BILL ANALYSIS Ó
SB 533
Page A
Date of Hearing: July 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SB
533 (Pan) - As Amended July 6, 2015
Majority vote. Fiscal committee.
SENATE VOTE: 25-11
SUBJECT: Cities and counties: sales and use tax agreements.
SUMMARY: Modifies the general prohibition on a city or county
entering into an agreement that would result in the payment,
transfer, diversion, or rebate of sales and use tax (SUT)
revenues under the Bradley-Burns Uniform Local SUT Law
(Bradley-Burns) to any person for any purpose. Specifically,
this bill:
SB 533
Page B
1)Repeals the existing statutory prohibition and instead
prohibits a local agency, defined as any city or county, from
entering into any agreement that would result in the payment,
transfer, diversion, or rebate of any Bradley-Burns revenues
to any person when both of the following conditions apply:
a) The agreement reduces the Bradley-Burns revenues that
another local agency would receive absent the agreement;
and,
b) The retailer continues to maintain a physical presence
within that other local agency.
2)Specifies that this prohibition does not apply to any mutual
tax revenue sharing agreement between local agencies to pay,
transfer, or divert Bradley-Burns revenues to another local
agency, and where the agreement would not result in the
payment of those revenues to a retailer.
3)Retains two existing exceptions to the statutory prohibition.
Specifically, the prohibition shall continue not to apply to
any local agency agreement:
a) To pay or rebate any Bradley-Burns use tax revenue
relating to a use tax direct payment permit issued under
Revenue and Taxation Code (R&TC) Section 7051.3; and,
b) Entered into under R&TC Section 7056(b).
4)Requires any local agency entering into an agreement that
would reduce the Bradley-Burns revenues received by another
local agency to:
SB 533
Page C
a) Post the proposed agreement on its Internet Web site for
at least 30 days prior to the agreement's ratification or
approval; and,
b) Notify the other local agency by certified mail
addressed to the attention of the chief executive of that
other local agency at least 60 days prior to the
agreement's ratification or approval.
5)Requires a local agency to post on its Internet Web site any
agreement it has entered that reduces Bradley-Burns revenues
that, absent the agreement, would be received by another local
agency, including any agreements entered into before January
1, 2016, that are still in effect.
6)Provides that if the Commission on State Mandates determines
that this bill contains costs mandated by the state,
reimbursement to local agencies and school districts for those
costs shall be made pursuant to existing law.
EXISTING LAW:
1)Prohibits, under certain circumstances, a "local agency" from
entering into any agreement that would result in the payment,
transfer, diversion, or rebate of any tax revenue resulting
from the imposition of a SUT under Bradley-Burns to any person
for any purpose. (Government Code (GC) Section 53084.5(a).)
Specifically, this prohibition applies when both of the
following conditions arise:
a) The agreement reduces Bradley-Burns revenues received by
SB 533
Page D
another "local agency" from a "retailer" located within
that other "local agency". The prohibition, however, does
not apply to a reduction in use tax proceeds distributed to
that other "local agency" through one or more countywide
pools; and,
b) The "retailer" continues to maintain a "physical
presence" within the other "local agency". The
prohibition, however, does not apply if the "retailer" has
expanded its operations into another jurisdiction with the
result that the "retailer" is conducting a comparable
operation within both local agencies.
2)Defines a "local agency" as a chartered or general law city, a
chartered or general law county, or a city and county.
3)Defines a "retailer" by reference to R&TC Section 6015.
4)Defines "physical presence" as the lease or ownership of any
real property for the purpose of carrying on business
operations.
5)Specifies that this prohibition does not apply to any of the
following:
a) Local tax proceeds a local agency provides to a retailer
to reimburse the retailer for the construction of public
works improvements serving all or a portion of the local
agency;
b) An agreement to pay or rebate Bradley-Burns revenues
relating to a "buying company". A buying company, in turn,
SB 533
Page E
is defined as a legal entity that is separate from another
legal entity that owns, controls, or is otherwise related
to, the buying company and which has been created to
perform administrative functions, including acquiring goods
and services for the other entity, as defined by the State
Board of Equalization (BOE), and meets the requirements of
a buying company under R&TC Section 6066 et seq., and the
regulations adopted pursuant thereto; and,
c) Any agreement by a local agency to pay or rebate any
Bradley-Burns use tax revenue relating to a use tax direct
payment permit issued under R&TC Section 7051.3.
6)Specifies that this general prohibition shall not be
interpreted to limit a local agency's ability to enter into an
agreement under R&TC Section 7056(b).
