Dinuba preps for revenue dip as tax-sharing bill advances

Dinuba City Councilmember Kuldip Thusu listens to Dinuba Fire Chief Greg Chastain during a regular council meeting at Dinuba City Hall Feb. 13, 2024.(Serena Bettis)

Senate Bill 1494 could end Dinuba’s sales tax revenue-sharing agreement with Best Buy, change online sales tax revenue allocation method

DINUBA – Dinuba city officials and elected representatives are currently fighting a bill in the California State Legislature, which – if approved – would significantly reduce the amount of sales tax Dinuba is able to collect by ending some tax-sharing deals between cities and corporations.

Senate Bill 1494 would prohibit any new online sales tax revenue-sharing agreements — like the one Dinuba has with Best Buy — from being created and require all current agreements to end by 2030. Authored by District 7 Sen. Steve Glazer, who represents the East Bay Hills area, the bill is awaiting a vote on the Senate floor and, if approved, will be sent to the State Assembly next.

“If you ask people about taxes, I think one thing you’ll hear very quickly from them is that they don’t like paying them, but if they have to pay them they want to make sure that it’s a fair system, that people are treated equally and fairly under the rules,” Glazer said during the Senate Local Government Committee’s hearing on the bill on April 17. “That’s really why I have this bill … because under our current tax structure, there is a significant unfairness, and it goes to online retailers.”

Glazer’s bill targets a section of California’s Bradley-Burns Uniform Local Sales and Use Tax Law that distributes the revenue generated from e-commerce sales differently than it does for most other transactions. Typically, revenue generated through sales and use taxes is allocated to the local jurisdiction where the transaction takes place, which is easily identifiable when it occurs in person.

When the transaction occurs online, however, the sales tax allocation can go to a specified location where the sale “takes place,” such as a company’s designated sales office, or where the order is fulfilled and shipped out from. This makes it so that local jurisdictions may not receive any sales tax revenue from purchases their residents make online, and specific cities may receive all of the revenue. 

“This creates a perverse economic incentive when companies bait cities into giving away millions of dollars in sales tax revenue through rebates in exchange for marginally higher tax revenue and quote-unquote ‘good jobs,’” Glazer said during the Senate Revenue and Taxation Committee’s hearing on SB 1494 on April 24.

The city of Dinuba has one of these agreements with Best Buy, which it entered into in 2015. According to the agreement, Best Buy will designate its Dinuba fulfillment warehouse as its primary point of sale — thereby ensuring all sales tax revenue is allocated to Dinuba — in exchange for Dinuba giving the company 50% of the sales tax revenue it receives from online Best Buy purchases.

The terms of the agreement also stipulate that Best Buy will retain approximately 285 jobs at the Dinuba distribution center and the agreement will last for at least 40 years.

Although the exact amount of sales tax Best Buy generates through online sales is protected through taxpayer confidentiality laws, it makes up a sizable portion of the city’s total sales tax revenue. Prior to the city’s adoption of the agreement, sales tax revenue in the city’s general fund for fiscal year 2014-15 was approximately $5.2 million and for fiscal year 2015-16 was just under $6 million. The Best Buy agreement went into effect midway through the fiscal year on Jan. 1, 2016.

For the first three years after the agreement began, Dinuba sales tax revenue increased by approximately $2-3 million; in 2016-17, the city reported a general fund sales tax revenue of just under $9 million, in 2017-18, it reported $7.5 million and in 2018-19 it reported $8 million. Revenue jumped higher in fiscal year 2019-20, when the city reported $11.3 million in sales tax revenue, and it reached its peak during the COVID-19 pandemic at $15.8 million in fiscal year 2020-21 and $13.7 million in fiscal year 2021-22.

With more than half of the city’s annual general fund revenue coming from total sales tax revenue, Dinuba is bracing for SB 1494 to become law while trying to ensure it doesn’t.

Fighting for sales tax-sharing agreements

Dinuba City Councilmember Kuldip Thusu, the city’s point person on the issue and chair of the League of California Cities (Cal Cities) Revenue and Tax Committee, said that without the sales tax generated from the city’s agreement with Best Buy, Dinuba will have a much smaller annual surplus in its general fund and will have fewer resources to fund capital improvement projects.

