifies the "place of sale" for purposes of the local sales tax. Bradley-Burns sales taxes are allocated to the place of business of the retailer, unless the property sold is delivered by the retailer or his or her agent to an out-of-state destination or to a common carrier for delivery to an out-of-state destination, in which case no tax is collected. CDTFA must consider specific characteristics of the retailer to correctly determine the “place of sale,” and therefore correctly allocate the Bradley-Burns sales tax.

For a retailer that has one location in the state, that location is determined to be the place
of sale for all of its sales. CDTFA does so even if title to the property passes from seller to buyer outside of the jurisdiction of the seller, or if the property never enters the jurisdiction of the seller. For example, CDTFA would determine that all local taxes attributable to a furniture store in the City of Sacramento would be sourced to that city, regardless of where the store delivered furniture to the buyer.

For a retailer that has more than one location in the state, CDTFA determines the location based on the location where principal negotiations occurred. In the above example, if a retailer has more than one location, CDTFA considers the place of business the location where the retailer takes the order, regardless of whether they subsequently forward it to another location for delivery. For example, if a resident of the City of Davis called a furniture store in Sacramento to order a lamp, which the store shipped to Davis from its location in Vacaville, CDTFA would consider Sacramento the place of business for purposes of allocating the local tax.

For a retailer that has no location in the state, but has property in the state from which it fills orders, CDTFA considers the place of sale as the location from which the property is shipped. For example, if a resident of the City of Davis ordered a lamp from an internet retailer that did not have a retail location in the state, but filled the order from its warehouse in Vacaville, CDTFA would consider Vacaville the place of sale.

Typically, allocating Bradley-Burns sales taxes at the place of sale leads to competition among cities and counties to attract land uses that generate local revenues.

1. Economic Development Incentives. Local governments engage in a wide variety of economic development activities to build their tax bases. In this respect, local officials use their regulatory powers to direct spending and tax policies, which, in turn, influence where, when, and how the private sector invests capital and improves real property.

AB 562 (Williams), Chapter 740, Statutes of 2013, established requirements for local agencies to meet before approving any subsidy and during the term of such subsidies.
In arguing for the bill, the author noted, "Each year, local governments give out billions of dollars in tax incentives to corporations in hopes of increasing economic growth and drawing jobs for their residents…State requirements for local budgets, annual financial reports, and regular audits allow constituents to review most of the direct fiscal decisions made by local governments. However, local economic subsidies do not receive the same public scrutiny as budgets and regulatory decisions. Additionally, local governments rarely track how many jobs are created and it’s impossible to know whether the jobs would have been created without the aid. AB 562 seeks to remedy this shortcoming."

AB 562 succeeded, after several years of failed attempts, in requiring local agencies to gather and make available to the public – in writing and on the agency's website – specified information about any subsidy of $100,000 or more, both before the subsidy is approved and during the life of the subsidy.

1. Subsidies and Warehouse Distribution Centers. Since AB 562 was enacted, a number
   of news reports and studies have focused on Amazon distribution centers and the subsidies state and local agencies have granted in an effort to convince Amazon to locate in their jurisdictions. This followed on the heels of several years of controversy surrounding Amazon's avoidance of sales taxes as a cornerstone of the company's business development strategy. Among the publications and research institutes that have reported recently on the issue of local government subsidies, both generally and specifically for Amazon, are the Economic Policy Institute, the Institute for Local Self-Reliance, The Atlantic, the New Republic, the Fresno Bee, the New York Times, Good Jobs First, and others.

According to a New York Times article dated December 1, 2012, "A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains. The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid…

"A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas if they did not get subsidies in the United States. Over the years, corporations have increasingly exploited that fear, creating a high-stakes bazaar where they pit local officials against one another to get the most lucrative packages. States compete with other states, cities compete with surrounding suburbs, and even small towns have entered the race with the goal of defeating their neighbors...Questioned about incentives, officials at dozens of other large corporations said they owed it to shareholders to maximize profits. Many emphasized that they employ thousands of Americans who pay taxes and spend money in the local economy."

