Assembly Standing Committee on Revenue and Taxation

Checking. One, two. Hello. There it is. Well, good morning everybody, and welcome to today's informational hearing on local sales tax allocations in California. I want to remind everybody that testimony and public comment must be in person. We are no longer using a moderated telephone service. This hearing is being live streamed and I want to thank everybody that flew down from Sacramento with all their equipment to help livestream. It will be live streamed on the Assembly website and a recording will also be posted.

So hopefully this will serve as a resource that can be referred to in the future. I know that our Committee Members were unable to join us in person, but a number of them will be watching live and as we expect, other stakeholders will be doing. Also, before I start, I would like to thank the panelists in attendance today as we examine California sales and use tax laws, their Administration, and the implication for cities and counties.

I would also like to thank the City of Westlake and their staff, Antoinette for making their council chambers available for this hearing. This hearing will be an opportunity for this Committee and the public to develop a deeper understanding of how Bradley Burns tax revenues are allocated and how local governments have responded to a rapidly changing technological environment. Like many of my colleagues in the Legislature, I got my start as an elected official at the local level. I served on the City Council of Thousand Oaks.

My service and local government made it crystal clear that cities and counties are on the front lines of California's most pressing challenges. From housing and homelessness to the deadly fentanyl crisis, local officials see the challenges facing our residents up close every day. When we discuss these issues in Sacramento and debate possible solutions, we hear constantly that cities and counties are overwhelmed. My colleagues and I do our best to incorporate these perspectives into our decisions as we grapple with the resource constraints that do exist.

Still, competition among local agencies can lead to an overall reduction in the total amount of revenues received by these agencies. Some have described this as a race to the bottom. Given this context, I decided to convene this hearing so that both the Committee and the public can gain a better understanding of an important revenue source for our cities and counties.

Local sales and use tax under the Bradley-Burns Uniform local sales and use tax local governments levy a 1.25% rate on taxable sales, of which 1% is used for General purposes and 00:205% is used for transportation purposes. To be clear, Bradley-Burns revenues are distinct and separate from voter-approved transaction and use taxes that vary by jurisdiction. This hearing will consist of two panels. The first panel will feature experts who will explain current laws and regulations and some recent legislative history to this discussion.

The second panel will feature leaders from several California cities who will share their perspectives, including the challenges and opportunities that cities are facing. For each panel, we will have an opportunity after each speaker to ask questions, and then we'll have a Q&A portion for the entire panel at the very end. Panelists, after you finish your presentation, please remain seated, if you don't mind.

After you finish your first presentation now we will welcome our first witness for the panel, Nicolas Maduros, the Director of California Department of Tax and Fee Administration. We have asked the Department to provide an overview of the state's role in administering sales and use taxes, as well as how Bradley-Burns revenues are allocated to local governments. And just before you begin, I would like to remind everybody that the PowerPoint and additional information is available right on the table. You may begin, Director.

Thank you so much, Chair Irwin, for having us here today. My name, as you mentioned, is Nick Maduros. I'm the Director of the California Department of Tax and Fee Administration. Together with our team of about 4000 state employees, we administer more than 40 tax and fee programs for the state. Three of those tax and fee programs, we tend to think of sales and use tax as one tax program, but it's actually three. And you can see it here.

There's the state portion, which is a 6% tax on purchases of tangible personal property in the State of California. The Bradley-Burns, as you mentioned, is 1.25%. And then there are the transaction use taxes, which at the Department we typically call district taxes. And so just to avoid any confusion, if I say district taxes during the presentation, that, as you mentioned, those are voter-approved taxes on top of the statewide rate of 7.25.

Looking at last fiscal year, the state portion, the 6%, generated $53.8 billion in revenue with about 34.8 billion of that going to the General Fund. The local component of that which gets shipped back to cities around the state was 19 billion. The Bradley Burns revenue was 11.8 billion. And the district taxes, or TUT revenue was 14.4 billion in the last fiscal year. So the state sales tax dates back now 90 years. It was enacted in 1933.

It's imposed on all retailers for the privilege of selling tangible personal property at retail in the State of California. It's based on a retailer's gross receipts derived from the retail sale of TPP or tangible personal property. Two years later, the state enacted a use tax which is imposed on the storage, use or other consumption of TPP in the state that's purchased from retailer. Basically, the law says when sales tax doesn't apply, use tax applies.

The Bradley-Burns tax, which will be the primary focus of my discussion today, was enacted in 1955 to bring uniformity to the local tax system around the State of California. So the Board of Equalization and since 2017, the California Department of Tax and Fee Administration administer under contract the Bradley Burns tax for all of the jurisdictions in the state. And by 1962, all of the local jurisdictions had aligned with BoE for Administration of the Tax. And then the TUTs, the district taxes.

There are 412 currently voter approved taxes imposed by local jurisdictions. Those began in 1969, particularly with some of the property tax issues and the inability to generate sufficient local tax revenue. This has become an increasingly important source of revenue for jurisdictions around the state, as I'm sure all of you are well aware. So just a bit of how this all works at the Department and how it works for taxpayers. So the sales and use tax portion on the return there are various schedules.

The Bradley-Burns comes into effect on the Schedules B and C. The district taxes are on a Schedule A, and we rely on taxpayers to tell us where their tax revenue should be allocated, which jurisdiction, and then each month our team in the local Revenue bureau sends out money to all of the jurisdictions in the state.

An added complication is that the returns are filed quarterly, and so we send in advance for the first two months and then the third payment we true up based on their returns, and we use prior allocations from the light quarter of the previous year to try to make sure that we're getting jurisdictions about the right amount. But sometimes if there are significant changes in allocations from year to year because of a business change, then you will see a larger true up than you otherwise might.

So, as I mentioned, our local revenue branch handles this work. They also respond to petitions filed by various jurisdictions. So each month we typically get hundreds of petitions from various jurisdictions around the state saying, because we do send media to each jurisdiction with their tax allocation by taxpayer only for the taxpayers and the revenue related to activity in their district.

And so, either on their own or working with consultants, the jurisdictions review their allocations and then often file petitions and say that we believe actually this local tax revenue should have come to us. And the local revenue branch is the first stop in that, in trying to address any discrepancies that may arise between tax returns and the affiliated schedules, and where jurisdictions believe that the tax dollars rightfully belong.

If LRB determines that there are misallocations, they notify the jurisdictions of the proposed reallocations and then they request that retailers or taxpayers amend their returns or correct their reporting. So now it gets very complicated, which is why I'm very glad to have this opportunity. There aren't that many people who are willing to sit and listen to an in depth discussion of California's sales and use tax. So this is very exciting for somebody who spends a lot of his life doing sales and use tax.

So I'm going to now try and walk you through how the law applies. And I will say it gets even more complicated, but I'm happy to answer any questions around additional nuances, but I'm trying to give sort of a basic overview. So sales tax applies in the State of California if the sale occurs in California, which means the title passes to the customer in the state, title to the goods occurs in the state, and the retailer's place of business in California participates in the transaction.

And you will hear a lot in my discussion today about this participation in the sale or participation in the transaction. I think it's a very important distinction between participation in the business and participation in the transaction. The law hinges on participation in the actual sale at issue that generates the tax dollars that are to be allocated, rather than a general participation in the business enterprise that is involved in the sale. If either of those two conditions are not met, use tax applies.

And as you will see as we discuss this, sales tax and use tax are allocated differently under California law. Not to mention that the transaction use tax, which I will not discuss today, is also allocated differently than the Bradley Burns under California law.

If you could just go back to that. I know that mostly it's nerdy people in the audience here, but not all. Yes, but could you just give examples of use tax?

Sure. So use tax would apply, and I've got some examples later in the presentation. But use tax could apply if the item is shipped from out of state under standard shipping terms, because the sale, generally, the title transfers when the item is left with the common carrier or the shipper. So in those cases, the sale would not occur in California and it would be a use tax transaction.

Similarly, if somebody in the State of California bought something and did not pay sales tax, but is using the item in the State of California, then use tax would apply. So those are two common situations, like a Truckee resident who buys their car in Reno. Yeah. So as you can see from the previous slide, there's discussion of place of business.

And the place of business is defined under California law as an office, a place of distribution, sales, or sample room or place warehouse storage space or other place of business. It's a broad definition. California law also, and this is an important distinction to make, because it underlies, I think, some of the legislative thinking over the years and how the program was set up. California law recognizes the different legal entities as separate, even if they're very closely related.

And if with that being the case, it would be very possible if under some alternate interpretations of California law, for tax dollars to be very easily all concentrated in single jurisdictions, which is not how it is typically. The law has been interpreted for decades by Board of Equalization and now CDTFA, and I think is an important policy consideration for policymakers as you consider local tax allocation issues, because it would make a real difference in terms of how things are structured.

Also, marketplace sellers, which arise in the wake of the Supreme Court's Wayfair decision and the legislation in California AB 147 to extend sales and use tax collection obligations to out-of-state retailers with economic nexus in the state, also created this notion of marketplace sellers who are basically facilitating the sale for other retailers who might sell through their platforms, for instance, just by way of example, like the fulfillment by Amazon process.

So under California law, the individual operations of those sellers, if they're selling through marketplace facilitator, do not count as a place of business of the marketplace seller. Anyway, this will become more clear. I know it's confusing, but I've got some real life examples coming, I promise, if you bear with me. So, under California law, local sales tax is allocated to the city or county where the sale occurs.

When one looks at the Bradley-Burns local tax law, if only one place of business of the retailer participates in the sale, and this is sort of your standard situation, if you go to a restaurant or a store here in Westlake Village, then the sale occurs at that place of business. And it's pretty straightforward where the sales tax applies. If more than one place of business of the retailer participates in the sale, then the sale occurs at the place of principal negotiation.

And again, I'll have some real life examples of this, but basically, if you go to a store here and bargain for something and pay for it there, but it's shipped from somewhere else, the local tax would apply to where you actually interacted with the merchant. And so that's what we're getting at with the place of principal negotiation. And then local use tax is allocated in a different manner, via a countywide pool to the place where the property is used.

And so the countywide pool is another accounting method that the Board of Equalization developed decades ago. The use tax is allocated to the county by the taxpayer on the Schedule B, and then those tax dollars are allocated among all of the jurisdictions in the county based on the same percentage of their other Bradley Burns revenue, their sales tax revenue. So now we'll just talk, because there has been a lot of discussion about this participation in the transaction issue.

And so I just wanted to go through a few of our regulations that have been on the books for many years and some of the legal opinions over the past decades to try to dig deeper into what all of this means for taxpayers and for local jurisdictions. So, under Regulation 1620, see, sales tax applies when the order for property is sent by the purchaser to or delivery of the property is made by a place of business in this state.

And I think what's important in this first part of this is, I think when the regulation was made, you were basically looking at somebody either placing the order or the delivery. Those were the sort of two big thoughts at the time. This obviously predates the incredible growth of online sales that we have seen in the old days.

Placing an order, you would actually talk to somebody, even if that retailer was remote and a distant retailer, you would pick up the phone and you would call an 800 number and actually talk to somebody at LL Bean or Lillian Vernon, I'm dating myself with whatever the catalogs were coming to my house as a child. And then you can see under 1620 as well, the participation in the transaction in any way.

And this is one thing that, again, people have talked about the difficulty of, well, we participate in the transaction. But as I started in my testimony today, it's not the participation in the business. It is the participation in the actual transaction and that particular sale that is reported on the schedule that matters. In terms of California law for tax allocation, then if you look to Regulation 18 two talks about, again, the retailer for the purpose of the Bradley-Burns.

If a retailer has only one place of business in the state, all California retail sales of that retailer in which that place of business participates. So again, it requires the participation in those individual sales. I think I've covered some of this. Participation in the transaction, if we can go to just that third bullet point, must serve some real purpose.

We have had cases over the years where many cases where taxpayers have set up sort of superfluous activities that only apply to sales in California and don't apply anywhere else, or where somebody just maybe sits at a computer and hits enter in order to claim participation in the sale in a local jurisdiction. So the law has developed to require that there's actually some real purpose behind the activity.