“The impact on the city’s revenues is uncertain, as we expect to receive some revenues through the countywide pool; however, the city has been prudent in not over-committing this portion of general fund revenue to ongoing costs,” Thusu said. “If SB 1494 passes, the city will track revenues and expenditures closely and make any necessary adjustments over the next five years.”

Wanting to protect the city’s revenue stream, Thusu has been actively lobbying against the bill alongside other cities and Townsend Public Affairs, the city’s lobbyist and grant writing firm, he said. They have sent position papers and letters to local state legislators and the governor and asked other organizations to join them in opposition.

Some of the entities that have registered in opposition to the bill include the California Business Roundtable, the California Chamber of Commerce, the Central Valley Business Federation and the cities of Fresno, Ontario, Tracy, Rancho Cucamonga, Merced, La Palma, Beaumont, Eastvale and Perris. As of May 7, the only entity to register its support of the bill has been the city of Simi Valley.

During hearings on the bill in the Senate Local Government and Senate Revenue and Taxation committees in April, representatives from Fresno and Perris spoke in opposition. Lobbyist Angie Manetti, speaking on behalf of Fresno Mayor Jerry Dyer, said that the bill jeopardizes sales tax incentives that help rural communities attract businesses.

“This bill strikes a very heavy blow to local governments by removing our ability to attract and retain businesses in an already unlevel playing field,” Manetti said on April 17. “This valuable tool helps disadvantaged communities promote economic vitality, development and create jobs. Eliminating them prospectively leaves these communities with the status quo, and it stymies investment.”

Manetti said that sales tax incentives helped the city of Fresno attract clothing retailer Gap to California from Arizona, creating 3,500 direct jobs and up to 4,000 indirect jobs.

A representative from the California Taxpayers Association also spoke in opposition and brought up the fact that similar bills to SB 1494 have been vetoed by Gov. Gavin Newsom in the past. In 2019, SB 531 would have prohibited these agreements without a phasing-out period; it passed the legislature, but was vetoed by Newsom in October 2019.

In his veto message, Newsom said that “these tax agreements are limited but also an important local tool that captures additional economic activity, particularly in rural and inland California cities that continue to face significant economic challenges like high unemployment rates. Therefore, completely removing these tax options from local decision makers is the wrong approach.”

Fighting for uniform sales tax distribution

Glazer’s argument is that while some cities benefit greatly from these agreements, the majority of cities across the state are hurting. According to a study conducted by state tax authorities, 7% of all cities in California have these types of deals, meaning that 7% of all cities receive all online sales tax revenue generated in the state, and giant corporations like Apple, Best Buy and Walmart receive millions in sales tax that should be funding public services, Glazer said.

“While these agreements allow some cities to profit at the expense of their neighbors, the majority of our cities, about 93%, are experiencing substantial losses in tax revenue due to this manipulation of tax allocations,” Glazer said.

To remedy this, the bill would amend the section of the California Government Code that regulates the powers and duties of local agencies to prohibit a local agency from entering into these kinds of agreements.

Existing tax law prohibits local agencies from entering into agreements that would “result, directly or indirectly, in the payment, transfer, diversion or rebate” of any sales tax revenue if two conditions apply: the agreement results in a reduction of revenue under Bradley-Burns that would be received by another local agency and the retailer maintains a physical presence within the jurisdiction of that other local agency.

SB 1494 adds on to this section to prohibit revenue-sharing agreements made in exchange for a retailer “locating or continuing to maintain a place of business that serves as the place of sale” within the jurisdiction of a local agency if that place of business would generate revenue from the sale of property delivered to and received by a purchaser in another local agency.

“Place of sale” is defined in the bill as “the place at which retail sales are consummated,” meaning it is where the purchaser receives the goods.

The bill retroactively prohibits any new agreements from going into effect as of Jan. 1, 2024, and would void all current agreements, regardless of their expiration dates, on Jan. 1, 2030. It also requires local agencies post on their websites any online sales tax-sharing agreements currently in place in an effort to promote transparency.

