Senate Bill 1494 Aims to Remove Valuable Sales Tax Incentive For Retailers

Issue No: 2024-10

Summary

For the third time since 2019, a California state senator has proposed legislation that aims to prevent Californian cities from entering into agreements with retailers that provide tax benefits to the parties involved. Vetoed in 2019 and 2021, respectively, S.B. 531 sought to ban new tax-sharing revenue agreements and S.B. 792 sought a reallocation of sales revenues from retailers with more than $50 million in annual online sales.1 Now, S.B. 1494 aims to increase transparency on existing tax revenue sharing agreements and prevent new tax revenue sharing agreements from being signed.2 With a retroactive effective date of January 1, 2024, this proposed legislation serves as another attempt to modify California laws which currently allow local agencies and retailers to enter into mutually beneficial contractual agreements which may be up to 20 years for allocation of the 1% increment for local jurisdictions, known as the Bradley Burns local sales tax. In the event the bill passes, tax-sharing revenue agreements entered into after January 1, 2024, will be invalidated.3

Like all bills, S.B. 1494 would need a two-thirds vote from the California Legislature, and it would need to pass the muster of Gov. Gavin Newsom’s ability to veto the bill. It is unclear at this time whether the bill will pass as Gov. Newsom has signed a bill that supported increased transparency of tax-sharing revenue agreements and stated that “completely removing these tax options from local decision-makers is the wrong approach.”4

In Detail

Under existing law, retailers can enter into a negotiated tax revenue-sharing agreement with localities in California enabling those retailers to retain a portion of Bradley-Burns 1% local sales taxes which are generated by the retailer’s sales. In these agreements, California local agencies incentivize retailers to establish a physical presence within certain localities through a warehouse or sales office.

Through that physical presence in a specified locality (“place of business”), retailers can assign their in-state sales to the locality with which they have an incentive agreement. These assignments are favorable for the respective localities because 1 percentage point of the 7.25 percent California statewide sales tax is allocated to the local government in which each sales transaction takes place.

Many large and mid-sized companies, including Apple, Walmart.com, Best Buy Co. Inc., The Gap Inc., Ulta Inc., QVC Inc., Williams-Sonoma, and EBay Inc., have realized significant tax benefits through their participation in these local tax revenue-sharing programs. Over the past 20 years, Apple has exemplified the potential upside of tax revenue-sharing agreements, having received nearly $70 million from its hometown of Cupertino due to its physical presence and corresponding local sales tax assignments.

Insights

Under the current laws, companies with California operations stand to benefit from engaging in tax revenue-sharing agreements. By negotiating with a California locality and establishing a presence therein, a company can effectively receive additional revenue and margin increases for each transaction it consummates within California for a period of up to 20 years. Companies that are positioned to benefit the most from these types of tax-sharing incentive agreements are those that may have plans to or have a need to expand in the state for a facility such as land distribution centers. The successful negotiation and execution of a tax-sharing incentive creates a direct financial benefit from what may otherwise be a cost center for the company. In addition to the lucrative sales tax benefits, an expansion within the state may provide additional benefits under other programs such as the California Competes Tax Credit.

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Mike Shaikh , Sharvil S. , Howard Lam

Sources

1 See S.B. 531; S.B. 792

2 See S.B. 1494

3 CA Govt Code § 53084.5(c)(1).

4 GVWire.com