It must have some meaningful effect in the actual sales process, and it must involve some genuine physical human interaction with the transaction. This is another issue that has come up. It actually dates back well before CDTFA, this notion of human interaction, and it stems from, I think there was a time many years ago, 20 years ago, where there were thoughts that the local tax allocation, some people thought that the local tax would be allocated where the computer server existed.

And so this notion of human interaction was developed in order to differentiate what California law actually requires. So now recent developments in local tax, and these aren't, we'll be going back many decades here. So I don't know, we can call them recent, but I guess compared to Bradley-Burns, which dates back to the 50s, they are relatively recent. As I mentioned, a lot of this stems from the growth of Internet sales and e-commerce, and automated processes over the last 25 years.

There have been disputes over the years, and I'll discuss some of them in a moment around jet fuel sales, medical supply, other requirements, contracts. So it does go beyond Internet sales, but a lot of the same issues apply and the same standards apply, which is really important when you're trying to administer a very large tax program where you're sending out money to 1000 jurisdictions and you have a million taxpayers.

We need to come up with sort of pretty bright line rules in order to determine where the tax is properly allocated so that jurisdictions can also know what taxes they can expect without being surprised. The BOE, and then later CDTFA have consistently applied the law to these new scenarios as the marketplace has changed.

Dating back to 2006 and 2007, the BOE explicitly clarified that participation requirement applies to all transactions and affirmed that the General business activities of a headquarters, as I mentioned, do not typically constitute participation. And this opinion in these opinions in 2006, 2007 actually date back to transactions to 2001.

So we're going back more than two decades here and then Appeals Bureau decisions again at the Board of Equalization that were adopted by the Board, developed a framework for determining when an activity, things like credit checks, handling of documents related to monthly fuel orders and other things may constitute participation more recently, or these aren't actually more recently, these are also dating back years. You can see some meaningful effect on the actual sales has been a hallmark of the jurisprudence at the Department.

In 2014, you see the use of the genuine Physical Human Interaction standard, and in 2015 you see this explicit recognition that you need to have some genuine physical human interaction has to be sort of meaningful.

Um, some of these decisions date back into the 2000, pre-2007 period, actually, and have made their way all the way through the Board of Equalization and into the courts, where the board's position was ultimately upheld. It and then there are still two cases pending at the Office of Tax Appeals currently that date back to 2007 and 2009, one for a jurisdiction very close to here for the City of Fillmore, and one involving the City of Shafter in the Central Valley.

So here are some specific examples just to try to. After all of that, I hope I stayed with me this long. So here's one example, a relatively simple one. So Company A has a single location. It's located here in Westlake Village. Coincidentally, their California customers place orders for the sale of goods over the Internet, which Company A fulfills from inventory stored at their location here in Westlake Village.

In that case, Company A's sales to California customers are subject to sales tax, and local sales tax is allocated to its one place of business in the state that participates in the sales. So the local sales tax would be allocated here to Westlake Village. Now, again, that's sort of the simplest example we'll go through, make it increasingly complex. Here's example two. Company A has a sales office, again, coincidentally, in Westlake Village, out of which it negotiates contracts for the sale of TPP to California customers.

And they're fulfilled. So they're sent to the customers either from a warehouse in Sacramento or the Westlake Village business also has a warehouse in Reno, in this example. So Company A's sales to California customers fulfilled from Sacramento are sales tax transactions because the title transfers in the State of California and the local sales tax, even though they're shipped out of Sacramento, is allocated to Westlake Village because that's the place where the principal negotiation took place.

The sales fulfilled from Reno are subject to use tax because the sale takes place outside the State of California under standard shipping terms. It gets even more complicated. If the goods were shipped fOb destination, they'd be sales tax transactions. But if they're shipped under normal shipping terms by common carrier, they'd be use tax transaction. The local use tax would be allocated to where the customer is located through the countywide pool system that I mentioned earlier. Here's an example three.

I think we're even getting more complex here. Company A is an Internet retailer with corporate offices with locations in Westlake Village and Austin, Texas. California customers place orders for the sale of TPP over the Internet, which are fulfilled from a third party's inventory stored at the third party's warehouse in San Diego.

In this case, Company A's sales to California customers are subject to use tax, because if these are standard Internet orders where it's all basically done on a computer, there is no participation in the transaction by Company A's California place of business, and the local use tax for each transaction is allocated to the jurisdiction where the customer is located. Now, there are many variations in this that could change the fact pattern, and this is where it gets very specific.

And the team looks at all of these various permutations of transaction structures to make sure that sales tax is allocated properly. If it were their own warehouse in San Diego, then there would be a different outcome. If it were a third party warehouse where their goods were segregated and kept separately, it would be a different outcome. But in this scenario, it would be a use case transaction, and the tax would be allocated via countywide pool to the location where the customer resides.

So those are a few examples, and I'm happy to answer any questions. We recognize that taxes are very complicated, and we're happy to administer them in any way that policymakers choose to structure them. But we have attempted to put in sort of plain language and make this as simple as possible for people. There are resources there on our website for taxpayers and for jurisdictions. And lastly, if anybody has questions, there's my direct contact information. I'd welcome people.

Anybody reach out if you have questions, and we can help you to make sure that taxes are allocated properly. Thank you for the time. I'm sorry to take so long.

Oh, no, we have plenty of time. And perhaps if anybody in the audience has questions, you're going to be. Can't fly up to Sacramento.

Right. I will be here. And I'm joined, I should have mentioned I'm joined by one of our senior tax counsels who has forgotten more about local tax allocation than I have learned in my six and a half years.

The Department, Scott Claremont, anybody that has questions after. But I do have just a clarification. So, have there been any recent changes in regulations or case law that have prompted the Department to reevaluate site determination for major California companies?

There have been no changes. We have had a handful of issues, and again, we have a million taxpayers, and I'd say we have issues with probably fewer than five of the million in terms of local tax allocation and part of it. I think there are a couple of things at issue. None of it is a new law or a new interpretation, new regulation with COVID we did see a huge rise in online sales and a closing for periods of all the retail locations.

And so it became very clear when looking at returns, maybe, how people were allocating improperly in a way that was not visible outside of COVID So that's one thing. Two, I think we got a new computer system a few years ago which has allowed us to be more efficient and effective in our tax Administration and to try to catch some of these things. And lastly, I'd say that there was an enormous backlog at the BOE of some of these allocation petition issues dating back decades.

And once we cleared that backlog at CDTFA, the team was freed up to take a deeper look at some of these local tax issues. And we've made more of an emphasis, we have put more of an emphasis on it to make sure that the dollars are going to the right jurisdiction. But again, none of those things involve any change in policy.

All right, and thank you for that. And I know this is not exactly on topic, but always of interest to our local area, the district taxes. We have an interesting situation here because we have the City of Westlake in LA, and we have the City of Westlake. That's part of Ventura County. So most people can't tell the difference unless they look at what their home phone number is. But in Ventura County, East Ventura County, most of the cities have not increased taxes at all.

So cities are at the very lowest rate, which is 7.25. And then in Westlake, they have, I think, 9.25, maybe so, right across the street. So, interesting difference with the two cities. Certainly, it hasn't hurt their commerce because they have all the nice, hot. A lot of very nice hotels and Costco. So they're doing quite well. But I'm kind of curious. You said there are 412. And again, I know this is not the topic of today, but you said there's 412 local tax augmentations.

How many cities and counties are that? And how many cities are, like Thousand Oaks, for instance, that haven't augmented their taxes at all and the county hasn't either?

I would have to get you the exact answer, but most of the population centers, I mean, if you look at a map of the state, there are broad swaths that are at 7.25, but typically those are areas with lower populations. Most of the population of the state lives in areas with district taxes or tuts, on top of the seven and a quarter percent.

Some of the highest rates are in parts of Los Angeles County, but I'd have to get you the exact population that is in places with seven and a quarter.

Still. Do you happen to know what the highest rate is?

Just. I believe it's 10 point 75, I think, currently. zero, 10.25.

Okay. All right. Well, it's just always an interesting area where we meet with LA County.

Local jurisdictions can sort of, by. Right, with voter approval, go 2% over and to go higher than 9.25, it requires legislative approval and signature by the Governor and legislation to allow a higher rate.

Yeah, we've certainly done some of that. So thank you very much again, appreciate all of you coming in and joining us here in beautiful Westlake. Now we're going to hear from our next panelist, Dr. Seth Kirstein, an economist for the Legislative Analyst's office, who will be providing more historical context and data relevant to Bradley-Burns revenues. Whenever you're ready.

Thank you. Yes. Seth Kirstein with the Legislative Analyst's office. We've distributed a handout to accompany my testimony, and I'll present in three. My presentation will consist of three parts. First, I'll briefly review a couple points that Director Maduros made in his testimony. And second, I'll describe some of the variation or spread in Bradley-Burns revenue across cities. And then third, I'll highlight some past policy proposals that relate to Bradley-Burns revenue allocation.

Some of those proposals became the laws that shape the current system, and others represent attempts to address some of the perceived shortcomings of that system. So I'll start on page one of the handout here by briefly recapping how the state allocates Bradley-Burns local sales tax revenue, glossing over many of the nuances discussed earlier. Revenue from the 1% Bradley-Burns sales tax goes to the city or county that serves as the place of sale for the transaction that generated that tax revenue.

Some people refer to this type of system as origin sourcing because it sends revenue to the place where, broadly speaking, the seller is located, in contrast to destination sourcing, which, broadly speaking, sends revenue to the place where the buyer is located. And so this gives cities a fiscal incentive to maximize sales within their boundaries. And one way they do that is to enter into rebate agreements with retailers. So in these types of situations, the retailer makes sales within the city, generating Bradley-Burns revenue.

So that sort of helps the city, and then the city agrees to rebate some portion of the revenue back to the retailer and sometimes to third parties who were involved in the negotiation in some way. And so, taking just a minute to unpack this phrase, I used making sales within the city. That can come in the form of actual retail development of some sort, but it could also come in forms that are less economically substantive.

So, for example, some businesses buy fuel through so called cardlock systems, where they purchase large amounts of fuel in advance. And even though these purchasers actually fill up their tanks at various locations around the state, all of the Bradley-Burns revenue under those agreements goes to the, or sort of under that system goes to the city where they made that advance purchase agreement. So that's sort of one example of how this can occur.

Even revenue redirection can occur even when there's not redirection of substantive economic activity. So then, turning to the next page of the handout.

Oh, sorry, madam, could you explain that a little? How common is this? Because, of course, I'm sure local governments are looking and saying that all the wear and tear is on our streets and we have the pumps in our town. Is this commonly done, and does it have to be done through legislation, or how does that work?

I actually am not aware of how common it is. I think the next speaker is more of an expert on this issue than I am. I think I know of one example of a city that is sort of involved in this, but I'm not aware of how many others there are. So I don't know quantitatively how prevalent that is. Just sort of selected that as a relatively intuitive to grasp.

So, anyway, so that pretty much was the very brief recap of sort of the basic idea underpinning the revenue allocation system for the Bradley-Burns sales tax. So then, sort of moving on to that second part that I mentioned on page two of our handout, there is quite a bit of variation in Bradley-Burns revenue per resident across California cities. And so this is sort of one of the key fiscal outcomes that we observe under this revenue allocation system.

So we've got a little graph on that page of the handout and sort of displaying in a couple of different ways, the range of revenues across cities, just from a sort of a broad statistical standpoint. The average California City, sort of, as of the most recent data we examined, was getting about $225 per resident per year. But the top 5% of cities get more than $700 per resident per year, and the bottom 5% get less than $45.

And so, sort of, aside from that broad statistical characterization, the graph also provides a handful of examples of cities that fall into those different parts of the distribution. So, big picture, what we're trying to illustrate with these examples is there's more than one way that a city can end up with high, low, or average revenues.

So if you look on the left-hand side of the graph, for example, several of these cities that we've highlighted have well-publicized sales tax rebate agreements with major retailers, and presumably that's the main reason why their revenues are so high. But the other high revenue example we've got here is the City of Commerce, which, true to its name, has a lot of commercial development, including a large outlet mall in comparison to its pretty modest population.

