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