Focusing on subsidies exclusively for Amazon, the Economic Policy Institute issued a report on February 1, 2018, which states, "The expansion of Amazon’s physical distribution network has coincided with a strategic business plan of negotiating millions in tax abatements, credits, exemptions, and infrastructure assistance from state and local governments in the name of regional economic development. By the end of 2016, Amazon had likely received over $1 billion in state and local subsidies for its facilities, which would include not only fulfillment centers but 'sortation' centers that only sort packages, mailing centers, and other facilities. In return for the incentives each of the fulfillment centers receives, Amazon claims to create hundreds of jobs with competitive pay and benefits.

"Using tax and other incentives to lure businesses to state and local areas is a long-running economic development strategy pursued by subnational governments. In nearly every state, businesses can receive a significantly lighter tax burden for constructing a sports stadium, filming a movie, or building a manufacturing assembly plant. The results on whether these types of community development strategies have a positive impact on job creation and growth is highly debated in popular news outlets and among researchers. And as Amazon has grown, the debate in some cases has specifically focused on Amazon."

The report found that, "When Amazon opens a new fulfillment center, the host county gains roughly 30 percent more warehousing and storage jobs but no new net jobs overall, as the jobs created in warehousing and storage are likely offset by job losses in other industries…State and local governments give away millions in tax abatements, credits, exemptions, and infrastructure assistance to lure Amazon warehouses but don’t get a commensurate 'return' on that investment. Rather than spending public resources on an ineffective strategy to boost local employment (luring Amazon fulfillment centers), state and local governments should invest in public services (particularly in early-childhood education and infrastructure) that are proven to spur long-term economic development."

1. State Auditor and Legislative Analyst Reports. Both the California State Auditor and the Legislative Analyst’s Office (LAO) have issued reports questioning the statewide benefit of economic development incentives local agencies offer to retailers for locating in their jurisdiction. The November 2017 report from the California State Auditor entitled, “The Bradley-Burns Tax and Local Transportation Funds: Changing the Allocation Structure for the Bradley-Burns Tax Would Result in a More Equitable Distribution of Local Transportation Funding,” states:

“Some counties may benefit disproportionately from the Bradley‑Burns tax because of the way state law currently directs the allocation of the funds. Retailers generally allocate Bradley‑Burns tax revenue based on the place of sale, which they identify according to their business structure. However, retailers that make sales over the Internet may allocate sales to various locations, including their warehouses, distribution center, or sales offices. This approach tends to concentrate Bradley‑Burns tax revenue into the warehouses’ or sales offices’ respective jurisdictions. Consequently, counties with a relatively large amount of industrial space may receive disproportionately larger amounts of Bradley‑Burns tax, and therefore Local Transportation Fund, revenue. The State could make its distribution of Bradley‑Burns tax revenue derived from online sales more equitable if it based allocations of the tax on the destinations to which goods are shipped rather than on place of sale.”

Similarly, a 2007 LAO report entitled, “Allocating Local Sales Taxes,” states:

“The use of financial incentive does not result in net benefits to a broader economic region within the state. It simply shifts existing sales taxes from one jurisdiction to another – at the cost of government resources that could be used for other purposes The counterproductive aspects of the current system could be addressed through major reforms involving either the local sales tax allocation methodology or changes in local government’s system of taxes. Both of these options would involve significant public policy trade-offs and would require changes to the state’s Constitution.”

1. Bill Summary and Author’s Statement. This bill prohibits a local agency from entering into any agreement that results in a rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating within that agency’s jurisdiction. This bill finds and declares that it addresses a statewide concern and therefore applies to contract cities. This bill is sponsored by the author.

The author states that, “Current tax law has created an environment that puts the power to allocate local sales tax into the hands of online retailers. These retailers can choose to allocate any and all sales tax revenues to a specific location within the state – be that a warehouse, distribution or sales center. What results is a race to the bottom as local governments offer increasingly generous rebates to these companies, often between 50-85% of the revenues generated, in exchange for locating a warehouse or sales center within their jurisdiction. Private companies profit doubly from these tax-sharing agreements, which allow them to keep both the funding from their retail sales, and the public funds siphoned to them as a rebate. California cities are sending an estimated $1 billion in taxpayer dollars back to giant corporations each year – at a time when state and local governments are scrambling to fund public safety, roads, affordable housing, and tackling the homeless crisis. The gains from these agreements are doubtful. Though warehouses may generate jobs, they are often grueling, low wage, and without benefits. This bill would prohibit tax-sharing agreements between local governments and private corporations, effectively ending the perverse competition our tax system creates.”