And then moving over to the right-hand side of the graph, we've got a couple of examples of cities with low revenues. And clearly the thing these cities have in common is they don't have much retail activity. But we've chosen two examples to highlight two distinct paths towards that outcome.

So on one hand, you've got some cities like Hillsborough, affluent suburban communities that are sort of embedded within larger metro areas where there is lots of retail activity, sort of broadly in the region, but those communities are largely residential. And then on the other hand, you've got cities like McFarland, which is about half an hour from Bakersfield and has much lower incomes and property values than a place like Hillsborough.

So even though they're sort of Bradley-Burns revenue per resident, they're both pretty low and kind of similar. Sorry about that. The overall local tax base might look pretty different once you account for things like property taxes. And so, moving on, then. Sorry, Madam Chair, did you have something? Okay.

A local equivalent of Hillsborough would be Hidden Hills.

Thank you. Yes. Sorry, not a lot of that is.

My district, so that's very.

Okay. Thank you. Thank you. Yeah, sorry. Not a lot of examples here in this particular region. And the handout. Sorry about that. So then in the third and the final part of my presentation, I'll just be discussing some of the key policy milestones that have shaped this system, as well as some proposals that have been made over the years to address some of its perceived shortcomings. So on page three of the handout, we've just noted the two major pillars of the revenue allocation system.

There's the original 1955 Bradley-Burns Law that Director Maduros mentioned, which was fundamentally an attempt to replace the prior hodgepodge of local sales taxes with a single centrally administered sales tax with a uniform rate across the state. And that law established the origin sourcing system that we still have today. And about half a century later, Proposition 1A of 2004 enshrined that revenue allocation system in the state constitution.

So the context was that there was this broader effort to prevent the state from redirecting local revenues to solve some of its own budget problems, which had sort of been an issue over a decade or two prior to that. So then on the next page of the handout, we've listed some legislative attempts over the years to limit sales tax rebates, these sorts of agreements that cities enter into with retailers, or to give the public more detailed or timely information about those agreements.

So, broadly, I'm not going to sort of enumerate everything here, but broadly speaking, we've seen progression over the last couple of decades where the state has periodically been placing additional restrictions, additional statutory restrictions on these rebate agreements. And most recently, sort of the most recent developments here that I've highlighted in the handout are two bills from 2019.

So there's AB 485, which the Governor signed, and SB 531, which the Governor vetoed, and AB 485 created some disclosure requirements for local subsidies specifically for warehouse distribution centers that are more extensive than the disclosure requirements under existing law that apply to business subsidies more generally. In SB 531, what it would have done is it would have enacted a pretty broad prohibition on these types of rebate agreements going forward, although it would have allowed existing agreements to remain in place.

And at least at that time, the Governor regarded that policy as too restrictive and vetoed it. And so then, turning to the final page of the handout, I'll just note some recent legislative attempts to move to really change in a very fundamental way how this revenue allocation works and to move towards more of what would be considered a destination sourcing system. So those included a couple of proposed constitutional amendments that would have enacted destination sourcing specifically for e-commerce.

And so they were proposed, they did not end up passing, which is sort of why we're having this discussion. But the other thing we've highlighted here is what, relative to those proposals, was a much more incremental Bill that did pass the Legislature, which would have required certain online retailers sales tax returns to specify where the goods were delivered.

So essentially, having taxpayers in the state collect some data that could inform, potentially in a more precise way, what a destination sourcing system might look like for Bradley Burns. So the Governor vetoed that Bill, arguing that it wasn't worth the administrative cost or the hassle to taxpayers to conduct that exercise. So that concludes my prepared remarks, and I'd be happy to answer questions if you have any.

Sure. Thank you. So given the constraints on statutorily altering the allocation rules, what role do you envision for the Legislature?

Sure. I mean, I'd say just taking a step back a bit. When it comes to changing laws, the Legislature can never act, as you know very well, Madam Chair can never act completely unilaterally. I mean, either. If you want to pass a typical statute, you need that governor's signature to become law, but you don't need the voters to approve it.

And then sort of the flip side, if you sort of are going that route of a constitutional amendment, you do need voter approval, and that is a very substantial hurdle. But on the other hand, you don't need the governor's signature. The Governor isn't directly involved in that process. So if the Legislature is concerned with the current situation, there are many options you could consider.

I don't have an exhaustive list, but some broadly characterized options include, certainly statutory changes that could further limit sales tax rebates, if those are a particular concern. Certainly I mentioned just a few minutes ago, SB 531, which was very much along those lines, was vetoed. But that was several years ago.

I don't personally know if the Governor still has that perspective on that issue or the Legislature could consider a statute that is perhaps in that spirit, but substantively different from SB 531 in some way that might address some of the governor's concerns. Another type of option could be something along the lines of SB 792, although again, that was another one that was vetoed.

But just the general idea of allowing the state to somehow get a better handle on what a date destination sourcing system for Bradley Burns might look like, or perhaps some other type of change to the allocation rules that wouldn't be a full transition to destination sourcing. And then, of course, to the extent that the Legislature did determine that it was interested in making these sorts of sweeping changes to the revenue allocation system, there is that constitutional amendment route.

And certainly, I think, as your question was suggesting, that's something that requires voter involvement, and that certainly is a lot to get done. But that is something that in many cases originates in the Legislature, and so that something that can certainly where the Legislature could be involved.

Mr. Maduros, did you have something to.

Add that in regard to an analysis of what the system would look like if it were destination based versus origin based use cess terms? The Department has been able, both through the use of credit card sales data and through the use of our Schedule B returns, which are destination based, and our Schedule A for the district taxes to come up with pretty good data about what that would mean for various jurisdictions around the state.

So we do have that, and we were able to do it, I think, without requiring taxpayers to fill out an additional schedule because the California sales and use tax return is already very complicated.

Thank you, Mr. Kirstein. We've heard about these revenue-sharing agreements with cities. Are you aware of any counties that have these agreements in?

Not. I'm not aware of any, it's not to say they couldn't exist, but I looked into that. I'm not aware of any agreements that are at the county level.

I mean, I think in terms of interest that counties might have in this issue, I think the main consideration is just that in instances where there are agreements that might divert sales to a particular city, some of those revenues could have been allocated to other cities, but in some instances, maybe some might have been allocated to unincorporated areas and affect county revenues that way.

All right, well, thank you very much, Mr. Kirstein. And then our final presenter for the panel will be Michael, an attorney with extensive experience representing local governments across California. Whenever you're ready.

Thank you, Madam Chair. I should start by saying who I am and who I speak for. I'm a contract city attorney. One of my clients is probably is Calabasas, which I think might be in your district, at least adjacent to it. And I have represented local governments consistently since 1989. And I do not speak for any of them today. I'm active in the League of California Cities and pointedly do not speak for them today. I don't speak for anybody but myself.

The downside is that means I don't speak for anybody. The upside is it gives me some freedom to give you a perspective of somebody who lives in this world. I think it might be helpful to start by framing what makes rational tax policy. If you start from the perspective of mainstream economics, an economist would tell you that you don't want to screw up the marketplace. You don't want to impair the allocated efficiency of a capitalist marketplace. It might be the way they put it.

And you do that by avoiding distorting effects from tax policy. So taxes should be relatively low in amount, widely spread, and efficiently administered. That's the sort of economist's ideal, so you don't distort the economy. I think there's another two considerations that are worth thinking about as well. I think there is value in linking who benefits from a tax stream to who is burdened by the economic activity that creates that tax stream.

So an example might be if you've got a sand and gravel quarry in your community that's doing business-to-business sales and those trucks are grinding up your street and irritating your residents, rational tax policy would have those revenues, some of them at least, flow to that jurisdiction to bear the burden that makes that economic activity possible. A second policy that I think makes a certain amount of sense is that housing doesn't pay.

If you are a city manager and your job is to balance the budget, and that is certainly one of your jobs, you want the houses in the neighboring community and the retail sales in your community. And it's sort of a beggar thy neighbor approach to municipal finance if you think of it in that way.

If we want to solve California's housing problems, and I'm sure we all do, perhaps trying to link income to heads in beds, so to speak, to residents who demand services would be constructive as well. And the pools do that to a better extent than the Citus does, but they don't do it perfectly well. So if you take a city like Hidden Hills, those folks are generating a fair amount of sales tax. They need police services. But very few sales taxes come back to their community.

They help people buy their Alfa Romeo's in Calabasas, not in Hidden Hills. My next point is that the sales tax was written during the Great Depression for a vastly different economy than we have today. It is about tangible things, not about services. And services are a growing portion of our economy. So it's overly simplistic to say that the sales tax is a declining, becoming antiquated revenue stream. It's not.

It's still billions of dollars, but it is not changing as rapidly, and it is not growing as rapidly as the economy as a whole. Senator Hertzberg, who I commonly refer to as the intrepid Senator Hertzberg because he takes on some of the toughest problems, looked at extending the tax to sales. That is its own political thicket. But that eroding tax base is relevant to this discussion. My next question is why are sales tax situs agreements or sales tax rebates agreement common, and why are they controversial?

They are common because from a business's perspective, they're an opportunity to cut your sales tax liability and therefore either increase your profits by keeping the money that your customers were willing to spend, or lowering the price of your services effectively to your customer and selling more of them. So from the business's perspective, it's a good thing.

From the host community's perspective, you can draw into your community an awful lot of revenue without putting out anything in services, and therefore you're willing to cut a deal with the business to kick some of it back to them. So for a relatively small community with a cardlock operator bringing in a relatively large amount of dollars, it is very, very tempting. Why are they controversial? They're controversial because they redistribute income away from people who are hosting the physical assets and bearing the burdens.

So the Cardlock dispute, the poster child for that dispute is the City of South Lamont in the San Gabriel Valley, which it's right off the 10 freeway. It's a tracking location. They've got those intersections that are wide enough for triple trailers. They've got lots of car lock operators in their city. And one of their big sales tax operators went away overnight when a city signed one of these contracts. And so South Lamont and their lobbyists were very present in your Committee hearings for a time.

Some cases are less controversial, and I think they're worth having on the table. So, for example, the City of Bonita, a relatively small city, hosted the reconstruction of the Benicia-Martinez Bridge across the Carquinez Strait, one of the largest public works projects that you're going to see. And that was very disruptive to the life of that city. One of the things they did was they cut a deal with the general contractor.

You will establish a sales office in our city and therefore route as much of the sales tax on the business-to-business supply purchases for your project to our city as you can. And that deal helped Venetia bear the burden of construction, and it went away when construction went away. And it's hard to pin down exactly who the donors for that transaction were. It would be a very hard question to sort of. I don't know.

We have the data to figure out where that money was coming to, but I think that's a very different case than the South Lamont case. Another example is the sand and gravel operation.

If you've got the sand and gravel operation in your town, and there's a whole lot of business-to-business transactions there, and you are, in fact, spending a lot of money to make the roads passable, it might make very good sense to allow an arrangement between the quarry operator and the community to redirect sales taxes. The next question your staff asked me to think about was, Are there some industries in which these agreements are more common than in others? I think the answer is yes.

We don't have very good data, because everybody had an incentive to be quite secretive about these agreements because they could be controversial. The losers might challenge you, you might invite litigation. The businesses didn't want to compromise their competitive position by tipping their hand to their competitors. There was a lot of secrecy around these agreements, and so we don't know as much about them as we would like. But we can observe anecdotally what's going on in the world.

What are the conditions that make for rapid uptake of this opportunity? One is a market that is very sales tax price sensitive, where that one penny or 10 penny on the transaction makes a big difference. Gasoline is a perfect example out of the card lock operation. When you talk about TUTs, Lathrop, another logistics town adjacent to Tracy, adopted a tut of 1%. Stockton didn't, and the local truck stop operators were up in arms.

Because if you're an independent hauler stopping for fuel, you're just going to continue on to Stockton and avoid that one cent per gallon because you're buying 500 gallons. So gas is sales tax sensitive, and the card lock operators are in a position to route all of their contracting to one location. Logistics is another good example. If you're a warehouse operator and you're in a position to take your California wide sales and put your point of sales in a warehouse or two warehouses, you have that opportunity.

