The City of Cupertino’s finance director is scheduled to provide the City Council with an informational budget forecast this afternoon that includes a potential 73 percent reduction in local tax revenue. At play in the anticipated loss of $30.7 million in tax dollars are the results of a state tax agency’s audit into an unnamed taxpayer in Cupertino.
Although the California Department of Tax and Fee Administration (CDTFA) is prohibited from disclosing the identity of the audited taxpayer, reporting by Bloomberg suggests that it is almost certainly Apple, Inc., the municipality’s largest source of sales tax revenue.
According to supplemental materials provided by city staff to Council, CDTFA notified Cupertino of its audit in December 2021. Just last month, CDTFA verbally advised the City of its decision and indicated that the agency would determine specific dollar impacts over the next 4-6 months.
According to reports, the audit was focused on the way in which Apple handles online sales across the Golden State. Under state law, a 1 percent portion of sales tax must be remitted to the jurisdiction where online transactions take place, not the jurisdiction where the customer is located. However, Apple considers all of its digital transactions with California customers as if they were made in Cupertino. The City then shares 35 percent of its portion of sales tax revenue remitted by the State back with Apple.
At this time, it is unclear exactly what aspect of Apple’s tax sharing agreement with Cupertino CDTFA has taken issue with. However, Bloomberg’s report indicates CDTFA has increasingly scrutinized these types of agreements. A similar decision by CDTFA found that most of Williams-Sonoma Inc.’s transactions assigned to a call center in the City of Shafter actually took place elsewhere. Williams-Sonoma Inc. is appealing the agency’s decision in that case, a move that Apple may ultimately consider as well.
The City’s supplemental materials indicate that budget-balancing cost containment strategies for consideration may include staff furloughs, reductions in workforce, vacancy controls, and reductions in capital outlays. On the other hand, revenue generation strategies for consideration may include a ¼ cent sales tax increase, a new parcel tax, a 2 percent increase to the transient occupancy tax, and sales of City-owned properties.
Exacerbating all of these fiscal concerns are looming anxieties about the state of the economy. Nonetheless, Apple has continued to make and plan for future investments here in Cupertino.