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Daily Tax Report: State

Lawyer at Center of Tax-Sharing Deals Being Probed on Ethics Law

May 28, 2020, 9:02 AM

California’s government ethics watchdog is investigating possible conflict-of-interest violations by a lawyer who brokered sales-tax incentive deals between cities and major e-commerce companies that included multimillion-dollar payouts for himself.

The Fair Political Practices Commission informed Robert E. Cendejas about its civil investigation in a letter dated May 20, just over a year after Bloomberg Tax detailed his role in brokering deals with Ontario and two other cities.

“The FPPC Enforcement Division can and often does initiate an investigation on its own, when it is made aware of or becomes aware of an issue or potential issue,” spokesman Jay Wierenga said.

Cendejas didn’t respond immediately to requests for comment.

The commission said it hasn’t made a determination yet about possible violations of California’s Political Reform Act.

Cendejas has, or has had, agreements with at least six California cities to bring e-commerce hubs for companies such as Best Buy Inc. to their jurisdictions. In the case of the city of Ontario, one of those six, he also has represented or consulted for the city on tax policy. The lawyer has also represented a number of California cities in tax disputes with the state’s Board of Equalization.

Long Beach

Under the sales-tax sharing deals, cities agree to give portions of local sales taxes they collect on purchases of products through a company’s distribution center or designated point of sale for all statewide sales. The deals typically last for decades and, in deals he helped negotiate, Cendejas has reached separate agreements to get a percentage of the additional tax collections for himself.

Cendejas brokered deals for Ontario with online retailer QVC Inc. and healthcare supplier Henry Schein Inc. in 2015. That same year, the Fair Political Practices Commission advised the city of Long Beach that similar arrangements Cendejas proposed there would violate a state law forbidding public officers from benefiting financially from policies they helped to develop. The commission said Cendejas was a public officer under the law because he helped write the city’s policy on sales-tax incentive deals as a consultant.

Representatives of the cities have told Bloomberg Tax they weren’t aware of the Long Beach opinion.

Cendejas’ deals are part of a larger practice among some cities racing to attract warehouses and online sales centers that can boost sales tax revenue. The agreements apply to a 1 percentage point increment of the state’s 7.25% sales tax that goes to local governments. A 1950s law created the 1 percentage point share, which the state distributes to local governments based on the location of a sale, not where the customer is.

Bloomberg Tax

Cities lure the companies by giving about half of their 1 percentage point increment back to the companies, often for decades. Apple Inc., eBay Inc., and Staples Inc. are among companies that have such agreements.

A new state law took effect in January requiring greater disclosures about the deals such as the number of jobs created, benefits for workers, and other state and federal subsidies the companies are receiving. Gov. Gavin Newsom (D) vetoed another law passed by the Legislature that would have banned such deals going forward.

41-Year Deal

Most cities with sales-tax sharing agreements use their own economic development officials to negotiate directly with the companies, Bloomberg Tax found in a review of more than 20 agreements with cities around the state. Some involve outside lawyers or accounting firms, but several city officials said those professionals typically charge an hourly rate or a retainer with a limited scope—as opposed to the decades-long percentages of tax collections negotiated by Cendejas.

For example, Cendejas’ 41-year deal between Ontario and QVC reached in 2015 gives QVC half of the sales tax revenue it brings in for locating a warehouse and assigning sales there. Cendejas and two affiliated LLCs get 5% of what the city keeps after it pays QVC.

The city had paid Cendejas $483,078 related to Henry Schein, and $154,608 for QVC as of June 2019, according to records the city provided to Bloomberg Tax in response to a request under the California Public Records Act.

The city of Whittier entered into a contract with Cendejas in May 2019, and the Whittier City Council approved a deal he presented in December 2019 locating a sales office for clothier UFF in the city.

Under the Whittier agreement, the city will pay the company 50% of the expected $2 million the call center will generate each year, and pay Cendejas 20% of the $1 million that remains for the city.

In Long Beach’s case, Cendejas advised the city to attract an unnamed company’s sales operations by splitting the city’s increased sales tax revenue with the company. What triggered the 2015 advisory opinion from the ethics panel was that Cendejas would get 20% of what was left after the city paid the company—a fee estimated to be $400,000 a year for 40 years. Long Beach elected not to pursue the deal after receiving the ethics panel’s opinion.

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