So I was involved in a dispute in which a company that provides medical supplies throughout California from three locations in Lathrop, Fontana and San Bernardino, cut a deal with Ontario to move their sales office to Ontario and nothing else. So from Lathrop's perspective, we're still seeing the trucks coming and going, serving supplies to hospitals all around the Bay Area. But now the sales taxes are going to Ontario, which has nothing but a sales office and no other physical services required for the transaction.

I should tell you, and I meant to say this at the beginning, I have clients on both sides of this problem, and I am not trying to take sides on this problem. I'm trying to be as neutral as I can be while also being Frank. To the extent I have bias, it's because my clients are mostly cities and I'll own that bias. So, yeah, I think they are common.

I would be surprised if there is a card lock operator in California that doesn't have one of these deals. It would be negligent on the part of their management not to have gotten one of these deals. You can't do them now. And so maybe there's some new entrants into the marketplace, but they're accepting a handicap in their industry, so I would expect they all have them.

It's gotten very popular in the logistics space, and it's gotten very popular in the Internet reseller space because of the Wayfarer decision and its impact on Internet resellers. San Jose, being a big city with sophisticated staff in the middle of Silicon Valley, cut a couple of very high-profile and very controversial deals to reallocate sales taxes. And that got much discussed. There are constitutional constraints. I list them in the notes that I provided.

They come out of a little push pull between the state and local governments at the ballot box over the years. I don't intend to dwell on them. A couple last points. One is that because cities are winners and losers on this issue, because it's a distributional issue among cities, the city managers Department of the League has fostered a pretty thorough dialogue, trying to arrive at policy that the League of California Cities could support, notwithstanding the fact that its Members have disparate interests.

So they've come up with some proposals that I think are worthy of attention. The second thing I would say is you asked Mr. Kirstein what kinds of things you could do, and I think at the risk of offending some of my clients, everything I said today is the risk of offending some of them, probably more guardrails to manage the race to the bottom.

Things like a cap on how much sales tax could be given away, a cap on how long the deal can last, something more than putting it on your website, maybe sending it to Mr. Bedoris and his staff to let them look at it, maybe express an opinion as to whether it's consistent with the restrictions that the law already applies. These kinds of things could manage the existing status quo, probably wouldn't change much, but would make sure the existing choices the Legislature has made are better enforced.

Because at present, in order for your statutes to be enforced, somebody has to know and somebody has to sue. And therefore, people work very hard to make sure that nobody knows, and then somebody's got to have the incentive to sue, and that's commonly not the case because the burden is disparate and the winning is concentrated. That's all I've got, unless you have questions.

Yeah, that was great. Now, I guess just going back to whether there's other comments on what could be a mechanism, a clearinghouse to get this type of information out, because I think often cities don't realize that these agreements have been made until they see their revenue going down. So who would be the appropriate authority for that type of information, and do we think it's possible to get it?

We also typically don't know. So we see it in the returns and see the shifts in revenue and then try to investigate, and we have been more active. I will say I can't go into any specific cases, but to not wait for other jurisdictions to sue necessarily. We've tried, of our own initiative to make sure that the tax dollars are properly allocated, but I do think that's a decent suggestion. I think more sunlight here certainly couldn't hurt. And the earlier the better in the.

Process, because we have no idea as a state how many of these revenue sharing agreements there are.

Right.

Well, they have to be made public, I believe. But it's hard on the website. Yeah.

Which means you need to arrange your needles in haystacks in the right place.

So should there be a clearinghouse where it's reported and we're transparent about what's going on?

Some of my clients will hate this idea. But what I will tell you is if you do that, you will create more transparency than there now exists. And we're all public agencies, we're all here doing the public's business, and we should not rely on secrecy to serve our public well.

So would CDTFA be the appropriate authority if something like that was?

Mean? Again, we will do whatever policymakers choose, but I think it would know there aren't too many other people in California. I believe we probably have the largest sales and use tax staff in the, you know, at least for transparency or just public. I think that would. My hunch is that would be the proper place. I think the other thing which Michael mentioned, which is an important consideration, and again, we will administer the law however it's written.

There is the potential, given the California law, for enormous concentrations of revenue, depending on how the transactions and the corporations are structured, for enormous concentrations of local Bradley Burns to go to very small jurisdictions without a ton of actual.

I think there was mentions of some revenue going to companies, some going to consultants. You could imagine with a very large taxpayer, if some other allocation theories are accepted, that jurisdiction would give back 95% of the tax revenue because even 5% of billions of dollars is a lot of money.

So the kind of guardrails you were talking about, none of them are in place? There is no limits on these agreements time-wise?

I'm not aware of any-

Or level?

No, it's up to what. These agreements have to be approved at a public meeting of the City Council, and they have to be on your website. You're going to have to respond to your local media if you have local media. One of the things that went wrong in Bell was they didn't have local media. So sunlight is helpful, but only if somebody's looking. One point I should add is that the revenue portfolios of local governments vary widely.

There are some local governments that are very dependent on sales tax. So a modest change in state policy could bankrupt some of them. So if you actually change the economic substance, which is to say, limit how much the refund can be, limit how long the contract can last, rather than just addressing transparency. Be aware that, from my perspective, you need to allow gradualism in the change. Because if you do anything too disruptive, you're going to get some Chapter Nine filings out of a city or two.

And kind of along those lines: is there a distinction to be drawn because I look at some of the vetoes from the Governor: is there a distinction to be drawn with these cities that are economically disadvantaged and the wealthy municipalities? Do you think there should be one set of rules for everybody or that distinction?

Well, I live in a rural county and I'm frequently aware that most legislators don't. So that's a hard answer. This is such a diverse state that legislating for it is challenging. I guess what I would say is that because we're talking about allocating the taxes on economic activity that occurs throughout the state, there really does need to be a common set of rules. Otherwise, you'll get economically distorting effects that may be problematic in their own right.

And, Madam Chair, I would say sort of this issue you bring up ties into the discussion earlier about transparency. And so far as right now, when you're asking about transparency, Director Maduros mentioned that there are opportunities in looking at tax return data potentially to observe shifts that can occur as a result of some of these agreements.

But sort of one of the things that you might have noticed in the graph I was showing earlier was the sort of outliers that the examples that I had in the top 5% and bottom 5% tended to be small to mid-size cities who simply don't have the economies that are in tax bases that are quite as robust and diversified as larger cities.

And so if you sort of take the sort of case-by-case investigation through the data approach, these things will be much less transparent when it's a large city entering into the agreement versus a smaller to mid-sized city. And so, one way to think about potential changes that could increase transparency is that they could, in some ways, make that transparency more consistent. Because otherwise, if you're just trying to back it out of revenue data, then for large cities, it might be very difficult.

Just a couple of points. One I think it is important to mention, and I didn't know if anybody else would mention it, there is a government code provision that does not involve CDTFA that prohibits revenue-sharing agreements if that revenue was previously reported in another jurisdiction. So you can't move something. It is unclear what the enforcement mechanism for that is currently, but there is a section outside the Revenue and Taxation code that does provide for that.

That has to be city versus city? Do you think if you're saying it's unclear who has been enforcing it?

I don't know that anyone has.

I don't know that it's been enforced. This is going to sound like a really trivial suggestion, but moving it to the revenue tax code, to the other sales tax statutes so that it won't get lost is probably not a bad thing to do.

Make a lot of notes on this, and I think it's interesting you talked when you started about how we should really allocate taxes to create the right type of behavior, but we're at this point; we would be twisting ourselves into a pretzel to try to fix a lot of the issues that we currently have. And it's almost like we really should be starting from scratch, but we can't do that.

You spoke about Senator Herzberg's sales tax bill, and it doesn't go anywhere because there's so many interests that are benefiting from the current status quo. So we do the best we can, but talking about the different circumstances, we are going to let the three of you go. Excellent discussion. And now we'll hear from the locals and the different situations that their cities are facing. And I really appreciate all three of you. Can we give them a round of applause, please?

And this is a good time to ask questions if you can catch one of those three. So we're going to be moving now on to the second panel, highlighting various perspectives from municipal leaders from across the state. For this panel, each witness will have up to seven minutes to present, and we'll have an opportunity for Q&A after each speaker and then an all-panel Q&A at the end. So if we could have our three speakers, please join us. Thank you very much.

And first up, we're going to have Council Member Miguel Arias, who represents District Three in Fresno. Councilmember, thank you so much for making the trip to be with us today. You probably had the longest drive. I think everybody else hopped on a plane.

That's right. I'd taken a late-night drive to be here today. So thank you for having me. Well, thank you, Chairman, and thank you again for allowing our city to participate in this critical hearing. Wanted to just give you some context on the city of Fresno. As you may know, we're the fifth largest city in the state of California, and we are the economic engine that leads the Central Valley's critical role as a provider of the nation's food supply chain system.

Recently, Fresno was named one of the fastest recovery cities from the pandemic-induced economic slowdown across the country. The truth is, we didn't recover faster than anyone. The fact is that we never shut down. See, you cannot harvest fields that fill the grocery store shelves, operate a poultry plant, or deliver health products that Amazon delivers via Zoom. You can't simply do that. In short, the vast majority of our economy was declared essential.

And as a result, we not only operate during the pandemic, but the assembly lines and the chicken plants, the Amazon distribution centers, the harvest fields were doubled to ensure that the national food and essential product supply chain didn't fail. This, of course, led to the deaths of thousands of our city essential workers who live in the poorest zip codes and the dirtiest air basin in the country. We know that we had an uphill battle with an economy that primarily relies on agriculture.

So years ago, the city chose to try and engage in diversifying our economy and engaging the growth of e-commerce. In doing so, we set out to attract these retailers because the infrastructure that we had built over generations to get food products across the country allowed us to engage in same-day delivery from the Canadian border to Mexican border, a geographic advantage and one that had a system of freeways and infrastructure built for exactly that model.

As this incurred, our city gave the residents one basic promise, and the promise was that these centers would generate a huge amount of tax revenue and that tax revenue would go back and be reinvested in those neighborhoods.

Neighborhoods that have been redlined through policies for generations, neighborhoods that have the dirtiest air basin in the country, the highest concentration of poverty in the country, and the ZIP codes that in the district that I represent, the life expectancy is 20 years less than the district from my northern neighbors in the same city. That's the health and environmental consequence of a system of infrastructure that moves through thousands of truck trips a day in diesel-fueled trucks.

So, when these agreements took place prior to my tenure, that was a promise that was made. And these distribution centers were, of course, established in communities and neighborhoods of the black and brown communities. And even when they opposed them, they were still located there on the rationale that it was heavy industrial uses; there was nothing there. And a simple distribution center that used to be neck in the place of ag fields.

Once it's cemented and is built, and now has thousands of truck trips a day, it actually increases the temperature of the neighborhood by 10 degrees and forces us to go from evaporated cooling homes to air conditioning homes, on folks on fixed incomes who don't have the means to support that. As a result, the city got sued. The city had to mitigate that impact. The city had to use the revenue that it generated from these distribution centers to mitigate the impact on the neighborhood.

Now, since my tenure in 2019, the city has taken a dramatically different approach and invested millions of dollars to rebuilding those neighborhoods: rebuilding the streets that were never built out for the distribution centers because they were given waivers of impact fees, waivers of development fees, waivers of infrastructure improvements.

So we went back and rebuilt those neighborhoods: built safe process schools, build new parks, and are in the process of trying to rebuild the infrastructure, but doing so requires that revenue, that revenue that we all counted on to redirect there. As a city, we also found ourselves with the lowest-staff fire department in the country, with the lowest-paid police officers and 911 dispatchers in the region. And it's simple. Our economy, based on agriculture, doesn't generate the general funds that our neighbor in Long Beach.

Long Beach is the 7th largest city in the state. We're the fifth. We have 100,000 more residents. Their budget is $1.4 billion larger. Their general fund is four times our size, the same general fund that we rely on to pay for police, fire, parks, and city streets. And so as we took this approach of reinvesting back into the cities, we've now found ourselves in a place of having to defend these agreements, agreements, frankly, that I would have not signed as a sitting Council Member at that time.