FISCAL EFFECT: The BOE estimates that this bill would not
impact state revenues.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
SB 533 will prohibit a sales tax rebate when (1) the
agreement results in a loss of sales tax revenue in another
local agency and (2) the retailer maintains a physical
presence within the territory of the other local agency and
eliminates the exception for a retailer that "has expanded
its operations into another jurisdiction with the result
that the retailer is conducting a comparable operation
within the jurisdiction of both local agencies." This bill
SB 533
Page F
requires the local agency entering into such an agreement
to provide sixty (60) days prior notice to the local agency
that is going to lose sales tax revenue due to the
agreement and thirty (30) days prior notice to the public
prior to Council ratification of the agreement. These
changes make it more difficult to take the sales tax
revenue that helps finance local agency services from the
commercial activities that create demands upon them,
resulting in a fairer and more transparent sales tax
structure.
2)This bill is sponsored by the City of West Sacramento, which
notes the following:
As you know, local sales and property taxes are the primary
means through which local jurisdictions generate the
revenues they need to provide crucial services to the
residents and businesses that reside within their
boundaries. The geographic relationship between revenues
collected and services delivered is the basis of local
government accountability.
Unfortunately, some jurisdictions have sought to unravel
this fundamental relationship by laying claim to the sales
tax revenues generated by businesses operating in cities
hundreds of miles away. Frequently aided by consultants,
these jurisdictions have entered into deals whereby the
"new" city agrees to rebate a portion of a business' sales
tax if the business agrees to book its sales tax there,
even as the business continues to operate in the existing
location.
These deals can have devastating fiscal impacts on local
jurisdictions. For example, the City of West Sacramento
recently saw its sales tax revenue from a local business
SB 533
Page G
drop by over $1 million annually as a result of a deal
between that business and a distant jurisdiction, even
though the business continues to operate in West
Sacramento. That is fundamentally unfair.
Government Code Section 53084.5 attempts to limit such
abusive sales tax agreements. However, fiscally predatory
jurisdictions - and a growing cottage industry of
consultants dedicated to helping them - still seek
loopholes. SB 533 would remove the current exclusion for
businesses that have "expanded [their] operations into
another jurisdiction with the result that the retailer is
conducting a comparable operation within the jurisdiction
of both local agencies," an essentially meaningless
qualifier that mostly serves to facilitate the very types
of agreements the law is intended to preclude.
3)This bill is supported by the City of Cerritos, which notes
the following:
This legislation is needed to protect cities from the
potential loss of an important revenue source, particularly
one that is needed to provide public safety services and
infrastructure needs that are required to support retail
developments within their jurisdictions.
SB 533 will remove a number of exemptions and require more
public transparency for future agreements that result in
the loss of sales tax to local agencies who have supported
a healthy retail climate in their community.
4)The BOE notes the following in its staff analysis of this
bill:
SB 533
Page H
a) Effect of the bill : "This bill eliminates certain
exemptions from the prohibition in GC Section 53084.5.
Those exemptions are:
"A retailer that expands its operations into
another jurisdiction with the result that the retailer
is conducting a comparable operation within the
jurisdiction of both local agencies.
"Local tax proceeds provided by a local agency
to a retailer to reimburse the retailer for the
construction of public works improvements that serve
all or a portion of the territorial jurisdiction of
that local agency.
"An agreement involving reductions in local
use tax distributed through the countywide pool
process.
"An agreement to pay or rebate local tax
revenue relating to a buying company.
"The bill requires local agencies entering into agreements
involving reductions in local tax revenues that otherwise
would be received by another local agency to notify that
other local agency by certified mail at least 60 days prior
to ratification or approval of these proposed agreements.
The local agency must post these proposed agreements on its
Internet Web site for at least 30 days prior to their
ratification or approval. Additionally, the bill requires
local agencies to post on their Internet Web site any of
these agreements entered into prior to the effective date
of SB 533 that are still in effect."
SB 533
Page I
a) The bill does not impact the BOE's administration of the
local tax : "Once the BOE disburses funds to cities and
counties based on the Bradley-Burns laws and regulations,
the cities and counties then control how the money is spent
or allocated."
1)Committee Staff Comments
a) An overview of existing law : The BOE administers
Bradley-Burns, which authorizes counties to impose a local
SUT. The tax rate is fixed at 1% of the sales price of
tangible personal property sold at retail in the county, or
purchased outside the county for use within the county.
Current law authorizes cities to impose a local SUT rate of
up to 0.75%. The city SUT rate is "credited" against the
county rate so that the combined rate does not exceed 1%.
