Sacramento Bee

West Sacramento loses sales tax revenue, seeks bill to close loophole

May 1, 2015

By Richard Chang

West Sacramento leaders noticed something awry when sales tax revenue came in last November.

The city – which has an array of retail stores, warehouse distributors and industrial businesses – was short nearly $600,000 in sales tax revenue it had anticipated from HD Supply, a company that sells hardware fixtures and home improvement products.

The impact was significant enough to the city’s $40 million budget that West Sacramento leaders wondered if the company had closed its distributing operations there. But HD Supply remained open. Its delivery trucks continued rumbling down West Sacramento streets on their way to make deliveries across the region.

The Florida-based company had quietly consolidated its point-of-sale operations in the Southern California city of Santee so that all of its local sales taxes would be assigned to that jurisdiction. In exchange, the city agreed to provide HD Supply a 50 percent rebate of the tax once revenue exceeds $500,000 annually.

The loss of sales tax left West Sacramento leaders fuming.

“They are simply hijacking 100 percent of the sales tax and sending it to this rogue city,” said West Sacramento Mayor Christopher Cabaldon.

Cabaldon believes businesses like HD Supply should pay local sales taxes to cities where they have a physical presence because the dollars help support services such as police officers and firefighters.

“Why would we keep zoning for industrial development if it doesn’t provide stable revenue to cover the costs associated with it?” the mayor asked.

Under the previous model, HD Supply would field orders from its West Sacramento office, making the city the point of sale for orders in the greater Sacramento region, according to West Sacramento City Manager Martin Tuttle. This allowed West Sacramento to net nearly $1 million annually before the company made the switch.

HD Supply declined to comment.

Santee officials defended the agreement with HD Supply, noting that it has brought 500 jobs and other economic benefits.

“It’s not like we went and sought them out,” said Pedro Orso-Delgado, Santee’s acting city manager. “They came to us and we established a dialogue.”

Since the 20-year agreement went into effect in late 2013, the city has returned about $1 million to HD Supply, according to Santee’s finance director, Tim McDermott.

The rebate arrangement would become illegal under Senate Bill 533 by state Sen. Richard Pan, D-Sacramento. The bill would close what Pan calls a loophole that allows companies to essentially reassign the sales tax to another jurisdiction without closing their facility in the original location. The bill would not affect current agreements, including the one between HD Supply and Santee.

“It’s a race to the bottom. It’s destructive,” Pan said of the competition from cities for tax dollars.

Orso-Delgado declined to comment on the bill but said he is actively tracking it. The legislation was spearheaded by West Sacramento and has no registered opposition. It is scheduled to be heard in the Senate Appropriations Committee on Monday.

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