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Daily Tax Report: State

EBay, San Jose Move Toward Sales-Tax Split Ahead of Proposed Ban

Sept. 24, 2019, 10:38 PM

EBay Inc. and its hometown, San Jose, Calif., are negotiating an agreement to split millions of dollars in local tax revenue from sales on the online marketplace, even as California’s governor weighs a bill to ban such pacts starting Jan. 1.

The City Council approved Sept. 24 allowing the city manager to negotiate and execute a 15-year agreement with eBay that would net the city between $5 million and $29.5 million a year. eBay would get 30% of what’s collected above $5 million, which could add up to $150 million over 15 years.

“The proposed length of the Agreement, 15 years, aligns eBay’s and the City’s interests long-term, locking in the agreement amid the potential for regulatory or operational changes that could reduce the ability to collect these sales taxes in the future,” according to a memorandum prepared for the council.

The deal with eBay is structured similarly to other long-term, tax-sharing agreements that other California cities have with companies including Apple Inc., Best Buy Inc. and Staples Inc. under which they share local sales taxes paid by California consumers on purchases of the companies’ products. Gov. Gavin Newsom has until Oct. 13 to sign the bill banning such deals in the future, and/or a separate bill would permit continued business incentives deals between companies and cities as long as they’re transparent.

EBay would declare all California transactions made on its platform as having been conducted in San Jose, according to a staff memo to city council. That would allow eBay to assign the full 1 percentage point local share of the state’s 7.25% sales tax to San Jose rather than distribute it among cities where sellers or customers are located. San Jose, in return, would give eBay 30% of the sales taxes on those transactions above $5 million.

“Just to be really clear—this is not about economic development or attracting or treating a business or jobs or anything like that,” City Economic Development Director Kim Walesh said.

EBay spokesperson Ashley Settle praised the deal in a statement. “eBay and San Jose have enjoyed a long-standing relationship since eBay was founded here over two decades ago,” she said in an email. “This announcement continues to evolve that relationship with an eye toward an even stronger future, enabling eBay and San Jose to continue supporting one another for the benefit of San Jose’s economy and residents. We look forward to partnering with the city on implementation.”

The deal would tap a new source of tax revenue. EBay and other companies handling third-party sales on their sites will be considered retailers starting Oct. 1 under a law signed by Newsom (D) April 25 and must start collecting sales taxes from transactions made by remote sellers to in-state customers. The law, A.B. 147, implemented the U.S. Supreme Court’s 2018 ruling in South Dakota v. Wayfair, which gave states more authority to tax remote sales into the state.

City staff members estimate the new sales tax law will bring in at least $5 million a year without the deal, but receipts could be much higher if all California sales are assigned to San Jose. On the high end, the city estimated $40 million in revenue, with eBay getting $10.5 million as its 30% share of that.

EBay has been headquartered in San Jose since its inception in 1995 and is one of the Silicon Valley city’s largest private employers.

Sen. Steve Glazer, a Democrat who authored the bill to ban new tax sharing deals, said the eBay deal would come at the expense of public services throughout the state, where eBay’s economic activity will continue to be dispersed.

“San Jose is not even pretending that its gift of millions of dollars a year to eBay would bring jobs or economic benefit to the city,” said Glazer, saying the deal represents “a crass manipulation of a broken sales tax system.”

San Jose risks being sued by other cities if it cuts the deal with eBay, because San Jose would be taking tax revenue that should be going elsewhere, said Michael Coleman, a consultant to the California League of Cities, which lobbies on behalf of municipalities statewide, and founder of the Local Government Finance Almanac. Other cities could challenge the deal under current law, regardless of whether the governor signs the bill to ban the agreements as of Jan. 1, 2020, he said.

“That agreement would hurt every other city and every other county in California,” Coleman said.

The league adopted a policy in February opposing sales tax sharing deals like the one San Jose is considering, saying “they have the effect of encouraging revenue to be shifted away from numerous communities and concentrated to the benefit of one.”

A Bloomberg Tax investigation found that a number of cities in California have struck similar deals lasting decades to give companies about half the sales tax they collect on e-commerce sales in the state. About 10% of the state’s 482 cities are using the deals as a tool to attract or retain headquarters or distribution centers.

eBay, San Jose Winners

EBay contacted the city to explain “these significant changes that were taking place for them,” as a retailer for tax collection purposes, Walesh said in an interview.

Having to collect and remit sales tax “was a very profound, very significant change for them. So it was a process of us learning about that and the impact on eBay and all the work going on to comply with the new California law and similar laws in other states,” said Walesh, who’s also the deputy city manager.

The city and the company both benefit from the arrangement. eBay has a couple incentives to ink a deal. The company would be able to track sales tax in just one city instead of juggling more than 400 California cities with varying tax rates.

The agreement is lucrative for San Jose as well . The new sales tax would represent 11% of the city’s 2019-2020 budget for sales tax after sharing, Walesh said in the memo. The $5 million threshold would increase by 3% annually.

“It is important to note that the City portion is net-new revenue that would otherwise not be collected absent eBay’s effort,” the council’s memorandum said.

San Jose staff and eBay worked on the agreement without any consultants, Walesh said. Some tax-sharing deals in other cities have given consultants who helped arrange them their own cuts of sales-tax proceeds on top of the company’s share.

To contact the reporters on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com; Joyce E. Cutler in San Francisco at jcutler@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Bernie Kohn at bkohn@bloomberglaw.com

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