And I'll go into those recommendations in a bit. But revenue that we need to mitigate the environmental, the infrastructure, and the health impacts that these distribution centers have generated. And just to give you further context on the economics of our city, the average family in our city is about $55,000 of annual income. The suburb that we share border with their annual income is $95,000. Our average home's price is 250,000. Theirs is 500,000.

As you know, as a former council member, you essentially have a couple of sources of revenue to operate your city. Property tax based on property values, sales tax on a whole bunch of configurations, and how it finally comes back. And then, of course, any government funding that you may get to come your way. And as a city, we're limited to those revenue sources.

So this was supposed to be that opportunity for us to recapture retail revenue that we were not capturing the past and to reinvest it back in those neighborhoods. I recognize that there needs to be some adjustments. My city, just last week, we announced ordinance to regulate smoke shops. They didn't exist in magnitude three years ago. Now they do. E-commerce wasn't as large now as it was five years ago. It also wasn't as essential.

But what I would also argue is that we have to look at a more complete picture. Just today, I stayed at a nearby hotel, and I got my bill. Included is a tourism tax and a local tax that I'm sure the revenue goes to address the impacts that folks that are attracted to these hotels generate for it. A lot of regional economic projects are built on that notion.

The Disneylands, the Six Flags, national parks, beaches, they were built on the notion that if you create a regional or statewide attraction, then you keep your revenue because your residents, your neighborhoods, your city is also having to deal with the impact that that activity garners. And so if we're going to change the process for how we redistribute revenue from these fulfillment centers, I think we have to look at the broader picture as well.

Because if not, we're simply going to take from the poorest communities, redistribute that wealth to the wealthiest communities, at least in my region, so that we can continue this expectation that you get front door same day service without the thousand diesel trucks in your neighborhood going by. And that simply is unfair and, I think, not the intent of a taxation system. In closing, what I would recommend going forward is that transparency is clearly something that needs to occur at a broader approach.

As a charter officer to my city, I do not have the right to the tax information from these agreements that were signed prior to my tenure. Because in these agreements, the revenue that they generate, the sales tax that they generate, they have declassified as proprietary information that we, as charter officers, don't have a right to. So I can't tell you, as a charter officer, how much revenue an Amazon fulfillment center in my district that employs 5000 individuals generates for the city. It's proprietary.

I cannot tell you exactly how many people they employ. I cannot tell you significant details of the agreements. Although they were required to make the contract public, the provisions of the contract classify quite a bit of information as proprietary. The rationale is they don't want Amazon to know. They don't want Walmart to know. Amazon doesn't want Walmart. Walmart doesn't want Amazon. Target doesn't want Walmart to know. Taxes are somewhat personal in nature.

But I would also ask that transparency also apply to any agreements that not just provide you a refund of sales tax or credits for how many individuals you employ but also what impact fees the jurisdiction is waiving. In our case, we waived millions of dollars worth of development impact fees that would have built out roads, installed intersection lights, crosswalks, and bike lanes. The same exact requirements that we have for every small business in the city. And now having to rebuild that infrastructure is significantly more costlier.

And it comes at the expense of the taxpayers and other projects that we would otherwise engage in. And just to give you an example: building one safe route to school, it's about $5 million in about four year process. One intersection light now is costing us up to $1.0 million. Repaving a street is a multimillion-dollar cost because once we rebuilt them as a city, a lot of these centers were built in the fringes of the community, formerly county areas, as you know.

Once we take them over, we got to build them to city standards. Water, sewer lines, curbs, and gutters, sidewalks, street lights, bike lanes. That cost is in the tens of millions of dollars. And if it was any other business - a mom-and-pop ice cream shop - they would have been required to pay their fair share of the cost for the impact that they were generating. But in this race to the bottom, we were all trying to attract this regional economic engine.

We gave up the house that we're now having to rebuild. I would ask that going forward, the transparency be applied much broader than simply: are you sharing sales tax revenue with the corporation? It should apply to any waiving of fees that otherwise would have to be picked up by another business or the jurisdiction itself.

In closing, you're absolutely right, chair, that we may not have created the situation, and it is extremely complicated based on the testimony of the tax experts, but it's also fundamentally flawed, and the solution cannot be worse than the actual disease. And in this case, I think the solution for some is to simply go back to an origination or destination that has significant consequences. And if we're going to open that door, not only is it a slippery slope, but I think everything should be on the table.

When I go to Sacramento, I should expect a refund check for the extra taxes that I paid since my "destination", quote-unquote, is Fresno. Thank you.

Thank you very much. Being here on local government, we did have a retailer that wanted to come to town, but they wanted a full sales tax rebate for the first eight years, and that was what we were looking at. Who's going to pay for the lights in the road? It's not like the jobs are that great that you're bringing. So, I certainly understand what you're saying, but I'm trying to get a little clarity. You said in 2018, how did that change come about?

How did you decide that you wanted to make sure that these companies that were coming in were paying their full costs?

In 2018, the previous council administration approved three specific agreements for revenue sharing: ALTA, Gab, and Amazon. Since 2018, we have not approved any new ones, and we have also eliminated all waiving of development impact fees for the purpose of attracting businesses. What we've concluded is that our advantage is our geographic location. You can get to same-day delivery in essentially three countries, and we have a fully built-out freeway system. And luckily for us, our freeway system is not as impacted as Southern California.

So it's a pretty nice flow of traffic, and we have an abundance of strong workforce. That's what's been operating our agriculture industry. And the workers that have toiled in the fields of agriculture have made a seamless transition to distribution centers. So we have the workforce, we have the public infrastructure, and we have a great location. So there was no need for us to engage in giving away the future house anymore for short-term gain of employment. That was going to come naturally to us either way.

Well, Councilmember, thank you so much for joining us today. And next, we are going to go to Brian Gabler, the city manager for the City of Simi Valley, another one of my constituents. Mr. Gabler, whenever you're ready.

Thank you very much. Good morning. I want to thank you for the opportunity to address the committee regarding sales tax distribution. This is a multifaceted topic, but I'll share with you some of the thoughts on how the current distribution of sales tax affects Simi Valley. A little bit of background: located in the southeast corner of Ventura County, the City of Simi Valley was incorporated in October of 1969 with a population of just over 126,000.

The city is a true valley and home to the Ronald Reagan Presidential Library Museum. There are over 5,500 businesses in our community, from large manufacturers and service sector businesses such as Aero Environment, Millgard, and Bank of America to retailers such as Costco, Home Depot, Lowe's, and thousands of small home-based businesses. The city prides itself on being business-friendly, encouraging all businesses to locate in our community.

This philosophy has resulted in a diverse employment base where Simi Valley is not dependent upon any one particular business sector for major employment of our residents. We enjoy a low vacancy rate for our industrial and commercial buildings because we believe as a city, we should get out of the way of business and let them do what they do best, and that's run their business. Cities in California rely upon various number of revenue sources to manage operations of the city and provide services to business and residents.

Without a doubt, the top two local government revenue sources are property tax revenue and sales tax revenue. Ensuring a consistent flow of these revenue sources allows cities to budget several years into the future with some level of certainty. Huge swings in these resources are uncommon when city councils and city managers stay informed, cities generally are able to predict revenue sources. Changes in the economy will increase or decrease both sales and property tax collections, but after economic downturns, conditions approve-

-sales tax collections will generally return to prior levels unless the retail picture has changed. However, large swings or unpredictable changes will, in turn, turn the city's budget upside down. For example, in 2019, changes to the distribution of online sales, which redirected certain sales tax collections from the county pool to the community with a fulfillment center, was heavily felt by our community and other communities in California. This change permanently impacted Simi Valley initially by over $300,000, with that number growing annually.

In 2007, the city was approached by a Georgia company to discuss a local business. This company stated that they've represented the business in Simi Valley that is in the construction industry and generate sales tax revenue for our city. They will not disclose any more information regarding the sales tax or the Simi Valley Company that they represented. We were told that this construction company was working with this Georgia company to review options regarding their operations which would affect the distribution of sales tax.

We were informed that if the city were to enter into an agreement with the Georgia company, then the Simi Valley Construction Company would not make any changes or consider a relocation. That proposed agreement would require the city to share sales tax produced by the Simi Valley Company with the construction company and the Georgia Company. Without any further agreement details or the name of the construction company. The city thanked them for their offer.

Cemex is a global building materials company providing concrete and aggregate through 50 aggregate quarries and 280 ready-mixed concrete batch plants across the United States. Cemex has operated a ready-mixed concrete facility on West Los Angeles Avenue in Simi Valley since 2003 after having acquired a previous operator at that location. From 2003 to 2008, the city received sales tax revenue from orders filled at the Simi Valley location. Beginning in 2009, sales tax collections that the city received from Cemex operations dropped by over 95%.

In 2008, Cemex opened a regional facility in the city of Shafter, California. This regional facility is not a concrete batch plant. Semex moved into an 8000-square-foot office building where they process orders for several of its ready-mixed concrete plants around California. Many years later, the City of Ontario, California Cemex opened a similar office for furthering ready mixed concrete order operations. A traffic impact study will show that a concrete batch plant will have over 90 daily trips of three-axle concrete trucks.

These concrete trucks weigh over 60,000 pounds loaded over 25,000 pounds empty. In contrast, the average automobile weighs just over 4000 pounds. In addition to these concrete trucks, the same facility will have over 50 trips a day of large tractor-trailer vehicles delivering cement, sand, aggregate, and other chemical additives that makeup concrete. This use of city streets, day in and day out, by trucks carrying extremely heavy loads accelerates the degradation of the road surface. A normal roadway in a city will last about 20 years.

West Los Angeles Avenue, where Cemex is located, has experienced constant heavy truck traffic carrying extremely heavy loads, speeding up the deterioration of the street. In the last ten years, the city has invested over $7 million to rehabilitate and improve the road surface to combat the degradation of that street. In addition to the added investment into the city's infrastructure, the Simi Valley community must deal with the noise created at the plant, dust, and particulates that are carried in the air from the sand, aggregate, and cement material.

There remains a constant trail of dirt in the street leaving the site, it's clear that the city is impacted both financially and environmentally by the operations of the Cemex facility. So, does Cemex have a concrete batch plant in the city of Shafter or Ontario, California? No, they just have an office operation. Does Shafter or Ontario deal with the same impacts as Simi Valley from Cemex's presence in their community? No.

Simi Valley would gladly take the impacts of a small office building over the impacts of 140 daily truck trips and a concrete batch plant. Does the city receive sales tax? Does the Simi Valley receive sales tax from the operations of Cemex to offset these impacts? No. What we receive is a drop of water in the ocean. State law precludes my ability to inform the committee on the amount of sales tax revenue the city receives from Cemex in Simi Valley.

However, I can tell you that the cumulative amount of sales tax revenue received by the city from 2008 to the present represents less than 3% of the total sales tax revenue the city received from this facility from the time period of 2003 when Semex began operating in Semi Valley, through 2008, when they redirected their sales tax to another community. Unfortunately, the distribution of sales tax in California is steeped in haves and have nots.

The haves are cities with automotive dealers, major retailers such as Costco, Walmart, and Lowe's, regional malls, truck stops and fuel depots, online fulfillment centers, and apparently order desks. With respect to the order desk for Cemex, Simi Valley is not alone. Semex has 22 concrete batch plants in Southern California. While I have not queried all 22, I know several that are not receiving any sales tax revenue at the rate that's commensurate with the sales tax batch plant operation.

With Cemex, you have two cities that are on the receiving end of sales tax revenue generated outside their community and 22 cities that are losing sales tax revenue yet have to endure the noise, the particulates, and the infrastructure deterioration in their community. This is not a new issue. In a January 2007 report, the California Legislative Analyst Office reviewed the allocation of local sales tax, sales tax sharing agreements, and the inequity issues entrenched in the distribution of sales tax.

In that report, the LAO's office looked directly at concrete batch plants, but not with Cemex and SimI Valley as the example, but with Robertson's Readymix and the city of Corona. In this example, the City of Corona received sales tax from 20 Robertson Batch plants located in neighboring communities. According to the report, several legislative measures were introduced that would have allocated the sales tax back to the location of the batch plants from which the concrete deliveries were made. Unfortunately, none of the legislative measures passed.

