California Cities Snub Retailer, split the sales tax between you

When it appeared that things might get awkward between two towns close to downtown Los Angeles because of sales tax revenue from online retailer Fashion Nova, Vernon, Calif., did something unusual: he made a deal with his neighbor instead of the company.

It’s a new twist on the controversial practice of online retailers snapping up a share of the local sales tax they collect customers by assigning it to a particular city with an office or warehouse.

The city councils of Vernon, an industrial city that serves as headquarters for Fashion Nova, and Santa Fe Springs approved the sharing agreement in December to avoid complexities and conflicts arising from California sales tax rules, which they say pit cities against each other to compete for revenue.

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The cities came together after Fashion Nova officials questioned whether some of the revenue that went to Vernon should go to Santa Fe Springs instead. At the same time, the company said it could continue to drive revenue to Vernon if the city returns half of it to Fashion Nova, Vernon officials said.

A handful of California cities have accepted offers like Fashion Nova’s to give businesses a share of sales tax proceeds — typically 50% or more — in exchange for locating warehouses or offices within their boundaries. Retail giants like Apple Inc., eBay Inc., Best Buy Inc., Walmart.com and Williams Sonoma Inc. have struck deals with cities hungry for jobs and income as e-commerce grows .

But the agreements create interurban tensions, because they concentrate tax revenues in a few municipalities to the detriment of hundreds of others. Vernon said no to Fashion Nova’s offer to share with the company and instead turned to his neighbor.

“This agreement represents a model for cities working together for mutual benefit rather than squabbling or undermining each other in business competition,” said Vernon acting city attorney Zaynah Moussa. , to city council before members unanimously approved the deal on Dec. 22.

A lawyer for Fashion Nova, a fast fashion brand popular with social media influencers, did not respond to requests for comment on what further action it might take.

Dispute avoided

The company also approached the nearby town of Whittier in 2019 to move its headquarters there in return for half of the tax revenue it generated. Whittier officials dropped out of talks with the company after learning Fashion Nova would have to move there from Vernon and was also negotiating a deal with Santa Fe Springs, City Manager Brian Saeki said.

Fashion Nova has negotiated with Santa Fe Springs in the past, City Manager Raymond Cruz said before the city council votes Dec. 22. But Santa Fe Springs has never entered into tax-sharing agreements with private entities.

“It defeats the reason sales tax is established — it should go to the jurisdictions where the service is provided, not to the private entity,” Cruz said.

At issue is a 1 percentage point share of the 7.25% state sales tax that is allocated to cities based on the location of the sale, not the location of the customer.

Vernon, south of downtown Los Angeles, has received local tax on all Fashion Nova online sales to California customers since 2016. It will now share revenue with Santa Fe Springs, its neighbor 11 miles to the southeast. . The amount of income is confidential.

A dispute may have existed between Vernon and Santa Fe Springs over where Fashion Nova’s online sales transactions took place, city officials said, but they did not push for it. Vernon’s sales personnel work with distribution center personnel where merchandise is warehoused and shipped.

Vernon could have asked the California Department of Tax and Fee Administration to determine where online transactions take place, and therefore where the tax should flow. Officials in both cities said the IRS guidance on the matter is unclear.

“The city recognized that this could have been a lengthy process, and if either party disagrees, there could be a legal challenge,” Vernon’s spokeswoman said. , Margie Otto.

What are the rules?

California law, regulations and department guidelines give retailers the responsibility to properly allocate the local portion of sales tax, department spokeswoman Tamma Adamek said in an email. But attribution is a matter of law, and neither retailers nor jurisdictions can choose where it goes, she said.

“Attribution is determined by the facts of each transaction involved,” she said.

According to Michael G. Colantuono, a solicitor at Colantuono Highsmith Whatley PC, specializing in municipal law. As long as California law requires that the local portion of sales tax be allocated based on the location of the sale – not the customer – granular scrutiny will be required to determine where sales are taking place.

The city-sharing deal “is a clever solution to a common problem”, he said.

As an example of what cities could face without a deal, Williams-Sonoma Inc. and the city of Shafter in the Central Valley are opposing a challenge from the tax department and 300 other municipalities in a pending case. before the California Office of Tax Appeals. Municipalities and the department allege the company set up a bogus ‘order review’ process to make it look like online transactions are taking place at a city call center so Shafter can receive the tax revenue local and donate half to the company. . Items are shipped from a warehouse in another city.

Vernon and Santa Fe Springs had the authority to enter into their agreement under a 1998 provision of the California Constitution that allows neighboring cities to enter into sales tax sharing agreements.

Cities rarely use this provision “because it’s not very often people want to give money,” Colantuono said.

Bernard P. Love