ANAHEIM : City to Ponder Hefty Refund of Sales Taxes

The city might have to refund $1 million or more to various defense contractors because of a state Supreme Court ruling that the firms are exempt from paying sales taxes on supplies, according to a report the City Council will review tonight.

Kenneth H. Stone, the city’s program development and audit manager, said that while parts such as computers or screws actually used in weapons systems have always been exempt from sales taxes, the court ruled two years ago that indirect supplies are also exempt.

“That means things such as paper clips, floor cleaner and computer paper are also exempt,” Stone said.

Anaheim could be the home to scores of companies that have sold such supplies to defense firms, he noted.

“Rockwell had a plant (in Anaheim). Hughes has one in Fullerton right next door. Odetics is located here. I’m sure they all bought supplies here, as did others (defense contractors). The city could be in for a major hit.”

Stone said the state is currently auditing the books of suppliers who have filed claims asking for refunds.

Any refunds granted will be deducted from future state funding the city would be entitled to receive.

Sales taxes collected as long as eight years ago could be refunded, he said.

The audit of one large firm, Lockheed, has already been completed, and Anaheim was found to owe it $43,000.

Stone said the city is putting together its budget for the next fiscal year, which begins July 1, and will assume that some funding will be cut.

He could not specify what, if any, city programs might suffer cuts.

The city trimmed $10 million from its budget last year because of declining sales tax revenue.

In Orange County, the sales tax rate is 7.75%. The state receives 6.25%, the county 0.5% for transportation, and the city where the purchase is made gets 1%.

For example, if a defense contractor bought $1,000 worth of computer paper from an Anaheim supply house, the state would receive sales tax revenue of $62.50, the county $5 and the city $10. It is that $10 that the city would have to refund.

More than 60 other cities across the state could also have to make refunds, as could various counties and the state itself, according to one city report.

The total bill to all government entities could be as much as $800 million, according to some analysts.