Nike, Apple Tax ‘Shell Game’ Costs California Cities Millions (1)

New details showing California cities have given $877 million to an array of companies through decades-long tax-sharing deals are fodder for changes to the rules that give rise to them.

The data, posted Monday by the California Department of Tax and Fee Administration, shows for the first time how much businesses have received in local taxes from cities where they have warehouses, offices, or headquarters. Many of the payments went to giants including Apple Inc., Nike Retail Services Inc., eBay Inc., and Williams-Sonoma Inc., but building materials manufacturer Edison Material Supply secured the most with almost $75 million from Long Beach. A few local restaurants were among the smallest recipients, according to the data.

The disclosures were required under a 2024 law (A.B. 2854) responding to a series of Bloomberg Tax articles exposing the deals, which were largely hidden from public view.

“I’m pleased to see that A.B. 2854 is resulting in the transparency it sought to deliver—to shine light on these hidden contracts,” bill author Assemblymember Jacqui Irwin (D) said in a written statement Tuesday. “I find it shocking that nearly a billion dollars of taxpayer money has been given to corporations and consultants instead of going back into our communities. As we continue to analyze the data, we will be better positioned to understand the trade-offs and whether reforms are warranted.”

Graphic: Andrea Vittorio/Bloomberg Tax

The disclosure law was passed as an alternative to other legislation (S.B. 1494) that would have banned the tax-sharing deals outright. Former Sen. Steve Glazer (D), who authored the bill to ban the deals and others to increase transparency about them, said the “new and forced disclosures” reveal in more detail the corruption in the state’s tax system.

“This manipulation and warping of our tax system is now in plain sight and lawmakers should close it down,” Glazer said.

Long-Awaited Transparency

The League of California Cities supported the bill and is analyzing the data to share with its members, lobbyist Ben Triffo said in a written statement.

“This data increases transparency around sales tax sharing agreements, and there is much that cities and the public can learn from this new information,” Triffo said.

The deals at issue take advantage of a feature in California’s tax system that sends a 1 percentage point increment of the statewide 7.25% sales tax to the jurisdiction where a transaction takes place. Online retailers can assign in-state online sales to their locations based on the presence of an office or a warehouse, rather than where the customer actually resides. The localities then share part of the tax revenue with the companies.

The deals happen in California because its rules are unlike those in most other states.

“Most states have destination-sourcing for a reason: It is a consumption tax, and therefore it should be imposed where something is consumed,” said Jared Walczak, vice president of state projects at the Tax Foundation. “Having local governments try to game where the transaction takes place by dangling rebates is not good tax policy.”

The data’s release also represents a win for transparency advocates. In addition to reporting to the state tax department, cities and counties are now also required to post details of tax-sharing arrangements on their websites. Previously, some cities did disclose if they had agreements in place, but often didn’t share the amounts of sales tax revenue they were returning to companies.

“This is information we have long wanted,” said Michael Colantuono, an attorney with Colantuono Highsmith Whatley PC who represents local governments. “It’s a more detailed picture than we’ve ever had.”

“It’s also important to see how cities justify those, how they justify for providing tax incentives to these companies,” said Lucy Dadayan, a principal research associate at the Tax Policy Center. “Having detailed information is both good for transparency and accountability.”

Some Cities Missed Deadline

Disclosures from 79 jurisdictions that have sharing deals reveal the biggest corporate beneficiaries. Apple received $65 million back from Cupertino since 2013, when the computer giant’s current deal with its hometown went into effect. The tax-sharing relationship with Cupertino dates back to 1998, totaling $120 million since then. Cooperative Sourcing, a consulting firm in Georgia, funnels its payments to Williams-Sonoma Inc. and cement company Cemex through two deals it brokered with the city of Shafter.

All of California’s 483 cities and 58 counties must comply with the new law and report whether they have sharing deals. Jurisdictions that don’t comply will be fined $1,000 a day for the first six months and $4,000 per day afterward. According to officials, 16 failed to meet the deadline, and they have until June 15 to provide the information.

From a transparency perspective, the data is very much a good thing, but the policy underlying the data creates “shell game” deals between jurisdictions, Walczak said. The data, he said, shows how unusual the entire system is.

“Hopefully this prompts a discussion about why California’s tax sales tax is so different that it would create this opportunity for localities to play games with where sales tax is generated,” he said.