PATTERSON, Calif. —Amazon.com Inc.for years has fought government efforts to tax e-commerce. Now it’s poised to pocket millions of dollars in sales taxes paid by California customers.
As part of a pact reached last year with state lawmakers, some online retailers agreed to begin collecting sales taxes this fall. About half of the projected $316 million raised in the first full year is expected to come from merchandise sold by Amazon, which is also setting up two California fulfillment centers that will employ at least 1,000 workers each.
San Bernardino and Patterson, where the centers will be located, will gain not only jobs but also a tax bonanza: Sales to Amazon customers throughout California will be deemed to take place there, so all the sales tax earmarked for local government operations will go to those two cities. It’s a windfall so lucrative — about $8 million a year initially for each city — that local officials are preparing to give Amazon the lion’s share of their take as a reward for setting up shop there.
Talks with Amazon about a so-called sales-tax rebate are still in the early stages. But in Patterson, a struggling Central California community of 21,000, Mayor Luis I. Molina said he’s ready to do what it takes to help his city.
“This is huge. This is monumental, not only for the city but for the county and the region,” he said. “We’re up to 20% unemployment, and this is going to make a dent.”
But critics worry that any deal would embolden other retailers to demand similar concessions at a time when California cities are scrambling to plug budget holes. Particularly grating, some said, is the idea that Amazon — whose business model long was based on selling merchandise without collecting taxes — could now profit from those levies.
“The tax is supposed to be supporting government,” said Lenny Goldberg, executive director of the California Tax Reform Assn. “Instead, it’s going back into Amazon’s pocket.”
Amazon did not respond to repeated requests for comment.
The potential pact is already attracting the attention of some California legislators seeking to ban so-called sales-tax rebates. Once used to attract sizable retailers such as car dealerships, these incentives are mushrooming as cash-strapped communities compete with one another to land big sales-tax generators.
That arms race is cheating taxpayers, who want their money spent on parks, police and street repairs, said Sen. Mark DeSaulnier (D-Concord), who is considering introducing a bill this session to address the issue.
“It seems like the private sector finds a way to pit one city against the other,” said DeSaulnier, a former city councilman and mayor. “You can’t give away sales tax in this manner.”
The proposed rebates are just the latest dust-up involving Amazon and sales taxes.
The company for years took advantage of aU.S. Supreme Courtdecision that exempted it from collecting sales taxes on most online purchases in states where it had no stores or warehouses. That enabled Amazon to undercut prices charged by its bricks-and-mortar competitors, such asWal-Mart Stores Inc.andTarget Corp.
Pressure from traditional merchants, combined with state budget woes, prompted California and other states to pass legislation requiring online sellers to begin collecting the levies from their customers.
Amazon last year launched a costly campaign to try to overturn California’s 2011 law with a ballot measure. The company backed off after the state agreed to delay implementing the measure until Sept. 15 of this year.
In California, about one-tenth of the statewide standard sales-tax rate of 7.25% goes to the city or jurisdiction where the retailer operates, with the rest going to the state and county. Amazon currently has no physical warehouse operations in California. So initially, all of the state’s cities will split those taxes, based on their residents’ share of Amazon purchases.
That will change next year, however, when the million-square-foot fulfillment centers open in Patterson and San Bernardino. California law allows some merchants to designate a legal “point of sale,” permitting them to direct 100% of the city share of sales taxes to a specific community where they have a physical presence.
This gives online retailers such as Amazon tremendous leverage to negotiate sales-tax rebates from cities that want one of their facilities.
“The incentive to compete and to steal tax dollars from other jurisdictions is really, really high,” said Geoffrey Propheter, a research assistant atGeorge Washington University’sInstitute of Public Policy who studies municipal government finance.
For Patterson, dubbed the Apricot Capital of the World and located just off Interstate 5 in Stanislaus County, the projected bonanza is nearly as big as its entire general fund.
City Manager Rod Butler said the city is considering rebating as much as 75% of its share of sales-tax revenues to Amazon. He reasons that even a reduced share of those taxes would enable the city to balance its budget and pay for city parks, streets and garbage collection.
Patterson “is not ashamed about taking advantage” of any legal tools available for economic development, he said, in part because rival communities are doing the same thing. In December, the nearby city of Tracy expanded its existing sales-tax-sharing plan to include e-commerce warehouse and shipping facilities in hopes of attracting Amazon.
San Bernardino, meanwhile, is working on an agreement with Amazon that would give the retailer as much as 80% of its share of sales taxes in the first few years, according to city spokesman Jim Morris. Two years ago the city inked a similar deal for Internet sales with department store chainKohl’s Corp.that gradually reduces the retailer’s cut to 20%.
“We’ve discussed with Amazon the possibility of some sort of sales-tax agreement,” Morris said.
Sales-tax rebates are so lucrative that economic development consultants are urging their corporate clients to demand them. California’s “point of sale” policy helps merchants pit revenue-hungry cities against one another for the best deal, said Susan Russell, a North Barrington, Ill., tax and economic development consultant.
“This gives the state a unique opportunity to attract business, especially from Internet companies,” she said, calling such tax-sharing agreements “a win-win for everybody.”
But California communities shut out of the sales-tax windfall are starting to wake up to this inequity as Internet commerce explodes, said Dan Carrigg, legislative director of the League of California Cities.
“We know that there’s a lot of sales volume that takes place on sites like Amazon. The purchasers that use that website are dispersed all over the state,” he said. “I think there would be concern among the cities of California if that [sales-tax] revenue they thought they would capture was not going to become available.”
Cities are already fighting in court for their share in such cases. San Diego, Palo Alto, Livermore and Industry will soon be splitting $12.4 million in sales taxes they said were siphoned illegally by the city of Fillmore. In proceedings before the state Board of Equalization, they accused medical-equipment giant Owens & Minor of setting up a “sham office” in Fillmore that routed local sales taxes to that city even though the company’s California distribution centers were in their cities. Fillmore rebated much of those funds to Owens & Minor and a broker who set up the 2007 deal. An appeals court last year ruled in favor of the plaintiffs.
“Sales-tax dollars generated locally are supposed to be used for local services,” Livermore Mayor Marshall Kamena said in a statement.
In the meantime, the giveaways continue. The Bay Area city of Martinez this month approved a sales-tax-sharing agreement with S&S Supplies and Solutions, a seller of industrial supplies. Under that deal, the city will give up 80% of sales taxes generated by future growth in company sales. That works out to about $800,000 annually by 2015 if S&S sales hit company targets.
City Manager Philip Vince said he recommended that pact, but only because he feared that the company would relocate. “It’s kind of the worst nightmare,” Vince said. “We’d like to have the growth and the full sales tax.”