California Governor Vetoes Ban Against Tax Sharing Agreements and Signs New Law Requiring Certain Public Information for Disclosure

Ab8oGgo5_400x400-300x300There were two competing bills regarding tax sharing agreements (TSAs) this legislative session: SB 531 and SB 485. The former would have barred all TSAs at the local level as of January 1, 2020. The latter would not bar TSAs but instead would require the locality to report certain information pertaining to the agreement that would be made publicly available. On October 12, 2019, Gov. Gavin Newsom vetoed the bill that would have barred TSAs altogether and instead signed the other bill that requires publicly reporting certain information pertaining to the TSAs.

For those unfamiliar with why this is an issue in California, here is the background.

For sales and use tax purposes, sales are generally governed by the destination rule. For example, I buy dog food from an online retailer that is located outside California. Regardless of whether the sales or use tax is applicable, the retailer is required to collect and remit the tax to California because the destination of the sale is California (i.e., my house). If the online retailer has no presence in California, typically the sale would be a use tax transaction and the local portion of the use tax would be allocated to El Dorado County, where my home is located. Again, destination sourcing.

Now let’s assume the online retailer from which I purchased the dog food has distribution centers (DCs) in California. Let’s further assume the sale was fulfilled, negotiated or otherwise handled by the retailer’s DC located in Sacramento County and that those services made my purchase a sales tax transaction. Now, instead of the local portion of the tax being allocated to El Dorado County, it’s sourced to Sacramento County. This is because California local law (Bradley-Burns Uniform Sales and Use Tax Law) requires that the local portion of the sales tax be allocated to where the retailer’s local place of business processed, fulfilled or otherwise participated in the sale.

One more assumption: there is a TSA between Sacramento County and the online retailer that states the local sales tax will be split equally between the county and the retailer. The county offered this as an incentive for the online retailer to locate its DC within the county’s jurisdiction.

So, not only does the destination county not receive the local tax portion to use for services it provides in my county, but the retailer receives half the local tax, leaving only half the local tax to be used for local services provided by Sacramento County.

Herein lies the issues related to the local TSA bills that have been in debate since early 2019.

Proponents of eliminating TSAs, or limiting their use in some manner, argue the localities should not be able to enter into the tax agreements at all, allowing retailers to locate their DC in the locality they believe is the best fit based on business needs. Proponents further argue that TSAs are often ineffective in bringing to fruition the promises by the retailer that more and/or higher paying jobs will be brought to the jurisdiction (among other promises encompassed in such agreements).

Opponents argue TSAs are an essential tool for smaller and inland counties and other localities to attract retailers to their jurisdiction. These jurisdictions often have the highest unemployment rates and local revenue-generating issues.

The governor sided with the opponents by vetoing the bill that would have banned TSAs prospectively and instead signing the bill that puts in place stricter public reporting requirements.