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California Cities Ink Last-Minute Tax Deals as Restrictions Loom

Dec. 18, 2019, 9:45 AM

It took 40 seconds earlier this month for the California city of Ontario to approve a 15-year deal to give the maker of North Face apparel about $20 million of its sales tax revenue for locating a warehouse in the city.

The latest in a long string of tax-sharing agreements comes less than a month before a new state law takes effect forcing more transparency with such deals. But it’s unclear if the new law effective Jan. 1 will dampen enthusiasm among California cities for dangling multi-million dollar payouts to lure in corporate headquarters and regional warehouses.

Bloomberg Tax this year has dissected dozens of tax-sharing agreements between California cities—involving such corporate stalwarts as Apple Inc., Home Depot and eBay—that have promised to share millions in sales-tax collections over decades, often with loose requirements to build new facilities or add jobs.

Some cities embrace the deals, but their neighbors may not. The California League of Cities, which represents all of the state’s 482 cities, opposes such deals because “they have the effect of encouraging revenue to be shifted away from numerous communities and concentrated to the benefit of one.”

More Sunshine

The Teamsters and other unions convinced lawmakers to impose more transparency with a law that takes effect Jan. 1, 2020.

“We need more sunshine for these subsidies,” Shane Gusman,legislative director for the Teamsters Public Affairs Council, said. “These giant corporations are getting our precious resources and not following through on their promises.”

Gov. Gavin Newsom (D) signed off on heightened disclosures in October while vetoing a bill to ban future tax-sharing deals, saying they are an important economic development tool.

The California agreements may never draw the same attention that Amazon.com Inc. faced in New York. Amazon announced Dec. 6 it will locate a new office employing 1,500 workers in Manhattan without getting tax breaks, less than a year after abandoning a plan for a larger expansion in Queens amid backlash about $3 billion in promised tax subsidies.

But with an estimated 10% of California’s 482 cities using the tax-sharing deals, the local subsidies give tens of millions of dollars a year to some of the world’s largest companies.

The agreements leverage a 1 percentage point increment of the 7.25% state sales tax that goes to local governments. The explosion of e-commerce makes the agreements attractive to both cities and companies, because the tax that consumers pay on online orders is assigned to the location of a warehouse or sales office instead of the community where orders are delivered. Cities hungry for jobs and revenue share their sales tax collections to keep the companies from locating in another city competing for the same facility.

A Typical Deal

Ontario’s latest deal is a typical one: VF Outdoor LLC, known for North Face, Timberland, Vans, and 16 other name brands, plans to lease a 1.2-million square foot warehouse in 2020, employing 300 full-time and 190 temporary workers.

In exchange, Ontario will give back part of the tax revenue on California sales from the warehouse. Every year for 15 years, Ontario will pay VF Outdoor 40% of revenue up to $1.5 million, and 50% of revenue over $1.5 million. The city projects it will give VF Outdoor $1.35 million of the $3 million it expects each year, for a total of $20.25 million.

The five-member city council unanimously approved the deal Dec. 3, with no discussion.

Ontario officials worked for about six months on the agreement, and the looming disclosure law had no influence on the timing of the city council’s approval, John Andrews, the city’s economic development director, told Bloomberg Tax in an email.

“It is important for California to continue competing for these types of business investments so that the jobs and revenues they provide continue to support our residents,” Andrews said.

Representatives of VF Outdoor didn’t respond to requests for comment.

Apple, Best Buy, Home Depot

A Bloomberg Tax investigation found Ontario has paid more than $28 million to a handful of companies including Staples and Cardinal Health, and their consultants, since 2013 through 10 other deals already in place. Most other cities have only a few, if any, such deals, Bloomberg Tax found. Ontario, 40 miles east of downtown Los Angeles, sits near major freeways, rail lines, and an airport that make the region a hub for goods movement.

Apple’s hometown, Cupertino, has paid the electronics giant $70 million in an agreement that started when the company was on the brink of bankruptcy in 1997 and continues as the company surpassed $1 trillion in market value, Bloomberg Tax found. Dinuba, a small, agricultural town in California’s Central Valley, has paid or owes Best Buy more than $9.5 million in a 2016 deal to keep the retailer’s warehouse there.

San Jose struck a deal with eBay Inc. in September to assign all California sales on the platform to the company’s hometown for 15 years, which could net eBay $150 million. That deal came with no strings attached – the city and eBay call it an opportunity to bring unexpected new tax revenue to the city now that eBay must collect online sales taxes under a new state law. The city has no expectation of new jobs.

Sharing Deal Details

Cities with the sharing deals point out that even after they give a percentage of the revenue to the companies, they still see a net gain for their coffers. Starting Jan. 1, they’ll have to share more information about the deals and their results.

Before approving $100,000 or more in tax breaks to a company for locating a warehouse in their jurisdictions, cities must disclose more data about the number of jobs, wages and benefits promised by the companies, and how much tax revenue they expect. The tax breaks are often in the form of sales tax sharing deals, but can also be sales tax exemptions on equipment and building materials for the warehouses, property tax breaks, or other subsidies.

Cities also will have to disclose other state and federal subsidies the companies are applying for or have received, and describe how they will hold companies accountable if they don’t meet terms of the agreements.

Once the tax breaks are approved, cities must issue reports and hold public hearings about progress toward the promises made each year.

So far, public reaction has been minimal. In the northern California city of Tracy, after staff explained a new, 20-year agreement with Home Depot Inc. to the five-member city council Dec. 3, one member of the public spoke briefly with concerns that it could be renewed for a second 20 years. The council approved the deal unanimously.

In Ontario, no city staff explained the agreement to the council and no one spoke for or against it during a public hearing that lasted seven of the 40 seconds it took to approve it. In San Jose, no one objected to the deal with eBay.

The Teamsters, the California Labor Federation, and community groups concerned about the proliferation of warehouses must stay vigilant in tracking the deals, said Gusman and Sheheryar Kaoosji, executive director of the Ontario-based Warehouse Worker Resource Center. The new law will help them know which cities are using them and whether city tax dollars are well spent.

The worker center tracks warehouse developments in 15 nearby cities while helping workers in low-wage, temporary or contract jobs push for higher pay and better working conditions, Kaoosji said. He expects workers and community members will speak out at the annual public hearings cities are now required to hold after approving the tax subsidies.

Keeping on top of new warehouses and the tax breaks cities give them them “would be a full time job if I had the capacity in our organization,” Kaoosji said. “They get approved before we even know about them.”

He told Bloomberg Tax he didn’t know about Ontario’s new subsidy for VF Outdoor.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com

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