A tax agreement between Apple and its hometown of Cupertino, California, has come under scrutiny from state regulators, potentially slashing the amount of money that the company sends to the city, reports Bloomberg (a subscription is required to read the article).
The California Department of Tax and Fee Administration launched an audit of the arrangement in 2021, and Cupertino’s finance director is scheduled to explain the findings to the city council on Thursday. The result may be that local tax revenues will fall 73% this year.
From the Bloomberg report: Although Apple isn’t named in the city staff report, the company is Cupertino’s largest source of sales tax revenue. According to the audit, revenue will drop to $11.4 million in the current fiscal year from $42.1 million, and Cupertino may be required to return money to the state that it has received in previous years.
The audit focused on how Apple treats online sales. Apple’s arrangement with Cupertino is such that the company “treats all online purchases of products in the state of California as if they were made in Cupertino.” This means that, under California law, “1 percentage point” of the 7.25% sales tax is earmarked for Cupertino.
From there, the city passes 35% of its total back to Apple:
Apple treats all online purchases of products in the state of California as if they were made in Cupertino, setting aside the 1 percentage point local portion of the 7.25% state sales tax for its hometown. The arrangement applies to Apple’s online sales to consumers in the state, as well as transactions with other businesses in California, sales at its two retail stores in Cupertino, and use tax on the company’s own equipment purchases, city officials have said.
The company remits all sales tax it receives to the state tax department, which then allocates the local portion to Cupertino. The city passes on 35% of its total to Apple.
It was reported in 2019 that Cupertino had given almost $70 million in sales-tax collections back to Apple over the past 20 years, with the amounts sharply increasing in recent years, public records show. Per Bloomberg Tax, the payments have been made under a little-known tax incentive deal struck in 1997, when Apple was on the brink of bankruptcy, “and that’s likely to endure until at least 2033.”
Also in 2019, The Mercury News reported that Apple was offering to spend $9.7 million on five bike and pedestrian-oriented transportation projects for the city of Cupertino, a proposal by the company after the city council agreed to put off changes to the business license tax that would have cost Apple $9 million a year.
At that time, the tech giant approached the city after a proposal last year to change the city’s business license tax from a flat fee with a progressive rate based on total square footage, to a tax based on the number of people a business employs. According to The Mercury News, the change would have generated $10 million in annual revenue, most which would have come from Apple, the city’s largest employer with 24,000 workers.