Of the 1%, cities and counties use 0.75% to support general
operations. The remaining 0.25% is designated by statute
for county transportation purposes and restricted to road
maintenance or the operation of transit systems. Counties
receive the 0.25% tax for transportation purposes
regardless of whether the sale occurs in a city or in the
unincorporated area of a county. In California, all cities
and counties impose Bradley-Burns local taxes at a total
uniform rate of 1%.
b) Place of sale - allocation of Bradley-Burns revenues :
R&TC Section 7205 specifies the "place of sale" for
purposes of the local sales tax as the place of business of
the retailer. If the retailer has only one place of
business in California, all California retail sales in
which that place of business participates occur at that
SB 533
Page J
place of business. The BOE allocates the local sales tax
to the city, county, or city and county in which that place
of business is located, even if title to the property
passes to the purchaser outside the jurisdiction in which
the retailer's business is located, or if the property is
never within the jurisdiction in which the retailer's
business is located.
If a retailer has more than one place of business in
California, the place of sale is determined in accordance
with BOE regulations. Specifically, SUT Regulation 1802
governs the "place of sale" for purposes of allocating
local tax revenues to local jurisdictions. Under
Regulation 1802, if a retailer has more than one place of
business in this state participating in the sale, then the
place of sale is where principal negotiations are
conducted.<1>
c) The existing statutory prohibition on certain
agreements : GC Section 53084.5 currently prohibits a local
agency from entering into an agreement resulting in the
payment, transfer, diversion, or rebate of any
Bradley-Burns proceeds, when both of the following
conditions apply:
i) The agreement results in reduced Bradley-Burns
proceeds received by another local agency from a retailer
that is located within that other local agency; and,
ii) The retailer continues to maintain a physical
-------------------------
<1>
Different rules apply for purposes of determining the place of
sale for jet fuel.
SB 533
Page K
presence within that other local agency.
Current law specifies that this prohibition does not apply
to certain agreements involving the following:
i) A retailer that expands its operations into another
jurisdiction with the result that the retailer is
conducting a comparable operation within the jurisdiction
of both local agencies;
ii) A reduction in the use tax proceeds that are
distributed to the other local agency through one or more
countywide pools;
iii) Any agreement to pay or rebate Bradley-Burns
revenues related to a buying company, as specified;
iv) Any agreement to pay or rebate any local use tax
revenue related to a use tax direct payment permit issued
under R&TC Section 7051.3; and,
v) Bradley-Burns revenues provided by a local agency to
a retailer if those proceeds are used to reimburse the
retailer for the construction of public works
improvements serving all or a portion of that local
agency.
d) What would this bill do ? This bill would repeal the
existing statutory prohibition on certain local agency
agreements contained in GC Section 53084.5, and add a new
GC Section 53084.5 applicable on and after January 1, 2016.
The new statutory provisions would prohibit a local agency
SB 533
Page L
from entering into an agreement that results in the
payment, transfer, diversion, or rebate of Bradley-Burns
revenues to any person when both of the following
conditions apply:
i) The agreement results in a reduction in
Bradley-Burns tax proceeds that, in the absence of the
agreement, would be received by another local agency;
and,
ii) The retailer continues to maintain a physical
presence within that other local agency.
The bill effectively eliminates nearly all of the
exceptions contained in the current version of GC Section
53084.5.
Moreover, this bill adds new public notification
requirements to increase governmental transparency and
accountability. Specifically, any local agency entering
into a permitted agreement reducing the amount of
Bradley-Burns revenues that would be received by another
local agency must do the following:
i) Post the proposed agreement on its Internet Web site
for at least 30 days prior to the agreement's
ratification or approval; and,
ii) Notify the other local agency by certified mail at
least 60 days prior to ratification or approval of that
agreement.
SB 533
Page M
e) What's the back story ? Recently, the Sacramento Bee
reported that in November 2014 the City of West Sacramento
found itself nearly $600,000 short in sales tax revenue it
had anticipated from HD Supply, a company that sells
hardware fixtures and home improvement products. The City
of West Sacramento responded by inquiring whether the
company had closed its distributing operations there; it
had not. Instead, the Florida-based company had
consolidated its point-of-sale operations in the City of
Santee so that all of its local sales taxes would be
assigned to that jurisdiction. In exchange, the City of
Santee reportedly agreed to provide HD Supply a 50% rebate
of the tax once revenue exceeds $500,000 annually. Thus,
the City of West Sacramento is sponsoring this bill to
prevent similar actions in the future and to prevent a
"race to the bottom" among municipalities competing for
revenues.
f) Double-referral : This bill was double referred to the
Assembly Committee on Local Government, which approved this
bill by a vote of 9 to 0 on July 1, 2015. For additional
discussion of this bill, please refer to that committee's
analysis.
REGISTERED SUPPORT / OPPOSITION:
Support
City of West Sacramento
City of Cerritos
SB 533
Page N
League of California Cities
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098