Riechel Reports - Events In And Around The City of San Bruno CA

City to agree on
$3.625 million in additional annual sales taxes from Walmart.com



Article Source:  City of San Bruno CA

City Council Agenda Item
 
Staff Report
 
CITY OF SAN BRUNO
 
DATE:
 
October 13, 2020
 
TO:

Honorable Mayor and Members of the City Council
 
FROM:
 
Jovan D. Grogan, City Manager
 
Marc Zafferano, City Attorney
 

SUBJECT:
 

Receive Informational Report on a Revenue Participation Agreement with
 
Walmart.com to Facilitate Economic Development and Additional Sales Taxes for
 
the City of San Bruno
 


BACKGROUND:
 

Walmart.com, headquartered in San Bruno, is the primary US e-commerce operating subsidiary
 
of Walmart Inc.  It is one of San Bruno’s largest employers, with over 2,000 employees.
 
Walmart.com owns the property located at 850 Cherry Avenue and is in the process of
 
completing substantial tenant improvements at the site to accommodate its employees.
 

The City Manager and City Attorney have been in negotiations with Walmart.com to finalize an agreement that would result in the City receiving additional sales tax revenue in exchange for revenue participation with Walmart.com. The net result is the potential for an estimated over $3.625 million in additional annual sales taxes to the City, and possibly more in the future.

Staff
 
is presenting an informational report to the City Council tonight and plans to return at the next
 
meeting on October 27 with a Resolution authorizing the City Manager to execute an agreement
 
with Walmart.com that would secure these funds. At that meeting, the City Council must also
 
hold a public hearing to consider an Economic Development Subsidy report that is required by
 
the State and must be adopted by Resolution.  
 


DISCUSSION:
 

Sales Tax in California/Bradley Burns
 

Under the Bradley Burns law in California, cities receive 1% of taxable sales from within their
 
boundaries. Like many cities in California, San Bruno relies heavily on sales tax revenue to fund
 
City services. Sales tax is currently the second largest revenue source, after property taxes, of
 
the City's $49 million General Fund budget, with $6.5 million budgeted for 2020-21, representing
 
13% of the General Fund budget. As the City Council is aware, sales taxes have declined
 
during the COVID recession, and the City is facing additional pressure on its structural deficit
 
from sales tax, hotel taxes, and other ongoing revenue sources.  
 
Honorable Mayor and Members of the City Council
 
October 13, 2020
 
Page 2 of 4
 
The Wayfair Decision  
 

The administration of California sales and use tax to online retail activity has been transformed
 
in recent years by a series of significant legal developments.  These developments began in
 
2018 with the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. Historically, only
 
businesses with a physical presence in a state could be required to collect and remit sales
 
tax.  The Court overruled this longstanding requirement, holding instead that a state may
 
mandate a business with more than 200 transactions or $100,000 in in-state sales to collect and
 
remit sales and/or use tax on transactions in the state regardless of whether the business has
 
physical presence in the state.  Following the Supreme Court’s decision, California passed the
 
Marketplace Facilitator Act (AB 147) in 2019, requiring a marketplace facilitator to collect and
 
remit any California sales or use tax applicable to retail sales made through its marketplace by
 
remote sellers.    
 

Walmart.com
 

Wal-Mart.com USA, LLC (“WM.com”) is an affiliate of Walmart Inc. (collectively,
 
“Walmart”).  WM.com operates the retail business operations conducted on the
 
www.walmart.com website.  Through the website, WM.com sells inventory owned by Walmart
 
as well as merchandise owned and sold by third-party marketplace vendors.  WM.com
 
maintains operations at various locations in California, including San Bruno.  
 

Under the new tax rules, WM.com is deemed a marketplace facilitator.  The substantial sales
 
tax obligations that come with this new designation caused WM.com to reevaluate its California
 
operations and e-commerce sales in conjunction with the applicable law for sourcing and
 
reporting its sales for California sales tax purposes under the Bradley-Burns Uniform Local
 
Sales and Use Tax Law. As a result, Walmart and San Bruno are able to enter into this mutually
 
beneficial Participation Agreement.  
 

Proposed Agreement
 

A table showing the projected tax sharing allocation is provided on the following page. The City
 
would receive 65% of the first $3.5 million in sales taxes generated by the sales team in San
 
Bruno, with 50% of all sales above that. The term would be for 25 years. The initial estimate of
 
annual sales taxes in total are $6.2 million, which is expected to grow over time. The split is
 
shown below, resulting in San Bruno receiving an estimated total of $3.625 million initially. The
 
proposed agreement would not apply to Measure G funds, which will continue to be allocated
 
directly to the City.
 
Honorable Mayor and Members of the City Council
 
October 13, 2020
 
Page 3 of 4
 


 

Staff have analyzed 16 similar arrangements between cities and retailers from across the state.
 
On average, cities have agreed to share total sales tax revenue in an approximate 50/50 split.
 
This proposed agreement would exceed that benchmark. The term of the agreements ranged
 
from 5 to 41 years, with the average length being 19 years, and the median length 15. The
 
proposed agreement would be for 25 years.
 

If approved on October 27, this participation agreement would have a significant impact on the
 
City’s General Fund budget, helping to close a portion of the City’s operating deficit as well as
 
accomplish key capital improvement and other priorities, as determined by the City Council.
 


FISCAL IMPACT:
 

The City of San Bruno stands to earn approximately $3.625 million annually in new sales tax
 
receipts, based on current sales.
 


RECOMMENDATION:
 

Receive Informational Report on a Revenue Participation Agreement with Walmart.com to  
 
Facilitate Economic Development and Additional Sales Taxes for the City of San Bruno
 


ALTERNATIVES:
 

1. Take no action, risking the City losing this economic development opportunity
 

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