I noted earlier that there were 22 cities losing sales tax and two cities receiving sales tax in Southern California. With regard to Cemex, when you look statewide and consider all the batch plants, there are far more cities losing sales tax revenue from batch plants in their communities than there are cities receiving sales tax revenue. Cemex has over 40 batch plants in California. Robertson's has almost 60. Both companies have plants in Simi Valley. We do understand CDTFA regulations.

We also understand that the cities receiving the sales tax from our batch plants are playing by the rules. So what is our ask? We believe that where the community is being negatively impacted by the operations of a sales tax-producing business, such as a concrete batch plant, the sales tax from that business should be distributed to the community where it is located. We are asking for a legislative change.

We are asking the legislature to revisit this issue as an offset to the environmental, infrastructure, and public service impacts upon our community; where a batch plant is located, all sales should be directed to the community where the batch plant is located. On behalf of the City of Simi Valley and the other impacted communities, I want to thank the Committee for your time and this opportunity to address the issue, and we hope that the Legislature looks at a change. Thank you.

Thank you. Well, Mr. Gabler, as you've heard, we did look at a change in the Governor vetoed him. So it's a whole process we have to get through. Do you have an idea what happened with the previous bills in 2009?

My understanding is that there was difficulty dealing with the haves and have-nots and the winners and losers, and that was part of the - among the major concern. I don't want to speak for the legislature, but I think that was part of the major concern.

And then, just to be clear, you said your sales tax revenue dropped 95% once these agreements were in place, and you have spent $8 million on roads since that time. Is that correct?

Yes.

I know that there is an effort right now for the league to try to address some of these issues. Obviously, there are cities on both sides of every issue, but certainly, I have a lot of sympathy for these cities that have. I mean, this seems sort of obvious: you want to address these big impacts on cities. Have you been in discussions with the league, and do you have some idea on how they're addressing or proposed to address this issue?

So I've had conversations with the city manager from Ventura County, who's representing us on the league's committee and had that conversation with him. And he's aware of what our issue is, and I trust he's brought it before and for the committee.

Okay. We are going to have public speakers after our last speaker and after we get through all the questions. I know we have a representative here from the league, and I'm hoping that everybody that's here that has something to say and knows about this issue maybe can address it. But obviously, with the first two speakers, very complicated issue.

Yes.

And thank you. Really appreciate again your time. And finally, we are going to hear from Damien Arula, the city manager of the city of Placentia. Thank you.

Yes, good morning and thank you honorable Chair Irwin and Members of the Committee who are also participating remotely, and staff. As you indicated, my name is Damien Arrula and I have the honor of representing the City of Placentia, located in Orange County.

I was asked to come and speak with you today by your staff in the League of California Cities to offer some insight and comments related to the challenging and often complicated issues surrounding Bradley-Burns Local Sales and Use Tax, or as we refer to it, SUT, and how it may be impacting Placentia and other communities throughout the state.

In preparation for today, and to understand the various arguments on sales tax agreements from multiple perspectives, I've spoken with several of the city managers that represent the City Managers' Sales Tax Working Group that has come up with some policy recommendations. These are from large to medium sized cities and smaller with little to no retail. So I believe I've heard all of the pros and cons on the arguments related to the subject.

Before I comment on sales and use tax, I believe it's important, though, to offer a little bit of background on Placentia and similar sized cities in relation to the subject matter. As you may know, there are 482 municipalities in California spread across 58 different counties. Of those cities, 305, or over 63%, or as some would say, nearly two thirds, have a population of approximately 50,000 or less. Placentia's population is approximately 50,000 and we are one of the oldest cities in Orange County.

We are about to celebrate our centennial and also nearly built out with limited opportunities for industrial and retail growth. Like many cities, we are primarily a bedroom community with limited commercial, retail, industrial and hotel uses. While we have commercial retail, these areas are relatively small retail centers like most communities and we don't have what I refer to as a retail destination driver, such as a mall or outdoor shopping district that can draw a large amount of retail sales from surrounding city's residents.

I would also like to point out that we are a full service city with our own police, fire and full suite of other city departments designed to address our community's needs, which can be difficult to provide a Nordstrom level of customer service based upon the current sales tax landscape.

I share all of this with you to simply indicate that I believe Placentia is a good representation and barometer of many communities throughout California who may not have a large retail destination, hotels or other uses that may generate additional revenue through the purposeful fiscalization of land use and at the same time has very limited opportunity to take advantage of future land use opportunities. There are two areas that I believe are important to reference when it comes to sales and use taxes.

And while I believe today you have heard both sides of the coin, I hope to offer a balanced perspective in various areas that will hopefully become sales tax reform someday. I don't think that anyone would argue that the current system of allocation typically favors less developed cities who have room to add large warehouses or distribution centers, or in some cases, as you heard from the prior speaker, sales offices.

Often these cities have incorporated other funding mechanisms into master planning for these developments, such as developer impact fees, multiple community facilities, districts which are designed to build and maintain the infrastructure from its inception and support operating expenses for that infrastructure that comes with these new developments. Whereas older, more established communities like ours don't have the ability to pay for large developments to pay to maintain infrastructure, leaving them more reliant upon basic sales tax and the current landscape.

And as we've heard from some speakers today, sales tax can be taken away from a community without the city even knowing it, or how they may be negatively affected by such an agreement. Often the only robust reporting that occurs is how such an agreement will affect the local agency entering into one via jobs, property tax increases, sales tax increases, et cetera. As a city, we are absolutely impacted by sales tax agreements.

However, we often know or hear very little about them as they are not very well published or noticed. Therefore, attempts to publicize these types of transactions we believe are important to ensure that there's more transparency in this arena. One consideration that may be to create an impact report that would be prepared by CDTFA that would demonstrate how the agreement would impact cities throughout California and notify those cities in advance of entering into such an agreement and establishing a waiting period.

I recognize that these policy reforms may not be popular even with some of my colleagues, but may be worth considering. Similar types of features can often be found in CEQA law today when a development may have an impact to an adjacent land use or a city, and how in some cases, depending on that impact, other parties are legally obligated to be notified.

This is even more notable when considering that these types of agreements may disproportionately benefit maybe 30 to 40 communities, or in other words, 8% of the total cities throughout the state of California, not to mention the private sector beneficiaries. And while Placentia believes that certainly we live in a capitalistic society, capitalism without rules or checks and balances can be just as problematic, and therefore we believe reasonable capitalism should always be the preferred approach. Ultimately, Placentia does support arguments on both sides.

However, policy reform is definitively needed to acknowledge and protect cities that would be affected both positively and negatively from future sales tax agreements. Now that I've shared some general thoughts on sales tax agreements, I would like to point out something that hasn't been really stated today that compounds the situation further to cities such as ours, and that is in relation to the Use Tax portion of Bradley-Burns.

When it comes to these agreements, Placentia believes that granting certain agencies credit in the county pool for direct allocations that are then rebated back to private companies creates an unfair playing field for agencies without the sales tax agreements. It does this by overstating the amount of net sales tax cities with agreements are receiving, thus superinflating their pro-rata share of the pool and earning them additional dollars at the expense of other agencies within that pool.

And as you may know, smaller bedroom communities are already penalized by the county pool methodology of distribution. A little more to come on that in a moment. But when you factor in these agreements, using those transactions to essentially double down the sales tax for a city that already benefits from the economic impacts these agreements initially create is, as some would say, truly problematic.

I will not go any further into the pros and cons arguments related to sales tax agreements as much of those arguments have been shared. I will simply state that while Placentia generally doesn't like these agreements, we do understand that there's a need for some cities to have an economic development tool to incentivize larger businesses to come to their community, thus creating a revenue stream jobs and distribution centers needed to support online sales.

Therefore, it should be noted that Placentia supports the equity statement and series of policy recommendations on sales tax agreements put forth by the bipartisan City Manager Sales Tax Working Group. While we support the City Manager Working Group's bipartisan recommendations on sales tax agreements, Placentia, and I would imagine many cities that are similar to ours, believe that even more reform is needed to address the county pool sales tax distribution system, which we believe is a much larger problem.

As you may know, the county pool methodology of allocating communities online sales tax significantly and negatively affects many communities like Placentia throughout the state. This was shown in example three that Director Maduros mentioned earlier. This example is the largest growing situation facing cities in our state as we have had a multibillion dollar growth in e-commerce sales and post COVID consumers' habits have continued to accelerate this type of situation facing cities.

I would also indicate that the arguments that support sales tax agreements, in my opinion, do not necessarily support the same arguments being made for keeping the antiquated system of the county pool. As a perfect example, many wealthy cities in Orange County that have a variety of destinations and alternative revenue sources are receiving what would normally be Placentia's online sales and use tax. In Placentia, we have had to educate our community about the county pool and how dysfunctional and antiquated we believe this system is.

We have had to also illustrate how the county pool formula inherently discriminates against smaller and medium sized bedroom communities that make up a large portion of cities throughout the state. I have had to present many examples over the years that have demonstrated that despite our residents purchasing items online and that online purchases are growing significantly, we are not benefiting like one would think when the residents believe they are, quote, still spending in the city.

The current county pool system disproportionately benefits those cities that have large scale retail destinations that rack up a larger total number of appropriated transactions within a particular county, which in turn, as Director Maduros has indicated, is factored in on how online sales and use tax is distributed. Many, if not all of these destinations have been developed utilizing those city's former redevelopment agencies.

While retail destinations are needed and will continue to be so, something must be changed with regard to the idea that nearly all or a large portion of Placentia's online sales tax is going to a much wealthier community that may not have to serve a disadvantaged portion of their community like we do. Therefore, we believe that reform is needed in the area of the county pool, both for online sales within the state and online sales that are being delivered from out of state.

There are a variety of ideas out there that would fix this equation to remove a large portion of every online sales tax dollar going to one community over another. The age old saying that time heals all wounds is appropriately referenced here as an example.

One policy consideration may be wherein the formula could be changed prospectively to a 90:10, then a subsequent year, 85:15, 80:20 and so on, that this would eventually allocate the appropriate amount of online sales to the location in which it's being delivered and would even the playing field in this area and acknowledge that these large trucks making last mile deliveries in our bedroom communities are creating an impact.

However, with these changes, we would now have a sustainable revenue source to address those road impacts as well as other impacts. As it stands today, we don't have those revenues and it certainly creates an impact. In Placentia's case, we had at one point in time, until we made some changes, we had the second worst roads in the county, so to speak, and so that was compounded by the fact of these online sales.

Now, you may ask, rather than just complain, what has the city done within its control to address these impacts from this antiquated Bradley-Burns sales tax allocation? We have done a lot to create our own destiny, and these actions include passing a 1% transactions and use tax. It's referred to as Measure U in November 2018.

While it is essentially the same 1% as the Bradley-Burns Sales Tax, the allocation of transactions and use taxes are vastly different in California and are more favorable for bedroom cities like Placentia, as the entire 1% is allocated to the City of Placentia and is not distributed to other agencies via the county or state pool.

In addition, automobiles purchased by Placentia's residents, we only have two car dealerships for context, that are purchased outside the city are subject to the 1% transactions tax at the time of purchase, regardless of where the vehicle is purchased from. The city where the dealership resides collects the Bradley-Burns tax, but Placentia recovers the full 1% transactions use tax. For reference, 25% of Placentia's Measure U revenue comes from the sale of automobiles despite only having two dealerships in the city.

This TUT literally saved the city during the pandemic, where we saw an all time increase in online purchases and were consequently able to receive the full additional 1%. Had we not passed it in 2018 and subsequently dealt with the pandemic, I am not certain where the city would be fiscally today.

In addition, the city has been proactive in developing CFDs, developer impact fees, creating a variety of new master planning areas, and we have completed other creative economic development projects such as partnering on electronic billboards, entering into gas station sales agreements- not sales tax sharing agreements for the record- simply getting a portion of the sale that occurs, as well as creating and establishing the first enhanced infrastructure financing district in the state between a county and a city.

While all of these things have reaped dividends and have put us in a much better financial position, these mechanisms, particularly the Transactions Use Tax, are no magic bullet. Not every community has the political fortitude, pedigree, and ability to educate a large portion of its community to pass a TUT by a 50% margin. This process, having gone through it in at least now two cities, is arduous and difficult, particularly in communities that are more conservative.