During the Senate Revenue and Taxation Committee meeting on April 24, Sen. Brian Dahle, who represents the northeast corner of the state, explained that he is in support of this bill because many of his constituents live in small cities in the Sierra Nevada and buy their essentials online, and tax-sharing agreements make it so that those cities do not benefit from the sales taxes residents are paying. 

“What happens is the ones (communities) that are good at lobbying get more money, and the ones that aren’t — which are my communities — don’t get it,” Dahle said. “For those reasons, I will continue to support this bill. I think it’s righteous in the face of all the special interest that’s out there that is trying to manipulate the system for their community, and quite frankly, it’s not fair to all the other communities who still have to provide those services with no resources.”

Glazer agreed and spoke about Newsom’s previous vetoes on similar bills Glazer has put forward, saying that a previous iteration of the bill would have also required a study be conducted to determine who the “winners and losers” of the tax-sharing agreements are.

“The fact is that 93% of the cities are losers, and when you talk about the Central Valley, and impoverished cities, you can put forward some that have that definition, but there are so many neighbors right around you that are in that exact same position, and you’re stealing their money,” Glazer said. “You’re stealing their money that they need for their community and their services.”

Thusu said that Glazer is misrepresenting the study conducted by the state tax and fee administration in 2023, which he said presented vague and approximate data due to confidentiality laws.

“You can (try to) bring any statistician worth their salt from all over the world, academia or private, who can agree with Sen. Glazer’s interpretation — you can’t,” Thusu said. “Moreover, impact on cities should be calculated at the very least by a relative percentage of general fund gains or losses.”

Dinuba’s future

While the bill, if it passes, won’t hurt Dinuba’s agreement for another five and a half years, the California Department of Tax and Fee Administration (CDTFA) is also reviewing and auditing these types of agreements across the state. According to Dinuba, the CDTFA has told the city that it has received more revenue from the allocation of online sales tax than it should have and it plans to change the allocation of the online sales tax that Dinuba receives.

During review of Dinuba’s Annual Comprehensive Financial Report (ACFR) in February, the city council briefly discussed the CDTFA’s audit of Dinuba’s sales tax allocation because the city has moved millions of dollars from its general fund to a special fund to prepare for giving that money back to the CDTFA.

Over the last two years, the projected sales tax revenue adopted in the city budget was $11 million for fiscal year 2022-23 and $11.5 million for fiscal year 2023-24; however, with the CDTFA’s determination and the city’s transfer of money to a special fund, the city has listed its actual sales tax revenue for fiscal year 2022-23 as $7.2 million and is projecting revenue for fiscal year 2023-24 to be $6.7 million.

Thusu said further details about the audit are confidential, but the city has said it is challenging the CDTFA’s decision. Without the sales tax agreement, the city can still make a balanced budget, but its overall financial security is less stable.

For example, the city’s adopted budget for fiscal year 2021-22 planned for $21.6 million in general fund revenues and $18.4 million in general fund expenses, leaving a $3.2 million surplus that could help the city fund major infrastructure projects, pay off debt or build up its reserves. As Dinuba currently prepares its budget for the upcoming 2024-25 fiscal year, it is projecting a general fund revenue of $18.4 million and expenses of $18.2 million, leaving just a $200,000 difference.

The city has been planning for this by not expanding the budget so much that it outpaces revenue estimates and by working to attract other retailers, like Ross Dress for Less and Superior Grocers, to Dinuba to expand its commercial tax base. Still, the overall sales tax reduction worries city officials and council members, as does the uncertainty of the outcome of SB 1494 and the CDTFA’s rulings.

“The city has done its best not to expend or commit these revenues to ongoing costs in anticipation that we might someday lose this revenue source,” Thusu said. “Sales tax sharing agreements have been under attack since 2017; we have been prudent and diligent to ensure that we can fund core services without these revenues.”

EDITOR’S NOTE: This article was updated at 10:50 a.m. on May 15 to include Dinuba Councilmember Kuldip Thusu’s response to Sen. Steve Glazer’s statements about the state auditor’s study on local tax distribution.

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