O.C. Cities Stand to Lose $33 Million in Sales Tax : Economy: The U.S. government is pushing to regain billions in state sales taxes paid by defense contractors.

Racing to fend off yet another raid on city coffers, Orange County mayors are asking the Bush Administration to stop forcing their cities to refund as much as $33 million in sale taxes paid by defense contractors over the past several years.

The federal government had reimbursed the contractors for the taxes, but U.S. officials now want that money back, because a judge ruled in 1990 that materials used by a company under government contract for an aerospace project are tax-exempt.

To refund the money now, city officials say, would be disastrous considering the sorry state of municipal finances.

“This is an economic hurricane,” said William E. Hodge, executive director of the League of California Cities, Orange County Division.

League members in Orange County last week adopted a resolution urging local officials to “take all appropriate actions” to stop the payments. The mayors of Santa Ana and Newport Beach launched a letter-writing campaign targeting the White House and other officials.

Already reeling from the Legislature’s decision to divert a substantial amount of revenues from cities to the state’s general fund, the mayors argue that they need the sales tax money worse than the federal Treasury needs it.

“We don’t need another hit,” said Santa Ana Mayor Daniel H. Young. “We just finished the budget rape of 1992, in which (the city) lost $6.5 million to the state.”

Aerospace firms doing business in Orange County have already filed refund claims totaling $16.7 million. The state expects to face total refunds of from $1 billion to $2 billion.

Local governments only have to pay about one-sixth of that amount, because roughly 83% of all sales taxes paid in California go into state coffers. The rest is divided by all cities in the state, and about 10% of that amount filters down to Orange County municipalities, officials estimate. So, Orange County would stand to lose only about $33 million on a $2-billion pay-back. The figure could be more because Orange County has a greater concentration of aerospace contracts than other counties.

As of May 28, the last date for which figures are available, defense firms have filed claims of $10 million in Newport Beach, $2.8 million in Irvine, and $1.3 million in Santa Ana.

State Board of Equalization officials on Friday declined to provide an updated list. “The claims are considered confidential,” said spokeswoman Delena Bratton. “It’s designed to protect the businesses involved.”

The sales taxes were paid by defense contractors when they purchased items such as desks, computer paper and paper clips from local suppliers. The taxes were passed along to the U.S. government as part of the cost of performing work under federal contracts.

The federal government won the right to the sales tax refunds in an obscure, 1990 state appellate court ruling. Lawyers for the Office of Management and Budgets successfully argued that since tanks and missiles are provided to the government tax-free, the supplies used in such contracts should be tax-free as well. Companies had been passing the cost of such sales taxes on to the federal government, which is now seeking the refunds.

Cities knew of the ruling, but the Board of Equalization only recently began withholding current sales tax revenues from cities in order to pay individual claims.

In April, Anaheim was forced to forgo $43,000 in sales taxes charged to Lockheed Aircraft Co., a major defense firm that has relocated out of the city.

Sales tax revenue amounts to a huge chunk of each city’s general fund--about 25% in Fullerton, for example.

Complicating the revenue issue is a lawsuit filed by the federal government that seeks to double the statute of limitations for recovery of refunds to the federal government’s six-year limit instead of the state’s three-year period.

The State Board of Equalization is processing individual claims, such as the $10 million refund sought by the former Newport Beach-based Ford Aerospace. (The firm has since been sold to another company.) That claim is the largest request from an Orange County firm so far.

Kenneth J. Delino, assistant to the Newport Beach city manager, says his city will lose about $500,000 from the Ford Aerospace claim alone. “We just had to lay off 12 part-time employees, and cut the hours of seven others,” Delino explains. “This amount of money would allow us to reinstate all of them.”

In a Sept. 11 letter to U.S. Sen. John Seymour (R-Calif.), Newport Beach Mayor Phil Sansone asked the GOP lawmaker to “renew” his efforts with the executive branch to “seek a waiver of this refund. . . . The aerospace refund creates a double blow to our withering budgets.”

Seymour met with federal officials in Washington in June, and got assurances that a deal could be worked out, Seymour aide H. D. Palmer said Friday. California, he said, hopes to limit claims to the three-year state statute of limitations and pay refunds over a 10-year period, which would greatly alleviate the financial blow to cities.

Newport Beach officials believe that the federal government can simply decide to waive its right to the refunds and halt the lawsuit that would double the amounts owed. Cities in Colorado don’t have to pay the refunds because state courts there ruled against the refunds. So far, federal officials have not taken the case to U.S. courts.

Staffers at the U.S. Office of Management and Budget, which is pursuing the refunds, were unavailable for comment late Friday.