Two California fulfillment centers, with at least 1,000 employees each, are preparing to give Amazon the lion's share of their sales-tax take as a reward for setting up shop there.
PATTERSON, Calif. — Amazon.com for years has fought government efforts to tax e-commerce. Now it’s poised to pocket millions of dollars in sales taxes paid by California customers.
As part of a pact reached last year with state lawmakers, some online retailers agreed to begin collecting sales taxes this fall.
About half of the projected $316 million raised in the first full year is expected to come from merchandise sold by Amazon, which is also setting up two California fulfillment centers with at least 1,000 employees each.
San Bernardino and Patterson, where the centers will be located, will gain not only jobs but also a tax bonanza: Sales to Amazon customers throughout California will be deemed to take place there, so all the sales tax earmarked for local-government operations will go to those two cities.
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It’s a windfall so lucrative — about $8 million a year initially for each city — that local officials are preparing to give Amazon the lion’s share of their take as a reward for setting up shop there.
Talks with Amazon about a so-called sales-tax rebate are still in the early stages. But in Patterson, a struggling Central California community of 21,000, Mayor Luis Molina said he’s ready to do what it takes to help his city.
“This is huge. This is monumental, not only for the city but for the county and the region,” he said. “We’re up to 20 percent unemployment, and this is going to make a dent.”
But critics worry that any deal would embolden other retailers to demand similar concessions at a time when California cities are scrambling to plug budget holes. Particularly grating, some said, is the idea that Amazon — whose business model long was based on selling merchandise without collecting taxes — could now profit from those levies.
“The tax is supposed to be supporting government,” said Lenny Goldberg, executive director of the California Tax Reform Association. “Instead, it’s going back into Amazon’s pocket.”
Amazon did not respond to repeated requests for comment.
The potential pact is already attracting the attention of some California legislators seeking to ban so-called sales-tax rebates. Once used to attract sizable retailers such as car dealerships, these incentives are mushrooming as cash-strapped communities compete with one another to land big sales-tax generators.
That arms race is cheating taxpayers, who want their money spent on parks, police and street repairs, said Sen. Mark DeSaulnier, D-Concord, who is considering introducing a bill this session.
“It seems like the private sector finds a way to pit one city against the other,” said DeSaulnier, a former city councilman and mayor. “You can’t give away sales tax in this manner.”
The proposed rebates are just the latest dust-up involving Amazon and sales taxes.
The company for years took advantage of a U.S. Supreme Court decision that exempted it from collecting sales taxes on most online purchases in states where it had no stores or warehouses. That enabled Amazon to undercut prices charged by its bricks-and-mortar competitors, such as Wal-Mart Stores and Target.
Pressure from traditional merchants, combined with state budget woes, prompted California and other states to pass legislation requiring online sellers to begin collecting the levies from their customers.
Amazon last year launched a costly campaign to try to overturn California’s 2011 law with a ballot measure. The company backed off after the state agreed to delay implementing the measure until Sept. 15 of this year.
2 fulfillment centers
In California, about one-tenth of the statewide standard sales-tax rate of 7.25 percent goes to the city or jurisdiction where the retailer operates, with the rest going to the state and county.
Amazon currently has no physical warehouse operations in California. So initially, all of the state’s cities will split those taxes, based on their residents’ share of Amazon purchases.
That will change next year, however, when the million-square-foot fulfillment centers open in Patterson and San Bernardino.
California law allows some merchants to designate a legal “point of sale,” permitting them to direct 100 percent of the city share of sales taxes to a specific community where they have a physical presence.
This gives online retailers such as Amazon tremendous leverage to negotiate sales-tax rebates from cities that want one of its facilities.
“The incentive to compete and to steal tax dollars from other jurisdictions is really, really high,” said Geoffrey Propheter, a research assistant at George Washington University’s Institute of Public Policy who studies municipal-government finance.
For Patterson, dubbed the Apricot Capital of the World and located just off Interstate 5 in Stanislaus County, the projected bonanza is nearly as big at its entire general fund.
City Manager Rod Butler said the city is considering rebating as much as 75 percent of its share of sales-tax revenues to Amazon. He reasons that even a reduced share of those taxes would enable the city to balance its budget and pay for city parks, streets and garbage collection.
Patterson “is not ashamed about taking advantage” of any legal tools available for economic development, he said, in part because rival communities are doing the same thing. In December, the nearby city of Tracy expanded its existing sales-tax-sharing plan to include e-commerce warehouse and shipping facilities in hopes of attracting Amazon.
San Bernardino, meanwhile, is working on an agreement with Amazon that would give the retailer as much as 80 percent of its share of sales taxes in the first few years, according to city spokesman Jim Morris.
Two years ago the city inked a similar deal for Internet sales with the Kohl’s department store chain that gradually reduces the retailer’s cut to 20 percent.
“We’ve discussed with Amazon the possibility of some sort of sales-tax agreement,” Morris said.
Way to attract business
Sales-tax rebates are so lucrative that economic-development consultants are urging their corporate clients to demand them. California’s “point of sale” policy helps merchants pit revenue-hungry cities against one another for the best deal, said Susan Russell, a North Barrington, Ill., tax and economic-development consultant.
“This gives the state a unique opportunity to attract business, especially from Internet companies,” she said, calling such tax-sharing agreements “a win-win for everybody.”
But California communities shut out of the sales-tax windfall are starting to wake up to this inequity as Internet commerce explodes, said Dan Carrigg, legislative director of the League of California Cities.
“We know that there’s a lot of sales volume that takes place on sites like Amazon. The purchasers that use that website are dispersed all over the state,” he said. “I think there would be concern among the cities of California if that [sales-tax] revenue they thought they would capture was not going to become available.”