Just before I close, I would like to point out one thing that is not often thought about in these conversations, and you heard City Attorney Colin Tuo touch upon it briefly, as you may know, state HCD, the Legislature and the Governor's office are all pushing for more housing in the State of California.

What no one is talking about, however, is that if you have some policy reform and how sales tax is allocated and appropriated in the future to the location of homes, apartments or any other type of housing unit, as opposed to the county pool, you may see less of an incentive for cities to push for so much commercial, retail or fiscalization of land use.

In other words, as online sales continue to increase, and if there is a change in the law or an administrative fix to the current county pool to apply sales tax to the destination exactly the same way it applies from a transactions and use tax, you would have more cities interested in creating more housing as they wouldn't be impacted as much. And you can essentially apply the old adage of killing two birds with one stone simply via sales tax reform.

To wrap up, I would say that bipartisan improvement is definitely needed on sales tax agreements, and we support the comments and policy recommendations from the City Manager Working Group. In addition, we believe that reform is absolutely needed on the county pool based upon all of the arguments mentioned earlier, and to not disproportionately benefit communities that are receiving other communities sales and use tax simply because the purchase was made online.

In closing, I thank you for all of your time and efforts to look into these very important matters and our city and many others throughout the state hopefully one day will see some reforms that will stand to benefit everyone in a more reasonable and balanced approach. Thank you.

Well, that was very comprehensive. Thank you. Can you first talk a little bit about how you were able to convince your residents to pass the TUT?

Yes. So we established a Citizens Fiscal Sustainability Task Force comprised of residents that really kind of spanned the full spectrum in our community, from those that were very conservative to those that were maybe not so conservative and really took about two years to educate them. Had series of Brown Act meetings where we published and noticed, and we had some community members show up.

And during ultimately, at the end of that two year process, by going through that, which was a lot of work by staff, on top of our council meetings and other Commission and Committee meetings that we were obligated to do, we were able to ultimately receive a recommendation from them to the City Council to unanimously support placing the measure on the ballot for 2018.

You were talking about reform of the county pool, and with everything that we're talking about, there's obviously winners and losers. Are you part of that city managers working group and has there been specifically a discussion about reforming how that county pool is allocated.

I am not part of the group. I have spoken with the chair and some of the leadership from that group on both sides of the coin, both my colleague Scott Ochoa of the City of Ontario, as well as John Gillison out of Rancho Cucamonga, and there are, of course, two Orange County representatives on that group. My discussions with them, as they've indicated, they've gotten essentially this far on the recommendations for sales tax agreements.

They have not yet addressed the county pool, and the county pool, a few of them have previewed to me, will be a very difficult conversation, I think, for all of them, as well as some that have those retail destinations stand to benefit and some others obviously lose quite a bit.

Okay. And then I was trying to understand, when you were talking about the reform going from 90:10, 80:20. What exactly was each side of that?

So essentially, when you have a situation where a use tax is allocated and determined to be allocated under the current formula, current law, from an online sale, goes into the county pool and is distributed, one way to maybe look at that, to unpack that a little bit more is to say, well, if we can determine this formula and maybe reduce it, it's difficult. It changes by quarter, by month even.

But if there's a way to unpack that a little bit more so that those communities that may challenge reform because they are disproportionately being benefited by the county pool, not just the sales tax they're getting from their destination, but also now the county pool, then maybe you have a slow unwind with respect to that. That would require a lot of analysis with CDTFA, but I believe there is a way to do it.

And if you do it over a period of time, cities can adapt and budget appropriately, just as they did when RDAs were dissolved.

All right. And then maybe for everybody, you did mention that the current tax environment doesn't favor residential. Do you have suggestions on reforms? And do either of the two of you have suggestions on reforms in that area? Because we've been saying that for years, there's always a benefit to developing these big box stores, and there's never been that much of an incentive to develop housing.

If I may chair. One thing to consider is- what we find ourselves is that there is quite a bit of incentive based on how the property taxes are also split, that we find every developer wants to develop single family market rate housing and get the biggest bang for their buck of investment, but none of them want to develop multifamily housing that's high density, that is actually affordable for the working class.

And that's been fundamentally our biggest challenge is that everybody wants to push up their property values to be able to then pass a property assessment or a tax to generate more revenue. And as has been indicated, what we've learned in Fresno, the hard way is that sprawl doesn't pay for itself. It's extremely costly. We don't have the resources to extend the streets another few miles, extend fire and police services another few miles. And every development that comes forward, they want an incentive waiving of fees.

So I see these development of single family subdivision suburbs in the same way as I see these industrial developments. There's a market for it, but that market is extremely subsidized by the rest of the taxpayers and they tend not to pay it for themselves. The other distincts I want to make is we recognize that there's an impact for all areas.

When you do front door delivery, your residential roads get used more, but they are being used by your vans, that were designed for your passenger vehicles. Where we see the significant impact is these huge diesel trucks, two or three trailers at a time, that are now going through these residential roads that they were not designed for.

As a result, we are now spending millions of dollars conducting the citywide truck study, millions of more dollars conducting a south industrial specific plan to account for the environmental and infrastructure impact and be able to levy those fees to those industries. Something that should have been done in the front end. But I think we were all caught off with the growth of e-commerce happening so quickly and then, of course, being put on steroids by the pandemic.

Mr. Gabler.

I think what's important to understand is that housing costs money and the sales tax generators generally don't. There's a very big cost differential in what it takes to provide services to residential versus commercial industrial. I think the city manager Arrula's point is that we're all moving more towards a county pool type of system because you're running out of land just as Simi Valley is, and he mentioned Placentia is as well. You're finding less opportunities to create sales tax generating opportunities.

And when you have the state that is pushing more towards more housing and actually taking away commercial, allowing development of housing into commercial zones now, now you're shirking that even quicker. So I think in the long run, the state is going to have to address a more equitable distribution of online sales as opposed to the system that's in place now, because that's where the majority of sales tax is going to be headed.

All right. Well, I really appreciate our panelists today, again, appreciate everybody that joined us. But I will say the state will try to fix these problems in fits and starts. The Governor will veto, Members will fight with each other, city managers will call up their Senators and their Assembly Members, and then we kill bills on the floor.

If we really want a solution where everybody feels a little bit uncomfortable, but it moves us forward to a more fair situation where you're dealing with the impacts on your cities, this is the best opportunity, having that city manager's group get input from everybody and then come to the Legislature and say, we have found the hard solution, but we think it's the right one for the majority. So I would encourage that process to continue and maybe make sure that it doesn't take years and years.

But for us, that's the easiest way for us to do things because as you see with housing, when the Legislature starts to pass bills, nobody's happy. Right? And so we don't want the same situation to happen with this. So I'm very optimistic. I hope that we hear that from our speakers today, that you're all going to come up with a solution that addresses a lot of the issues that we were talking about today. So thank you very much.

And with that, members of the public that would like to address us, to provide comments. I'm not sure how many of you there are, but we'll limit it to three or four minutes. So we just want to make sure that everybody has an opportunity that would like to speak, especially those of you that flew down or flew up or drove a long way past the 10, which is burned through the traffic. Okay. And the microphone is in the center.

So just come right up and looking forward to your comments. And please state your name and affiliation.

Thank you, Madam Chair. And the opportunity to speak. My name is Karin Schnaider. I'm the Assistant City Manager for the City of Tracy. A little bit of my background because I'm seeing that it adds some context. I have over 20 years of experience in local government, most of that, over two thirds of that as the finance director before promoting it as the Assistant City Manager. I have experience working in cities as small as 10,000, 30,000 and 100,000 as my career as a finance director.

So I have done budgets for everything. I've been in policy cities where the council said, Target's not in my neighborhood, it's not the right fit. It'll go in the neighboring city and my constituents will shop there. So now I'm in the city of Tracy where e-commerce is very strong and very prominent. We have dedicated over 2000 acres to just warehousing as our economic platform. And it's important to know that it is part of its 100 year history as a city.

Back when it was agriculture, as we heard with the city of Fresno, and there was railroads moving goods around to Eisenhower in the 1950s, who built the freeway systems and a system of distribution for the army to us bringing in the first yellow freight, which is now gone. And we have a 1980s facility that we're going to need to figure out how to bring economic diversity in there when I have land right next to it and no one's going to want to build on.

So I have a lot of experience in this. Also, I'm not speaking today, but I do have experience. I am one of the representatives for San Joaquin county on the City Managers Working Group and have that honor of working with them. I want to speak and say that they are doing great work. You're hearing some of the policies they're doing. I am not speaking on their behalf, but some of the good policies that you're hearing is policies we're going to bring forward on sales tax sharing.

And the other great policy that they brought forward is equity, meaning that there's got to be some balance. We can't do a winner and loser situation. I think, Madam Chair, you said it best when you said maybe there's a little pain on both sides. Some of the policy things I feel from a professional representing myself here is saying that it is a very antiquated system and no basis in tax law on why there is a county pool.

It's really important to understand that it was a process that was built out of convenience. And if we're talking about reforming a 60 year old, 70 year old tax law, start with some of the things that have just happened out of a necessity, not out of an actual tax law. You will not be able to point to anywhere where the county pool system is being generated.

Secondly, that is your very first area of direct distribution to someone's house, whether it is US Postal Services or an Amazon truck, which is what we all think in our head. But it's all of those trucks coming up and down our streets. The stuff coming from out of the state is going into the county pool and we have no basis for that.

So my 10,000 city population that I once represented, who doesn't have a strong sales tax base but might be buying from that, you're right, they're not getting the equal distribution and a city like Amazon warehouse cities are going to find a larger distribution of that. So yes, there is definitely a basis for that. But there's winners and losers even in changing that. I heard from one of our partners on the plan is that's death by a thousand cuts. We just keep changing.

We really need to look at this holistically and I can tell you the working group is doing that. I do want to speak on behalf of what it means to dedicate your entire economic platform. We will be one of the cities filing chapter bankruptcies. We have an estimated bill of $16 million to a $50 million loss depending on how you structure this out of $130 million General Fund, it won't be just a small change.

So when I speak on behalf of the City of Tracy and my mayor's here and she's going to speak after me, it means significant changes. And we really have to think about are we really just trying to redistribute money to other cities and what is the consequence to it? Fresno said it very, very well.

When they're talking about dedicating your economic platform and trying to diversify, well, people come, businesses come to Tracy because of the freeway systems that have been around for that same 70 years that this tax law and we have waited a really long time for it to generate sales tax. Yellow freight never generated sales tax.

OSH warehouse that's also gone and empty and no one wants to use is there the roads that are being built and the infrastructure and the 2000 acres, they need a revenue source to maintain them. And then I'll have the mayor speak to some of the more impacts. Thank you.

Thank you.

Real quickly. Good morning. Still morning, right? No, afternoon now. My name is Nancy Young, the mayor for the City of Tracy, and thank you for allowing us to come and just give some input here. And I just want to make mention that for the last couple of years I did serve on the State Board for League of California Cities as well. So I've been in those quite invigorating conversations regarding this on both sides.

And so as you know, Tracy is one of the cities that is deeply affected by this and we have been known for many years too as a bedroom community. So we purposely tried to diversify some of our investments and things that we look to to be able to not only help our community but the surrounding communities. I have some things written so I kind of stay on track. So I'm not long winded and I stay within your time frame.

So we understand the growing dependence on online and remote transactions introduces a unique change to existing local tax structures and tax revenue opportunities. However, we believe that any attempt to redirect Bradley-Burns sales tax threatens the vitality of communities like ours that have worked hard to attract and retain these type of businesses as fair considerations balance between community sacrifices and economic investment. And so let me just skip over here.

So, the City of Tracy, like other communities, have made significant investments in these type of businesses, developing a thriving and growing community that has not only benefited our city, but our entire region, and bringing jobs to our community and business opportunities and sustainable growth measures. These businesses serve as critically needed industries during- served critically during COVID-19 and as has been heard today, has thrived in the e-commerce sector. And so now there are some other ones that are challenged.