1. Related Legislation. AB 2853 (Medina, 2018) would have required local agencies to publicly report specified information when providing economic development subsidies of $100,000 or more for warehouse distribution centers. The Governor vetoed AB 2853 stating, “This bill requires local governments that provide economic subsidies of $100,000 or more for warehouse distribution centers to publically report on information such as employee wage rates, independent contractor rates, and the value of employee benefit packages for each job classification created by the subsidy. There is value in taxpayers knowing whether economic development incentives ultimately benefit their community. That is why I signed legislation in 2013 that required local agencies to provide information about the expected and actual impacts of approved economic development subsidies. This bill, however, significantly expands current law and goes too far by adding reporting rules that will be overly burdensome to a single industry. It may actually hinder efforts to improve business opportunities in local communities, which is an outcome no one desires."

SCA 20 (Glazer, 2018) would have amended the California Constitution to provide that the retail sale of tangible personal property transacted online is consummated at the point of delivery. The bill was held in the Senate Appropriations Committee.

AB 485 (Medina) is similar to AB 2853 and passed by this Committee on April 1, 2019, with a 6-2 vote. AB 485 is currently pending in the Senate Governance and Finance Committee.

1. Policy Considerations. Both the State Auditor and the LAO have suggested replacing situs-based allocation with a population based allocation system to reduce incentives for local governments to use their economic development powers to promote retail developments. Specifically, Internet retailers may identify their warehouses or distribution centers as their places of sale when remitting Bradley‑Burns tax, even though they may ship their taxable goods to locations across the state. As a result, local jurisdictions with relatively more warehouses or distribution centers receive Bradley‑Burns tax allocations that are disproportionate to their purchases. This disparity is likely to increase in the future due to the rapid growth of e‑commerce. If adopted, this bill will treat one of the negative consequences of the current allocation system by reducing competition between local agencies, however, in order to address the larger, more underlying problem, broad tax reform is likely needed. Without comprehensive tax reform, and because local agencies will continue to compete using alternative tax incentive tools, the Committee may wish to consider the overall impact this bill will have in curbing the utilization of taxpayer dollars and removing sales tax allocation disparities.
2. Arguments in Support. According to the League of California Cities, “The League’s policy states that sales tax agreements involving online retailers should be prohibited going forward because they have the effect of encouraging revenue to be shifted away from numerous communities and concentrated to the benefit of one agency with a portion rebated to a retailer…With the increasing volume of Internet sales, a tremendous amount of sales tax revenue can be concentrated in a retailer’s warehouse, sales office or fulfillment center, which makes locating these facilities an enticing prospect for local agencies. An agreement that benefits one agency by shifting the point of sale can come at the fiscal harm to many others.
   

“SB 531 would prohibit future rebate agreements that result in Bradley-Burns Sales and Use Tax revenue from being shifted away from numerous communities and concentrated to the benefit of one agency with a portion rebated to a retailer.”

1. Arguments in Opposition. According to the City of Perris, “The City has a population of approximately 73,000 residents, the median age of our citizens is 27.3 years old, our median household income is $54,657 (an increase of 4% from last year), and has a poverty rate of 21.2%. The national poverty rate is 12.3%, based on the U.S. Census Bureau estimates.

“In recent years, the City of Perris has been able to use a particular economic tool available to our community in order to begin the slow climb out of generational poverty. We have done this by leveraging sales tax rebate incentives. Through this development tool, the City of Perris has been able to attract and retain e-commerce centers. These e-commerce centers have provided living wage jobs to families in Perris. The growth in our median household income can be directly attributed to these e-commerce centers.

“In addition, the revenues that come with these e-commerce centers have allowed the City of Perris to provide critical services such as fire and police protection. However, more critically to the quality of life of its residents, these revenues generated by our e-commerce centers

have allowed us to provide parks and recreation programs that did not exist before. In fact, we have been recognized by the State Department of Parks and Recreation for our efforts, receiving awards in the last three consecutive years. All of these benefits are threatened by Senate Bill 531.”

1. Double-Referral. This bill is double-referred to the Revenue and Taxation Committee.
   

REGISTERED SUPPORT / OPPOSITION:

Support

California Labor Federation, AFL-CIO

Cities of Placentia and Rancho Cucamonga

League of California Cities

Opposition

California Retailers Association

Cities of Fresno, Moreno Valley, and Perris

Analysis Prepared by: Jimmy MacDonald / L. GOV. / (916) 319-3958

 THIRD READING  

Bill No: SB 531

Author: Glazer (D), et al.

