Apple’s Agreement With Cupertino Is Taxpayer-Fleecing Collusion

Apple Inc.’s tax agreement with its hometown of Cupertino, Calif., is under scrutiny by state regulators. At issue is an agreement wherein Apple assigns its online purchases in the state of California as though they were made within the confines of Cupertino, which allows the city to reap rewards via the 1% allocation from the 9.125% sales tax rate for purchases made in the city.

That seems like a good deal for Cupertino. So what’s in it for Apple?

The agreement outlines that 35% of that local portion that is returned to Cupertino is handed by the city to Apple—to the tune of $107.7 million since 1998. California took notice and launched an audit.

Cupertino is facing a 73% reduction in local tax revenue. California is taking issue with the agreement and examining the extent to which the California purchases attributed to Cupertino are proper.

The issue here seems apparent on the face of the facts. It isn’t difficult to imagine these sorts of agreements giving rise to bidding wars between municipalities, each vying to offer the most generous kickbacks in exchange for a large corporation allocating its state sales to that locale. This benefits no one save for the corporation with the deepest pockets.

New iPhone 14 Pros are displayed during an Apple special event on Sept. 07, 2022 in Cupertino, Calif.

Photographer: Justin Sullivan/Getty Images

In California, the local portion of collected sales tax goes to the location where the transaction took place, not the location of the customer. The corporation can designate where a given transaction has taken place, separate and apart from the underlying origin and destination realities.

The result is a grant of valuable power to the corporation from the state. Apple, or any other corporation, can virtually choose whichever municipality will be blessed with their substantial sales tax revenue. This is doubly true in sectors where the sales in question are handled online and for digital goods or services—servers can be located almost anywhere.

It was only a matter of time before corporations started imagining how the hand they were dealt might be used to benefit them. It’s actually pretty straightforward: “We’ll say our sales are made in your town if you give us a cut of the loot.”

Sales tax is already notoriously regressive—that is, it places a larger burden on low-income taxpayers. There are no brackets or marginal rates in sales tax. Whether you make $100 or $100 million, your sales tax in Cupertino is 9.125% of the taxable purchase. The result is the portion of individual income that goes to paying sales tax is invariably higher in lower income individuals than it is in higher income folks.

These sorts of agreements preserve that regressivity at the individual level and inject an additional element of regressiveness at the corporate level. If you’re any other business in Cupertino and you expect to receive a percentage of your collected and remitted sales tax, you’ll be waiting a long time.

Sales and use tax is a consumption tax intended to tax individuals at the point of “consuming” a good—which generally is the point of sale. Despite generally being collected by the merchant, sales tax is a tax on the individual making the purchase. In no way is the Cupertino–Apple agreement an example of Apple receiving a portion of its own money back; it is just receiving funds from the state that were paid in by California taxpayers.

State revenue from sales and use tax generally hovers around the 15% of revenue mark, with some variance year to year. In most states, it’s a significant source of revenue for government operations and specific programs, ranging from education and transportation to health care. Arrangements like Apple’s—and similar deals that other big retailers have with California cities—distort the distribution of revenue among communities and take hundreds of millions of already-collected dollars out of potential budgets for projects and put them directly in deep pockets.

Apple is receiving a kickback from the municipality for indicating that online sales to California residents are transacted in Cupertino. They’re not bringing customers to Cupertino—not physically, at least—but merely are choosing that city as where sales are made. If they didn’t indicate sales were from Cupertino, they’d need to choose a different municipality, and that town or city would receive the 1% allocation.

So, what legal right is Apple giving up in exchange for that 35% of remitted sales tax to Cupertino? The right to start a bidding war.

The only card Apple has to play with Cupertino is the implication that if Cupertino doesn’t cut them a good deal, they could take their online business elsewhere and simply indicate purchases were made in San Jose or Santa Clara. These agreements are antithetical to the policy goals of sales and use tax. And in Apple’s case, the California Department of Tax and Fee Administration is right to launch an audit into the arrangement.

Funneling money through Cupertino doesn’t insulate Apple from the deplorable economic reality of the situation. Apple is taking money from the hardworking people who contribute to the economy.

These taxpayer-fleecing collusions between industry and government are unacceptable, and Cupertino’s complicity is equally reprehensible. It’s high time for the legislature to put an end to these kickback agreements and hold municipalities and companies like Apple accountable for their unethical behavior.

This is a regular column from tax and technology attorney Andrew Leahey, principal at Hunter Creek Consulting and a sales suppression expert. Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social.