Amazon may see sales tax windfall from California warehouses

The Sacramento BeeJune 11, 2012 

— Amazon looks for sales-tax windfall from warehouses in 2 California cities dkasler@sacbee.com Published Sunday, Jun. 10, 2012

After years of wrestling with state officials about Internet taxation, Amazon.com finally agreed last fall to begin collecting sales tax from its California customers.

But some of that tax revenue, perhaps millions of dollars a year, could wind up back in Amazon's pocket.

The potential windfall stems from Amazon's decision to build distribution centers in Patterson and San Bernardino. Amazon appears to be angling to grab a portion of the sales tax revenue that will flow to the two cities because of the warehouses.

The company's stance irks some lawmakers and public-policy experts, who say cash-strapped cities shouldn't be coughing up tax dollars to curry favor with big employers.

"Cities are induced to do a number of things – they end up competing against one another for sales-tax generators and employers," said state Sen. Mark DeSaulnier, D-Concord. He's considering introducing a bill next year that would limit – or ban altogether – how much cities can share sales tax dollars.

Others say tax-sharing is a legitimate means of luring new business, particularly after the Legislature did away with redevelopment incentives last year.

"We've been stripped of all real opportunities to do anything to make the regional economy more advantageous," said Jim Morris, chief of staff to San Bernardino Mayor Patrick Morris. "We don't have any real tools."

For now, officials with both cities say they aren't actively negotiating with Amazon about sharing sales tax.

They also say they're confident the warehouses will open, whether or not a deal is struck on sales tax. Nevertheless, they say they're willing to discuss the tax-sharing idea with the company.

"We're very much open to it," said Rod Butler, city manager of Patterson. He said Patterson might share up to 75 percent of its sales tax windfall with the company.

Here's why: At stake is an estimated $20 million a year in "local" sales tax revenue – the 1 percent of the 7.25 percent state rate that goes back to local jurisdictions.

Butler said he was told Amazon has the right to choose where that money goes – to either Patterson or San Bernardino. Because of that, both cities want to stay on Amazon's good side.

But the state Board of Equalization, which administers sales tax collections, said Amazon doesn't have that flexibility. Instead, the tax revenue will be divided according to how many goods are shipped to Californians from each warehouse, the agency said.

The Bee was unable to reach Amazon officials for comment. Previously, the company issued a statement to the San Bernardino County Sun saying, "We are evaluating various incentives routinely provided to other retailers but have made no decisions."

Officials in both cities are thrilled to have Amazon coming to town. The Patterson warehouse is expected to create at least 1,000 jobs in western Stanislaus County, a county with 16.4 percent unemployment.

The city would still get "a huge boost to our sales tax base," even if much is shared with Amazon, Butler said.

Morris said Amazon didn't make tax sharing a prerequisite for putting the warehouse in San Bernardino. "They didn't say to us, 'Hey, this is a beauty contest, what's the sweetest deal you can give us?' " Morris recalled.

But the company did ask several months ago, before the warehouse was announced, if the city had tax-sharing agreements with other companies.

Morris, who is the mayor's son, said San Bernardino has one such agreement – with Kohl's.

The retailer opened a warehouse in his city two years ago to support its Internet sales. The city gives Kohl's 80 percent of the local sales tax generated by the warehouse, although the percentage declines over time.

Morris said the deal has worked out well for the city.

"Bottom line, it's of benefit for our people in a tight unemployment time," he said. As for the sales tax, he said "anything above zero is more than we would have gotten" if Kohl's hadn't come.

George Runner, a member of the Board of Equalization, said there's nothing wrong with Amazon taking a slice of the tax money it generates. "What Amazon is trying to do is no different from what many companies do," he said.

California has long wanted to tax e-commerce. Amazon has made strenuous efforts to keep the taxman at bay. The tax question is why Amazon made its headquarters in Seattle instead of the Bay Area – the place it really preferred.

A long-standing U.S. Supreme Court decision said out-of-state companies couldn't be forced to collect sales tax unless they had a physical presence in the state. By not putting its headquarters in the Bay Area, Amazon avoided having to collect taxes on sales made in its most populous market.

The California Legislature came up with a plan to get around that Supreme Court case and voted twice to tax e-commerce sales. The bills were vetoed by former Govs. Gray Davis and Arnold Schwarzenegger.

The Legislature voted for a tax a third time last summer. Gov. Jerry Brown signed it.

Amazon immediately fired back. It launched a referendum drive to overturn the new law, setting the stage for an expensive ballot fight. It also fired its 10,000 California "affiliates" – nonprofits and small businesses that earn commissions by funneling customers to Amazon from their websites.

A truce was reached last fall. Brown signed a compromise bill under which Amazon would start collecting taxes in September. The company also promised to build warehouses in California, although that wasn't part of the legislation.

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