Amended: 4/29/19

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 5-2, 4/24/19

AYES: McGuire, Moorlach, Beall, Hertzberg, Wiener

NOES: Hurtado, Nielsen

SUBJECT: Local agencies: retailers

SOURCE: Author

DIGEST:

This bill prohibits a local agency from entering into any agreement that results in a rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating within that agency’s jurisdiction.

ANALYSIS:

Existing law:

1. Imposes the sales tax on every retailer “engaged in business in this state” that sells tangible personal property, and requires them to register with the California Department of Tax and Fee Administration (CDTFA), as well as collect and remit appropriate tax at purchase and remit the amount to CDFTA. Sales tax applies whenever a retail sale occurs, which is generally any sale other than one for resale in the regular course of business. The current rate is 7.25%.
2. Allows cities, counties, and specified special districts to increase the sales and use tax, also known as district or transactions and use taxes.
3. Allows CDTFA to collect sales taxes from retailers, deposit the state share in the General Fund, and then allocate the local share of the Bradley-Burns sales tax and any district tax to the appropriate jurisdiction. The Bradley-Burns Uniform Sales Tax Act allows all local agencies to apply its own sales and use tax on the same base of tangible personal property. This tax rate currently is fixed at 1.25% of the sales price of tangible personal property sold at retail in the local jurisdiction, or purchased outside the jurisdiction for use within the jurisdiction. Cities and counties use this 1% tax to support general operations, while the remaining 0.25% is used for county transportation purposes. In California, all cities and counties impose Bradley-Burns local taxes.
4. Specifies the "place of sale" for purposes of the local sales tax. Bradley-Burns sales taxes are allocated to the place of business of the retailer, unless the property sold is delivered by the retailer or his or her agent to an out-of-state destination or to a common carrier for delivery to an out-of-state destination, in which case no tax is collected. CDTFA must consider specific characteristics of the retailer to correctly determine the “place of sale,” and therefore correctly allocate the local share of Bradley-Burns sales tax.
5. Bans cities and counties from subsidizing the relocation of big box retailers and auto malls within the same market area (SB 114, Torlakson, Chapter 781, Statutes of 2003).
6. Prohibits a local agency from entering into an agreement that would result in the payment, transfer, diversion, or rebate of Bradley-Burns local tax proceeds to a retailer if the agreement results in a reduction of revenue that is received by another local agency when the retailer continues to maintain a physical presence and location within that other local agency (SB 533, Pan, Chapter 717, Statutes of 2015).

This bill:

1. Prohibits a local agency from entering into any agreement that results, directly or indirectly, in the payment, transfer, diversion, or rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating or continuing to maintain a place of business that serves as the “place of sale” within the local jurisdiction offering the incentive if it generates sales tax revenue from the sale of tangible property delivered to and received by the purchaser in another jurisdiction.
2. Defines a “place of sale” to mean the retailer’s place of business is determined to be the place at which retail sales are consummated pursuant to existing law.

Background

Counties and cities engage in a wide variety of economic development activities to build their tax bases. Local officials use various tactics to influence where, when, and how the private sector invests capital and improves real property. Local officials sometimes use their economic development powers to induce businesses to relocate to their communities. Economic development incentives local agencies offer range in terms of (1) the level of rebate, (2) how long the retailer receives the benefit, (3) the types of jobs or services the retailer must provide in return, and (4) how long the retailer must promise to stay in the jurisdiction. Some agreements offer over half of the Bradley-Burns revenue generated by the facility, for periods of time ranging from one year to decades. The City of Fresno has recently entered into long-term agreements with Amazon, Nordstrom, and the Gap, and the City of Dinuba has done the same with Best Buy.

