California wants a bigger piece of Cupertino's tax earnings from Apple

A tax deal relating to online sales between Apple and the city of Cupertino is set to fall through, resulting in a 73% tax revenue decline.

Since 1998, Apple has reportedly had a deal with its hometown of Cupertino to treat all online sales made in California as if they were made in that city. This led to the 1% local portion of tax revenue swelling for years as Apple grew, not to mention a 35% kickback to Apple from Cupertino.

According to a report from Bloomberg, an audit that launched in 2021 by the California Department of Tax and Fee Administration has led to a breakdown of this old deal with Apple. Nothing is set in stone, as Cupertino's finance director is scheduled to explain the audit's findings to the city council on Thursday, but Cupertino is expected to see a significant tax revenue decline.

The report explains that Apple had a deal with Cupertino to report every online transaction made in California as if it were made in Cupertino. California law states that a portion of the sales tax goes to the location where a transaction takes place.

So, Apple reports all online sales in California as taking place in Cupertino, then it pays the 7.25% state sales tax to the tax department. The local 1% portion goes to Cupertino, which then passes 35% of that total back to Apple.

Those payments back to Apple have added up to $107.7 million since 1998, according to this report.

The tax revenue for Cupertino is set to drop to $11.4 million from $42.1 million. That and Cupertino may be required to return the money to the state that it received in previous years.

The audit and subsequent fines are set to reduce Cupertino's operation spending by millions. The city is expected to cut jobs, reduce local events, and reduce funding until things balance out — which may not be until 2030.

13 Comments

RickDawg 3 comments · 3 Years

About 1 year ago

More likely, California wants to distribute sales tax to the home tax district of the buyer. If Apple aggregates all sales to Californians in the Cupertino tax district, they are cutting the other tax districts in the state out of that one percent city, and local district taxes as well.

davidw 2112 comments · 17 Years

RickDawg said:

More likely, California wants to distribute sales tax to the home tax district of the buyer. If Apple aggregates all sales to Californians in the Cupertino tax district, they are cutting the other tax districts in the state out of that one percent city, and local district taxes as well.

Not of the "buyer", but the local tax district of where the online transaction took place. In CA, sales tax on online sales made inside the State is taxed at the rate of where the transaction took place and not of the buyer home location. It's no different than if a person living in SF drove down to the Apple Store in Cupertino and made a purchase. The sales tax on that purchase is based on Cupertino local sales tax, not the SF sale tax of the buyer's home district. Out of State online purchases are handle differently.

So the question is, are all CA online purchases handled inside Apple HQ or in Cupertino at all? Most likely not. Apple probably handle online sale transactions on sites outside of their HQ and Cupertino, but credited Cupertino with the sale. When in reality, the tax credit should be where Apple actually handled the transaction. It might be a warehouse in San Jose or Sacramento (Apple main CA distribution center is in Elk Grove). I kind of doubt that Apple HQ is where they keep their stock of online products and they are shipped from there. If the purchase is shipped from the nearest Apple Store or Apple warehouse that have it in stock, then the sale tax should be base on the location of that Apple Store or warehouse and credited to those local districts.

https://biz.crast.net/apples-local-tax-arrangement-with-hometown-comes-under-fire-2/

>At issue is the company’s treatment of online sales. Under California law, a local portion of the sales tax goes to the location where the transaction occurs, not the customer’s location.<

https://www.warehouseautomation.ca/news-notes-1/2020/10/9/apple-to-use-retail-stores-as-distribution-centers-for-faster-deliveries-8tj2z

AutigerMark 65 comments · 6 Years

I kind of doubt that Apple HQ is where they keep their stock of online products and they are shipped from there. If the purchase is shipped from the nearest Apple Store or Apple warehouse that have it in stock, then the sale tax should be base on the location of that Apple Store or warehouse and credited to those local districts.

The last 2 iphones I've purchased from apple.com have shipped to me direct from China.

get serious 92 comments · 11 Years

So if the transaction took place on a server in Oregon there would be no Sales Tax? Or maybe on a server in unincorporated Inyo County, would that be where the tax was booked? What if a company booked their online sales on servers in multiple locations?
No Apple chose to book them based on their US headquarters and worked a tax cut from the city council. The rebate is a bit shady. The article makes it seem that Cupertino will be the one taking the hit so I hope Apple can find a way to hero them out.

chutzpah 392 comments · 1 Year

Seems like a pretty dodgy deal in the first place.