Bloomberg Tax correspondent Laura Mahoney reveals new details about San Jose's fight to keep eBay tax sharing deal and how eBay could potentially be required to pay back ~$27 Million received from the agreement so far.
The city of San Jose is locked in a dispute with California’s tax department over about $100 million in sales tax revenue it has received from hometown company eBay Inc. since 2020, a city spokesperson confirmed.
The spokesperson said San Jose is appealing a determination from the California Department of Tax and Fee Administration that some portion of the revenue it’s received through a tax-sharing agreement with the auction and shopping website was improper—an argument similar to an ongoing fight between the tax department and nearby Cupertino over that city’s deal with Apple Inc.
At issue is eBay’s designation of all sales in California as taking place in San Jose, giving the city a 1 percentage point increment of the sales tax consumers pay. The city gives about a quarter of the proceeds to eBay...
...It is unclear how much of San Jose’s revenue could be shifted elsewhere, but it would be some portion of the $97.2 million the city received from eBay’s sales since the tax-sharing agreement took effect in 2020.
Under state law, the tax department can reach back as far as two quarters before it “obtained knowledge of the improper distribution.” EBay could be required to give back all of the money it’s received from San Jose, based on terms of the agreement,
According to the agreement, San Jose keeps the first $5 million it gets from eBay annually, then pays eBay 30% of additional proceeds. According to records the city provided to Bloomberg Tax in June, San Jose has paid eBay $26.4 million of the $97.2 million it’s received through sales to Californians on eBay’s platform through October 2022. A request under the California Public Records Act for more recent payment information is pending.
The tax department’s disputes with San Jose, Cupertino, and other cities with similar revenue-sharing deals hinge on a clash between the retailers’ assignment of sales to those cities and the department’s position that the location of the transaction depends on human participation.
The department’s regulations and guidance state that the storage location where an item is picked, packed, and shipped is often the only place of business that participates in an internet transaction. The location of automated online processes like servers and website hosting don’t count as participation.
Lucrative tax sharing deals in California are receiving new scrutiny as the League of California Cities pushes for fairer tax distribution and lawmakers push back.
Laura Mahoney of Bloomberg Tax reports:
Millions of dollars in sales tax revenue that the city of Cupertino shares with hometown company Apple Inc. would be protected until 2035 under legislation a group of lawmakers is asking California Gov. Gavin Newsom to pursue.
Six lawmakers representing Santa Clara County asked the Democratic governor for a bill blocking redistribution of the tax revenue in question away from cities in the county, or the county as a whole, according to a copy of their Aug. 18 letter to Newsom obtained by Bloomberg Tax.
The proposed bill would shield Cupertino from a 73% drop in annual sales tax revenue resulting from the California Department of Tax and Fee Administration’s examination of a tax-sharing agreement the city has with Apple.
It would also cover a similar arrangement between San Jose and eBay Inc., preempting the department’s actions and carving out an exception for Santa Clara cities that wouldn’t extend to the handful of other cities and counties where similar deals exist.
When eBay struck their tax sharing deal with San Jose in 2019, it was estimated the deal could be worth $5 Million - $29.5 Million annually for San Jose and $150 Million over the course of the 15 year agreement for eBay.
Bloomberg says according to city records, eBay has received $26.4 Million from the deal so far.
In San Jose’s case, the city keeps the first $5 million it gets from eBay online sales tax annually, then pays eBay 30% of additional proceeds. Since the deal was cut in 2019, San Jose has paid eBay $26.4 million of the $97.2 million it’s received through sales to Californians on eBay’s platform, according to city records.
The League of California Cities has long opposed these types of tax sharing deals, saying they lead to "tremendous inequity" as wealthy Silicon Valley localities receive tax revenue that should be going to other areas of the state.
The League of California Cities doesn’t have a position on the letter’s proposal, lobbyist Ben Triffo said. League members reached agreement in July to seek legislation in 2024 to limit future tax-sharing agreements between cities and retailers.
Under state law and the department’s rules, a retailer’s involvement determines where a transaction takes place. That jurisdiction gets a 1 percentage point increment of the total sales tax customers pay. Cupertino, San Jose, and several other cities around the state have leveraged those rules to make deals with retailers to share revenue.
The tax department’s requirements aren’t new, spokesperson Tamma Adamek said. Longstanding regulations and guidance state that the storage location where an item is picked, packed, and shipped is often the only place of business that participates in an internet transaction. Activities related to automated online processes don’t constitute the retailer’s participation and the location of a server where the website is hosted or maintained is also immaterial, according to the department’s rules.
The department has been taking a closer look at sales tax allocations involving several cities that have tax sharing agreements with retailers following stories by Bloomberg Tax on Cupertino’s Apple deal, as well as similar agreements in a handful of other cities with Best Buy Co. Inc., Walmart Inc., Home Depot Inc., Nike Inc., and others.
The letter from the Santa Clara delegation is seeking Governor Newsom's support for amendments that would block efforts to redistribute the tax revenue by allowing exemptions for existing tax sharing deals.
In the letter, lawmakers are asking Newsom to support amendments to the Revenue and Taxation Code blocking the tax department from redistributing revenue away from cities within Santa Clara County, or the county itself, if a retailer remitted the money to them before Jan. 1, 2035. The prohibition would apply to revenue from retailers that remit at least $3.5 million to the cities or county per quarter.
The proposal includes “marketplace facilitators"—online platforms that sell items on behalf of third-party sellers. San Jose has netted between $8.2 million and $11.5 million per quarter from eBay, according to information the city provided to Bloomberg News.
The fate of eBay's tax sharing deal likely will not immediately impact sellers, as regardless of where the tax revenue is being paid to, they will still be charged selling and advertising fees on the total including the sales tax.
However, if eBay does lose this tax windfall, sellers may be concerned they could be negatively impacted in more indirect ways if fees or other costs for selling on the platform increase incrementally to make up for those losses.