Comments

1. Purpose of the bill. According to the author, “Current tax law has created an environment that puts the power to allocate local sales tax into the hands of online retailers. These retailers can choose to allocate any and all sales tax revenues to a specific location within the state- be that a warehouse, distribution or sales center. What results is a race to the bottom as local governments offer increasingly generous rebates to these companies, often between 50-85% of the revenues generated, in exchange for locating a warehouse or sales center within their jurisdiction. Private companies profit doubly from these tax-sharing agreements, which allow them to keep both the profits from their retail sales, and the public funds siphoned to them as a rebate. California cities are sending an estimated $1 billion in taxpayer dollars back to giant corporations each year – at a time when state and local governments are scrambling to fund public safety, roads, and affordable housing, and tackle the homeless crisis. The gains from these agreements are doubtful. Though warehouses may generate jobs, they are often grueling, low wage, and without benefits. This bill would prohibit these types of tax-sharing agreements between local governments and private corporations, effectively ending the perverse competition our tax system creates and preserving taxpayer dollars to provide for the public good.”
2. If not this, then what? Cities that focus their economic development efforts on warehouse and distribution centers view these agreements as valuable economic developments tools that create employment and economic activity that can’t be generated any other way. Even if one of these agreements requires a significant rebate back to a retailer, that city still may be better off because they generate more sales tax revenue than if the retailer did not locate their warehouse or distribution in their city. Does the state sufficiently allow for other economic development incentives to provide opportunities for cities seeking continued economic growth, particularly cities with available land and above-average unemployment rates?
3. Hurry up. Since SB 531 does not go into effect until January 1, 2020, this bill would allow existing agreements to continue. Since these agreements range in length, allowing existing agreements to continue would allow some agreements to remain in place for years, and even decades, after the law goes into effect. Local agencies could use this time before the law goes into effect to implement new agreements, or extend existing agreements, that would be against the law after January 1, 2020. Despite this potential loophole, local governments would only have a few months to approve new agreements or replace existing agreements, and it is unclear whether this would provide sufficient time for such negotiations with a retailer to occur. It could also reduce the impact on the local agencies that have relied on these agreements to generate economic activity.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 4/30/19)

California Labor Federation

City of Placentia

League of California Cities

OPPOSITION: (Verified 4/30/19)

California Retailers Association

City of Fresno

City of Perris

Prepared by: Jonathan Peterson / GOV. & F. / (916) 651-4119

5/1/19 14:35:19

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Local agencies: retailers

Prohibits a local agency from entering into any agreement that results in a rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating within that agency’s jurisdiction.

Background

Sales and use tax. State law imposes the sales tax on every retailer “engaged in business in this state” that sells tangible personal property, and requires them to register with the California Department of Tax and Fee Administration (CDTFA), as well as collect and remit appropriate tax at purchase and remit the amount to CDFTA. Sales tax applies whenever a retail sale occurs, which is generally any sale other than one for resale in the regular course of business. The current rate is 7.25% as shown in the table below. Additionally, cities, counties, and specified special districts may increase the sales and use tax, also known as district or transactions and use taxes.

Unless the purchaser pays the sales tax to the retailer, he or she is liable for the use tax, which the law imposes on any person consuming tangible personal property in the state. The use tax is the same rate as the sales tax, and also like the sales tax, must be remitted on or before the last day of the month following the quarterly period in which the person made the purchase. CDTFA collects sales taxes from retailers, deposits the state share in the General Fund, and then allocates the local share of the Bradley-Burns sales tax and any district tax to the appropriate jurisdiction.

Bradley-Burns. The Bradley-Burns Uniform Sales Tax Act allows all local agencies to apply its own sales and use tax on the same base of tangible personal property. This tax rate currently is fixed at 1.25% of the sales price of tangible personal property sold at retail in the local jurisdiction, or purchased outside the jurisdiction for use within the jurisdiction. Cities and counties use this 1% tax to support general operations, while the remaining 0.25% is used for county transportation purposes. In California, all cities and counties impose Bradley-Burns local taxes.

Bradley-Burns law specifies the "place of sale" for purposes of the local sales tax. Bradley-Burns sales taxes are allocated to the place of business of the retailer, unless the property sold is delivered by the retailer or his or her agent to an out-of-state destination or to a common carrier for delivery to an out-of-state destination, in which case no tax is collected. CDTFA must consider specific characteristics of the retailer to correctly determine the “place of sale,” and therefore correctly allocate the local share of Bradley-Burns sales tax:

• For a retailer that has one location in the state, that location is determined to be the place of sale for all of its sales. CDTFA does so even if title to the property passes from seller to buyer outside of the jurisdiction of the seller, or if the property never enters the jurisdiction of the seller. For example, CDTFA would determine that all local taxes attributable to a furniture store in the City of Sacramento would be sourced to that city, regardless of where the store delivered furniture to the buyer.
• For a retailer that has more than one location in the state, CDTFA determines the location based on the location where principal negotiations occurred. In the above example, if a retailer has more than one location, CDTFA considers the place of business the location where the retailer takes the order, regardless of whether they subsequently forward it to another location for delivery. For example, if a resident of the City of Davis called a furniture store in Sacramento to order a lamp, which the store shipped to Davis from its location in Vacaville, CDTFA would consider Sacramento the place of business for purposes of allocating the local tax.
• For a retailer that has no location in the state, but has a stock of property in the state from which it fills orders, CDTFA considers the place of sale as the location from which the property is shipped. If a resident of the City of Davis ordered a lamp from an internet retailer that did not have a retail location in the state, but filled the order from its warehouse in Vacaville, CDTFA would consider Vacaville the place of sale.

Allocating Bradley-Burns sales taxes at the place of sale leads to competition among cities and counties to attract land uses that generate local revenues.

Economic development incentives. Counties and cities engage in a wide variety of economic development activities to build their tax bases. Local officials use various tactics to influence where, when, and how the private sector invests capital and improves real property:

• Regulatory tools, including general plans, zoning, and subdivision standards;
• Direct spending, including building public works projects like dams, water systems, sewers, levees, and roads, as well as grants and loans, and site preparation; and
• Tax policies, including lower rates on local taxes (such as sales taxes or property taxes) for selected taxpayers and tax abatements where officials return the revenues to the taxpayers.

Local officials sometimes use their economic development powers to induce businesses to relocate to their communities. State law bans cities and counties from subsidizing the relocation of big box retailers and auto malls within the same market area (SB 114, Torlakson, 2003). State law also prohibits a local agency from entering into an agreement that would result in the payment, transfer, diversion, or rebate of Bradley-Burns local tax proceeds to a retailer if the agreement results in a reduction of revenue that is received by another local agency when the retailer continues to maintain a physical presence and location within that other local agency (SB 533, Pan, 2015).

Even with these restrictions on economic development incentives, local agencies can still offer the following types of agreements:

• A reduction in the use tax proceeds that are distributed to the originating local agency through one or more countywide pools.
• Any agreement to pay or rebate any local use tax revenue related to a use tax direct payment permit issued under RTC 7051.3.
• Any mutual tax revenue sharing agreement between local agencies to pay, transfer, or divert tax revenues that would be received by one local agency to another local agency, and where the agreement would not result in a rebate of those tax revenues to a retailer.
• An agreement where a retailer expands its operations into another jurisdiction, but the originating local agency receives no less revenue than if the expansion did not occur.

Economic development incentives local agencies offer range in terms of (1) the level of rebate, (2) how long the retailer receives the benefit, (3) the types of jobs or services the retailer must provide in return, and (4) how long the retailer must promise to stay in the jurisdiction. Some agreements offer over half of the Bradley-Burns revenue generated by the facility, for periods of time ranging from one year to 30 years. The City of Fresno has recently entered into long-term agreements with Amazon, Nordstrom, and the Gap, and the City of Dinuba has done the same with Best Buy.

State Auditor and Legislative Analyst Reports. Both the California State Auditor and the Legislative Analyst’s Office (LAO) have issued reports questioning the statewide benefit of economic development incentives local agencies offer to retailers for locating in their jurisdiction. The November 2017 report from the California State Auditor entitled, “The Bradley-Burns Tax and Local Transportation Funds: Changing the Allocation Structure for the Bradley-Burns Tax Would Result in a More Equitable Distribution of Local Transportation Funding,” states:

“Some counties may benefit disproportionately from the Bradley‑Burns tax because of the way state law currently directs the allocation of the funds. Retailers generally allocate Bradley‑Burns tax revenue based on the place of sale, which they identify according to their business structure. However, retailers that make sales over the Internet may allocate sales to various locations, including their warehouses, distribution center, or sales offices. This approach tends to concentrate Bradley‑Burns tax revenue into the warehouses’ or sales offices’ respective jurisdictions. Consequently, counties with a relatively large amount of industrial space may receive disproportionately larger amounts of Bradley‑Burns tax, and therefore Local Transportation Fund, revenue. The State could make its distribution of Bradley‑Burns tax revenue derived from online sales more equitable if it based allocations of the tax on the destinations to which goods are shipped rather than on place of sale.”