And it's sad because our ball is dying by 1000 cuts too. And I'm the in-person shopper, so it's hurtful for me, but for others. Now we shouldn't be penalized now as a city that has actually invested into logistics, into bringing these e-commerce into our communities, because now others are impacted by this.

So the economic benefits that are generated through potential Bradley-Burns sales tax do not serve as a windfall for the city because that's what some people will say, it's just a big windfall for you. But instead, they are vital to offset the direct impacts generated by the economic activity. This includes accommodating increased truck traffic by providing new roads, truck routes and overpasses, as well as the necessary ongoing maintenance for this infrastructure.

And as has already been mentioned here earlier, it's millions of dollars of infrastructure, a lot of things that we were expecting to come in that did not come in for many years. And then with the restructuring, we're finally able to catch up with and begin to catch up with some of this infrastructure. But the ongoing maintenance is just really out of hand.

And so it's going to be a real hardship for us, not only in the reality of what we deal with, but as legislators, you know, that we hear from our constituents and all the time they are complaining about not only the infrastructure of our roads, but also for the impacts to our quality of life and air quality. And all the many things that we hear day in and day out every week, different ones are bringing these things to our attention.

So with the loss of sales tax revenue to our city, it will have a direct impact on the services that we can provide to our community. And as was already stated by Assistant City Manager, that it will actually lead us into that bankruptcy, it will be very devastating for us financially. And so further, as I conclude, and as a minister, I've heard the second conclusion earlier.

So I want to make sure in my conclusion one time, our communities tend to be working class, lower income, and disproportionately share in both the benefits and the burdens of working and living in areas where warehouses and distribution centers constitute the largest parts of the local economy. So this is represented also in our cycle six arena numbers. And we have already trying to address this with allocations that we have received a substantial increase in our low and extremely low income housing requirements.

And so the state has repeatedly pushed these on us. And so without having a funding source, shifting sales tax designation based communities continues to limit our community's ability to respond to these state mandates. And we love our State of California. I've grown up in California and lived here all my life. And so we want to see some great things. And I know, as it was said by Assembly, want to hear that it is an uncomfortable situation.

And even looking at things that may seem fair for me, I would just say leave the policy alone and let different ones be able to thrive within their own communities. The burdens that we bear for the things that we attract and we invest in. But if we must need, comes to some other solutions, possible solutions, as was said earlier, that the League of California Cities has really put forth together some very thoughtful things.

It's a rub for me in some areas, but I agree that if we're going to do something, to look at something that's most fair, and otherwise, as I think maybe it was the Councilmember in Fresno, that if we're going to look at things that are going to affect the future of any of our cities, then we need to put everything on the table in all fairness. And that's what it's all about when we're leading our communities to be fair. But thank you for your time. I appreciate it.

Thank you. We have another speaker sneaking up.

Good afternoon, Madam Chair. Ben Trippa with the League of California Cities. I first just want to say thank you for putting this informational hearing on, and thank you to your staff as well. They've been a pleasure to work with. And then thank you to everyone who traveled far and wide to get down here. I think there was a lot of great information on a nuanced and complex set of issues today.

So, as has been stated, the League of California Cities has convened a statewide city managers sales tax working group. There's a few goals of this working group. But first, I just wanted to point out, and it has been stated, this is a working group that comprises of rural, urban, Northern, Southern, destination cities, warehouse cities.

So we have a diverse set of city managers that are taking part of this working group, really hoping to build a set of consensus based policy solutions that we can put forward. And since I've been with League of California Cities since March, I think we've done that, especially around the sales tax rebate agreement piece.

In fact, this last July, our board of directors unanimously approved a set of prospective policy proposals put forward by the City Managers Sales Tax Working Group, which have been mentioned today kind of in broad strokes. They deal with a term limitation on sales tax rebate agreement, a rebate cap, enhanced transparency around these with the creation of some type of statewide dashboard, whether that be CDTFA, potentially the state controller's office, GO-Biz, whatever that appropriate entity is.

We haven't quite drilled down to that level of detail yet, but I think we all agree that there's a need for enhanced transparency in this space. The final component of our rebate of proposals involve the county pools. To an extent that Damien was speaking know kind of being able to count that rebated dollar into your pro-rata portion of the county pool. So one of the proposals that we put forward is you cannot count those rebate dollars into your county pool calculations.

Secondly, we also hear talked about rebate or sales tax reform in the e-commerce space when it comes to warehouse cities, destination cities. This is something that the working group is really starting to dive into now. It is a very complex situation. There are a lot of difficult conversations going on. That said, there is a desire from the working group to move forward on this and make progress. We haven't drilled down to what that exact solution will be.

There's been conversations around a potential split, whether that, what, you know, between the two cities, what that looks like, what that number is. We're going to be having those conversations this winter and going to the spring. But the goal is we want to develop consensus around this. We don't want this to be, we're picking the winners and we're picking the losers.

And the last thing we would want to do is come up with a policy solution that we think works, we run a bill and then it gets vetoed for the Governor, which has been mentioned with a handful of bills previously. So I think we're making great progress. We have buy in from the entire working group. We're having folks who, like you said, I'm not okay with 100% of this, I'm not okay with 100% of this. Maybe that means this is a good policy. So there's a sense of we have momentum. We've brought forward proposals around the rebate agreements.

Let's dive into this next elephant in the room, which is that e-commerce sales tax situation. And I'm confident that in the coming months, we're going to be able to come to a consensus internally of what that looks, you know, as we go forward into the future, look forward to working with your Committee, your staff, where we're able to. And again, thank you again for having us here today.

I just want to ask one question, because you covered most of it, and I'm not really clear on the Simi Valley example. I mean, most of us would look and say that's an incredible impact on those streets. I mean, just like the warehouses with the big diesel trucks rolling through. Where would that be addressed in any of the proposals you're looking at currently?

I think you could be folded in there without seeing the specifics of exactly how those agreements are structured. We're looking at rebate agreements broadly across the state. More than happy to connect with the city manager of Simi Valley to see those exact impacts, because, again, I'm more than happy to bring those little carve out situations that aren't the general 99% of these rebate agreements. I think you could say that ready mixed concrete is very different than having a warehouse distribution.

So I want to make sure that I'm taking all that into consideration and bringing that back to the working groups. They're more than happy to touch base with him and then see what we can do to bring that forward to the group. But I would say there is an interest to making sure we're covering all our bases with these policy proposals.

That sounds great. And Mr. Gabler is still sitting here, so you will have an opportunity. All right. Thank you so much. Do we have any other speakers?

Good afternoon, Madam Chair and Committee Members. My name is Jaime Boscarino. I'm the Finance Director for the City of Thousand Oaks in the harbor of Westlake Village. And I want to thank you all and all the speakers today for bringing awareness to this important topic. Also like to thank our CDTFA for all the work they do.

And as mentioned numerous times, the Cal Cities City Manager Sales Tax Working Group that has been meeting regularly, delving into this topic and thoughtfully identifying equitable approaches to revising the existing sales tax code. As a city that incorporated without a general municipal property tax, sales tax is our largest revenue source and bringing almost 40% of our General Fund revenue. Negative revenue declines in sales tax cause difficult budget decisions by city councils and management.

A robust, vibrant and diverse sales tax base is vital to a healthy economic environment in a city. Our sales tax revenue pays for our city streets. We regularly have our General Fund assist our gas tax in improving our city streets, our roads, our sidewalks, our landscape, our stormwater homelessness efforts, affordable housing, sustainability improvements, EV infrastructure, solar projects at city facilities. So sales tax is providing a significant impact in our community. As discussed today, sales tax and use tax is complicated.

There have been many changes, as we have all heard, in the way we all shop and the resulting impacts and new delivery methods. And although the Wayfair decision was a victory for all California cities, we do believe that changes are necessary in determining how tax is allocated. The proliferation of delivery vehicles on city streets bring added deterioration to our streets, increased traffic and increased pollution.

Cities such as Thousand Oaks have a last mile warehouse, but we do not get the sales tax from any goods that are delivered out of that last mile warehouse. That is instead going to the distribution center that has opened up in Ventura County. And we do understand the impact that a large distribution fulfillment center has on the city that it is located in. And we do not expect all of the sales tax to stay in Thousand Oaks, but that it should be shared equitably.

We have impacts as well, just as those cities do. We've seen these impacts. We felt these impacts over the past several years. As Mr. Gabler mentioned, Simi Valley also has last mile warehouses as well. We've seen millions of dollars in the past several years of a lessening in sales tax based on online retailers. Because of the impact of the distribution center in Ventura County. We do believe there's a more equitable method of distributing the sales tax.

There has been no change in how our residents are shopping, how goods are being delivered, yet we've lost millions of dollars in the past several years because of this distribution center. This is some of the important work that Cal Cities' working group is doing and we really appreciate all of the efforts and the continued movement and forward progress on this. Thank you.

Just a couple of questions. So this is affecting, obviously the new distribution warehouse is affecting every city in the county. What do you think the loss is to the other cities per year?

I wouldn't know. I think Mr. Gabler said something like $300,000 annual. We anticipate for Thousand Oaks it's likely closer to one million dollars annually. Our second quarter results, which was April through June. I think the state as a whole, in the county and a lot of cities had actually negative sales tax revenue growth, whereas this particular city experienced an over 30% increase in sales tax revenue growth for that quarter.

And that's 100% because of the distribution center. We get negatively impacted also because now our share of the county pool is smaller because they have a higher share of the overall sales tax revenue in the county. And so then they're getting a higher share of the county pool. So whereas before, maybe we were getting over 20% share of the county pool, now we're getting less than that.

So it's a double impact to all of the other cities in the county that are now receiving a smaller share of the county pool.

And so the City of Thousand Oaks is hoping to address this through the city managers group, not some local agreement with the cities in Ventura.

Yeah, we're hopeful that the city managers group will be able to have an equitable method. We don't expect, as I mentioned, 100% of that sales tax because obviously there are impacts to the cities that have distribution centers, but we should get a share of that sales tax from the goods that are sitting in the distribution center because they may be going into our last mile warehouse, and then it's causing traffic and impacts to our streets and roads as well.

Well, thank you very much. Appreciate you joining us today. Good afternoon.

My name is David Bolog. I head the legislative subcommittee of the SFE Alliance. Thank you for this hearing today, Assemblymember Irwin, and thank you for the presentation from the participants today. It was very clear I'm accustomed to state legislative hearing, so my testimony will be two minutes or less. What would a revenue taxation hearing be without a grizzly man in a cowboy hat saying the often agreed upon but rarely addressed statement that taxation is theft.

A person does not have to be a nerd to follow how money is taken from that person and is distributed. Just a basic education, which seems to be the way the supermajority of Democrats are moving away from educating our children and turning their focus onto students sexuality and identity even before the children has physically developed or mentally thought of such subjects about themselves. Why would this even be a topic for today's hearing?

First, although you have been more than cordial today and throughout the year with a welcoming disposition in the Capitol, your colleagues in Sacramento do not have the same congeniality that you have exhibited.

So coming to these hearings is one of the few outlets people have in addressing their concerns to the legislators and have them recorded onto the media record. A healthy, well adjusted child with a good upbringing will grow into a productive child or grow into a productive adult in order to continue proliferating a vibrant economy in which the parasitic state can continue to take revenue from. Antifamily legislation that you have supported and voted for, such as state sanctioned kidnapping bill AB 665 and AB 957, which would have mandated interfering in the parents raising their children in a way that they know best, would have strained and will ultimately remove the child parent relationship from which will harm the education process, leaving the child grown into adult either not living up to their full potential or worse becoming an economic burden to the state and the economic vitality of this society.

The Democratic legislators are moving into directions that harm not only the people, the state creating more burdens, rather than allowing people to expand the economy and ultimately having a larger tax base. In the future, I encourage you, Assemblymember Irwin, to vote in a way that supports family instead of tearing them apart from- By putting a child's, who does not yet have a brain with a fully developed frontal cortex, immature thoughts first before those that know, love and would do anything for them. The parent's child- The child's parent. Thank you.

Thank you for joining us today. Do we have any other speakers? All right, well, again, for the 10th time, thank you all for joining us today. And with that, we conclude the special hearing here in Westlake of the Revenue and Taxation Committee.