California sales tax kickback schemes should be banned

Starting today, the city of San Jose will begin collecting a windfall of unanticipated sales tax revenues from eBay.

But, as part of a deal struck last month to cut other California cities out of the sales tax action, San Jose will kick back part of the revenues to the online marketplace company.

The deal is legally questionable under California’s arcane sales tax laws because it’s not clear that eBay’s offices in San Jose are the legitimate point of sale. A bill by state Sen. Steve Glazer, DOrinda, that’s currently sitting on Gov. Gavin Newsom’s desk would explicitly block such kickbacks in the future.

Newsom should sign Senate Bill 531. And then lawmakers should take the next step: Placing a constitutional amendment on the statewide ballot requiring equitable distribution across California of all sales tax revenue.

At issue is the 1% portion of the 7.25% statewide sales tax, the portion that is redistributed back to local governments. It’s unlike other local sales taxes approved by voters, which are generally distributed back to the government in the buyer’s location.

In the days of brick-andmortar stores, the distribution of the 1% wasn’t a significant issue. The buyer and the seller were usually in the same location. Sure, there were mail order businesses, but never of the scale of the internet today.

However, rapidly growing e-commerce and court rulings have forced a rewriting of the rules. As a result, the 1% portion of sales taxes on internet transactions from California companies is usually allocated to the city from which the firm sells its product.

For years now, companies have been cutting deals with individual cities, agreeing to designate the cities as the tax beneficiaries in exchange for a kickback of a portion of the tax money.

In some cases, the cities got something in return, often a warehouse distribution center that provides jobs. Some studies have questioned the value of those deals, whether the benefits to the communities offset the lost tax revenues.

But that’s not the case with San Jose’s eBay deal, which has nothing to do with economic development. Moreover, in most cases, neither the seller nor the buyer is in San Jose. EBay merely acts as an intermediary.

San Jose’s deal with eBay is an attempt to protect the city’s revenue spoils, money the city had not anticipated receiving when it put together its current fiscal-year budget. Under a new state law, “marketplace” companies like eBay, which facilitate sales between parties, must also start collecting sales tax, effective today. The question is which city should collect the 1% portion.

To try to ensure it stays in San Jose, the city agreed to share the wealth with the company. Under the 15-year deal, San Jose will keep the first $5 million in new tax revenues and give the company 30% of the new taxes above that threshold. (The $5 million threshold will increase by 3% each year.) San Jose estimates the city could give back to eBay anywhere from zero to $10.5 million the first year.

The problem is that San Jose is collecting and giving away tax money that would otherwise mostly go to public benefits throughout the state.

California should make sure that the public gets all the tax revenues it’s entitled to. That’s why the governor should sign Glazer’s bill ending more of these kickback schemes in the future.

Then there’s the bigger issue: Cities with online retailers or marketplaces should not reap disproportionate shares of sales tax revenues.

The fairest way to fix this is to distribute the 1% sales tax revenues back to the city of the buyer — the same way other local sales tax money is handled.

But that would require a constitutional amendment altering the state’s tax rules. That’s the next step.