Similarly, a 2007 LAO report entitled, “Allocating Local Sales Taxes,” states:

“The use of financial incentive does not result in net benefits to a broader economic region within the state. It simply shifts existing sales taxes from one jurisdiction to another—at the cost of government resources that could be used for other purposes The counterproductive aspects of the current system could be addressed through major reforms involving either the local sales tax allocation methodology or changes in local government’s system of taxes. Both of these options would involve significant public policy trade-offs and would require changes to the state’s Constitution.”

The author wants to place additional limits on the types of economic development incentives local agencies can offer to businesses from local Bradley-Burns sales tax revenue.

Proposed Law

Senate Bill 531 prohibits a local agency from entering into any agreement that results, directly or indirectly, in the payment, transfer, diversion, or rebate of Bradley-Burns local tax revenues to a retailer in exchange for that retailer locating or continuing to maintain a “sales nexus” within the local jurisdiction offering the incentive if it generates sales tax revenue from the sale of tangible property delivered to and received by the purchaser in another jurisdiction.

Under the bill, a retailer locates or maintains a sales nexus in a jurisdiction if the retailer’s place of business is determined to be the place at which retail sales are consummated pursuant to existing law.

The measure includes various findings and declarations supporting its purposes.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “Current tax law has created an environment that puts the power to allocate local sales tax into the hands of online retailers. These retailers can choose to allocate any and all sales tax revenues to a specific location within the state- be that a warehouse, distribution or sales center. What results is a race to the bottom as local governments offer increasingly generous rebates to these companies, often between 50-85% of the revenues generated, in exchange for locating a warehouse or sales center within their jurisdiction. Private companies profit doubly from these tax-sharing agreements, which allow them to keep both the profits from their retail sales, and the public funds siphoned to them as a rebate. California cities are sending an estimated $1 billion in taxpayer dollars back to giant corporations each year – at a time when state and local governments are scrambling to fund

public safety, roads, and affordable housing, and tackle the homeless crisis. The gains from these agreements are doubtful. Though warehouses may generate jobs, they are often grueling, low wage, and without benefits. This bill would prohibit these types of tax-sharing agreements between local governments and private corporations, effectively ending the perverse competition our tax system creates and preserving taxpayer dollars to provide for the public good.”

2. If not this, then what? Cities that focus their economic development efforts on warehouse and distribution centers view these agreements as valuable economic developments tools that create employment and economic activity that can’t be generated any other way. Even if one of these agreements requires a significant rebate back to a retailer, that city still may be better off because they generate more sales tax revenue than if the retailer did not locate their warehouse or distribution in their city. The Committee may wish to consider whether other economic development incentives the state does allow are sufficient to provide opportunities for cities seeking continued economic growth, particularly cities with available land and above-average unemployment rates.

3. Race to the bottom. Allowing communities to take advantage of their sales tax revenue to offer huge rebates, sometimes more than half of the total sales tax revenue received, often results in shifting economic activity from one jurisdiction that needs more economic growth to another. As the rebates grow larger and larger, the benefits accrue more and more to the company receiving the rebate, not the local agency providing it. As this race to the bottom continues, more and more tax dollars go to retailers, not to local jurisdictions. Taxpayers pay sales tax under the supposition that the revenue goes to the state and local agencies to provide services, not to provide a rebate to a corporation. Instead, retailers often receive a significant portion of the benefits of this sales tax revenue. Local agencies are pitted against each other to attract retailers with these incentives in exchange for a promise of jobs and economic activity. However, both local agencies end up on the losing end. The local agency that loses the competition loses jobs and economic activity. The local agency that wins the competition ends up sacrificing a portion of sales tax revenue they may have generated if the retailer had plans to locate in that jurisdiction anyway.

Businesses make decisions about where to locate on a variety of factors, including whether or not a local agency offers them a lucrative sales tax rebate. However, it is unclear whether the offer of a sales tax rebate outweighs other factors: proximity to major transportation routes, access to particular markets, and whether a retailer already has warehouses and distribution centers in the area. It is unclear how many of these businesses would have located in these communities regardless of whether or not the city offered them a rebate because these other market forces were more important than the incentive received. As a result, some local agencies may be giving away sales tax revenue they would otherwise receive to lure a retailer that already had plans to locate a facility in their jurisdiction.

