BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Patricia Wiggins, Chair
BILL NO: SB 27 HEARING: 3/4/09
AUTHOR: Hancock FISCAL: No
VERSION: 2/23/09 CONSULTANT:
Weinberger
LOCAL SALES TAX REVENUES (URGENCY)
Background and Existing Law
The Bradley-Burns Local Sales and Use Tax Law authorizes
counties to impose a 1% tax on the sales price of tangible
personal property sold at retail in the county, or
purchased outside the county for use in the county. Cities
can impose a 0.75% sales and use tax which is credited
against the county's tax. The remainder of the county rate
(0.25%) is earmarked for county transportation purposes.
Except for sales of jet fuel, Bradley-Burns sales taxes
must be allocated, on a "situs" basis, to the place of
business of the retailer. Generally, this is the place
where the transaction occurs. However, if a seller has
more than one place of business and the sales and delivery
of a product occur at separate locations, State Board of
Equalization (BOE) regulations require that the sales be
allocated to the site of the principal sales negotiations.
This is usually the company's sales office.
The situs-based system for allocating sales tax revenues
leads to competition among cities and counties to attract
land uses that generate local revenues and shun land uses
that need expensive public services. This "fiscalization
of land use" distorts local land use decisions by
emphasizing tax revenues, but discounting traffic, air
quality, open space, and affordable housing.
Some large retailers take advantage of the fiscalization of
land use to play one community against others. They ask
local officials to give them subsidies so they can
relocate, moving their sales tax revenues from a "sending"
community to a "receiving" community. The receiving
community gets new revenue, but spends some of it on the
retailer; the subsidy to the retailer lowers its costs; and
the sending community suffers the revenue loss.
SB 27 -- 2/23/09 -- Page 2
Local agencies can't give financial assistance to a big box
retailer or vehicle dealership that relocates from another
local agency within the same market area (SB 114,
Torlakson, 2003). However, local officials continue to
engage in other forms of competition involving sales taxes.
For example, a county or city can offer a sales tax rebate
to a business to consolidate all of its California sales
offices into that county or city. The cities of Livermore,
Industry, and San Diego are losing millions of dollars in
Bradley-Burns sales tax revenues because a major retailer
in those cities consolidated its sales activities into the
City of Fillmore. Under an agreement between the City of
Fillmore and a private consulting firm, the firm receives
85% of the Bradley-Burns revenues that are attributable to
a retailer that works with the firm to relocate sales
offices into Fillmore. In turn, the majority of the 85%
gets rebated to the relocated retailer.
Livermore and Industry city officials want the Legislature
to prohibit counties or cities from entering into similar
Bradley-Burns sales tax rebate agreements that draw sales
tax revenues away from other communities.
Proposed Law
Senate Bill 27 prohibits a city, county, or city and
county, on or after the bill's effective date, from
entering into any form of agreement or taking any action
that would result, directly or indirectly, in the payment,
transfer, diversion or rebate of any amount of
Bradley-Burns local tax proceeds to any person for any
purpose when:
The agreement results in a substantial reduction in
the amount of Bradley-Burns tax proceeds received by
another local agency from a retailer within that other
local agency; and ,
The retailer continues to maintain a physical
presence and location within that other local agency.
SB 27 also specifies that its provisions do not apply to:
A reduction in use tax proceeds that are
distributed to a local agency through one or more
countywide pools.
A retailer that expands its operations into another
SB 27 -- 2/23/09 -- Page 3
jurisdiction with the result that the retailer is
conducting a comparable operation in both local
agencies.
Bradley-Burns local tax proceeds provided by a
local agency to a retailer if those proceeds are used
to reimburse the retailer for the construction of
public works improvements that serve all or a portion
of the territorial jurisdiction of the local agency.
Any agreement to pay or rebate Bradley-Burns local
tax revenue relating to a "buying company," as defined
in specified statutes and regulations.
Any agreement to pay or rebate Bradley-Burns local
use tax revenue relating to a use tax direct payment
permit.
The bill contains legislative findings and declarations.
Comments
1. Righting a wrong . A scheme in which a retailer
consolidates its sales offices into a shell location in one
city just to divert another city's local sales tax revenues
is simply wrong. SB 27 imposes a narrowly-tailored
prohibition on the use of Bradley-Burns tax rebates. The
bill allows Bradley-Burns rebates in the case of a
legitimate business expansion into a new community, and to
help pay for the costs of beneficial infrastructure, while
preventing the kind of relocation scheme that victimized
Livermore, Industry, and San Diego.
2. Treating the symptom, not the disease . Sales office
consolidation schemes are a manifestation of the aggressive
competition for sales tax dollars that local officials
engage in as a result of the situs-based sales tax
allocation system. The Legislative Analyst's Office
recently suggested replacing situs-based allocation with a
population based allocation system to reduce incentives for
local governments to use their economic development powers
to promote retail developments. The LAO also suggested
that replacing local government sales tax revenues with a
different tax base could achieve similar results. The
Committee may wish to consider whether, by leaving the
situs-based sales tax allocation system for local
governments unchanged, SB 27 adequately addresses the
SB 27 -- 2/23/09 -- Page 4
underlying problems associated with the fiscalization of
land use.
3. Leaving symptoms untreated . The sales office
consolidation schemes prohibited by SB 27 are just one of
the many undesirable consequences of local competition for
sales tax dollars. If local sales taxes continue to be
allocated on a situs basis, legislators should not be
surprised to see other types of schemes to redirect
Bradley-Burns revenues come to light in the future. The
Committee may wish to consider whether, by narrowly
prohibiting only one type of sales tax diversion scheme,
and broadly excluding many types of local tax rebate
agreements, SB 27 invites further misuse of Bradley-Burns
tax rebates, which will require additional legislative
remedies.
4. Try again . SB 27 is nearly identical to AB 697
(Hancock, 2008), which Governor Schwarzenegger vetoed,
saying that the bill was not a high priority.
5. Urgency clause . Regular legislation takes effect on
the January 1 following its passage, but urgency bills take
effect as soon as they're passed, signed, and chaptered.
The California Constitution allows urgency statutes that
are "necessary for immediate preservation of the public
peace, health, or safety." SB 27 contains an urgency
clause explaining the need for the bill to take effect
immediately.
Support and Opposition (2/26/09)
Support : Cities of Livermore and Industry, California
State Association of Counties, League of California Cities,
American Federation of State, County, and Municipal
Employees, California Narcotics Officers Association,
California Peace Officers Association, California Police
Chiefs Association, California Professional Firefighters,
Livermore-Pleasanton Firefighters Local 1974, Livermore
Police Officers Association.
Opposition : Unknown.