4. Don’t recreate the wheel. The bill attempts to reduce the types of economic development incentives local agencies can offer by eliminating agreements where the retailer maintains a “sales nexus,” a new term in state law. Existing law already defines where CDTFA attributes sales taxes revenue for various types of retail operations. For a retailer that has more than one location in the state, CDTFA determines the location based on the location where principal negotiations occurred. For other retailer arrangements, state law and regulations outline the process for determining where the sales tax is attributed. Rather than create a new term to define where a retailer has a physical and/or economic presence, the Committee may wish to consider amending the bill to tie to existing definitions of whether a retailer maintains a physical and/or economic presence in a particular jurisdiction.

5. Hurry up. Since SB 531 does not go into effect until January 1, 2020, the bill would allow existing agreements to continue. Since these agreements range in length, allowing existing agreements to continue would allow some agreements to remain in place for years, and even decades, after the law goes into effect. Local agencies could use this time before the law goes into effect to implement new agreements, or extend existing agreements, that would be against the law after January 1, 2020. Despite this potential loophole, local governments would only have a few months to approve new agreements or replace existing agreements, and it is unclear whether this would provide sufficient time for such negotiations with a retailer to occur. It could also reduce the impact on the local agencies that have relied on these agreements to generate economic activity. The Committee may wish to consider whether providing this time for retailers and local agencies to adjust could result in a flurry of new agreements, which could be addressed if the law went into effect immediately.

6. Treating the symptom, not the disease. Both the Auditor and the LAO have suggested replacing situs-based allocation with a population based allocation system to reduce incentives for local governments to use their economic development powers to promote retail developments. The LAO also suggested that replacing local government sales tax revenues with a different tax base could achieve similar results. Yet, because Section 25.5 of Article XIII of the California Constitution prohibits the Legislature from enacting a statute that would change the method of distributing revenues derived under Bradley-Burns Uniform Local Sales and Use Tax Law, as it read on November 3, 2004, except to comply with federal law or to allow the state to participate in an interstate compact, moving away from a situs-based sales tax allocation system would require a Constitutional Amendment or enacting a new local tax scheme. While SB 531 reduces counterproductive economic competition between local agencies, broad tax reform is needed to address the underlying problem.

7. Previous efforts. The Legislature has considered previous efforts to address the allocation of local sales taxes:

• AB 376 (Chavez, 2001), SB 1114 (Brulte, 2002), and AB 553 (Chavez, 2003) provided that for purposes of allocating the local tax on concrete batch plant sales by retailers with more than one place of business in California, the place of sale is the point of manufacture of the concrete. These bills were not enacted.
• The Legislature enacted AB 451 (Yee, 2005), which required that all local tax on jet fuel sales be allocated to the point of delivery into the aircraft, regardless of whether the jet fuel retailer has one or more places of business in California.
• The Committee approved SB 983 (Hernandez, 2014) which provided that for purposes of allocating the local tax on sales of fuel made through a card lock network, the place of sale is the point of delivery of the fuel into the vehicle. The author subsequently amended the measure for another purpose.
• AB 2853 (Medina, 2018), which the Committee approved at its June 13, 2018, hearing on a vote of 6-1 and the Governor subsequently vetoed, required local agencies to publicly report specified information when providing economic development subsidies of
• $100,000 or more for warehouse distribution centers. AB 485 (Medina, 2019) includes similar requirements and is currently up for consideration in the Assembly Appropriations Committee.
• SCA 20 (Glazer, 2018), which the Committee approved at its April 25, 2018, hearing on a vote of 7-0, amended the California Constitution to provide that the retail sale of tangible personal property transacted online is consummated at the point of delivery. The bill was held in Senate Appropriations Committee.

8. Charter cities. SB 531 says that its statutory provisions apply to charter cities. To support this assertion, the bill includes a legislative finding and declaration that amending the types of economic development agreements allowed is a matter of statewide concern, not a municipal affair. Because the Constitution does not define “municipal affairs,” the courts determine whether a topic is a municipal affair or whether it is an issue of statewide concern.

Support and Opposition

(4/19/19)

Support: California Labor Federation; City of Placentia; League of California Cities.

Opposition: City of Fresno; City of Perris.

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