The California Department of Tax and Fee Administration (CDTFA) launched an audit in 2021 investigating an arrangement between Apple and the city of Cupertino. The arrangement began in 1998 using a 1950s law that looks at orders based on the sale location. In other words, online orders are taxed based on the company’s location, not the customer’s. Since Apple is headquartered in Cupertino, this law treats all Apple online purchases in California as if they were made there. Therefore, Cupertino receives the sales tax. In exchange, Cupertino gives Apple a portion of the tax money it collects. The two entities renegotiated the percentage in 2013. Apple now receives 35% of the city’s sales tax revenue from Apple’s online sales in California.
A Tax Agreement Deemed Improper
The agreement benefits both the company and the city tremendously. Apple is the largest source of sales tax revenue for Cupertino. According to records, $107.7 million has been given back to Apple from the city’s sales tax. State findings deemed the tax agreement improper. However, Cupertino has much to lose. Therefore, City Council members appealed the state’s findings. If the tax authority does choose to intervene, Cupertino’s local tax revenues could drop from over $42 million to under $12 million this year. Furthermore, Cupertino would be obligated to pay back the sales tax it received in previous years. Additionally, the city would be responsible for subsequent fines.
Tension on the Rise
Cupertino is not the only city cashing in on retail companies with substantial online sales. Macy’s distribution center is located in Sacramento County. The county earns the sales tax from online orders and in return gives back 50% of this revenue as reimbursement to Macy’s. Moreover, Fresno cashes in on Ulta Beauty online sales tax and pays back 75% to the beauty store chain. As online shopping becomes increasingly popular, tensions continue to arise between California cities and the tax department.
Cupertino Prepares to Appeal
Cupertino officials are prepared to appeal to the Office of Tax Appeals, an independent administrative law judge body. After that, the city can take the case to state court. Apple is taking responsibility for the costs of the appeal and a portion of funds that may need to be repaid. In addition, the company will be forced to repay what it’s received back in sales taxes since the tax department obtained knowledge of the improper distribution. Since the audit was launched in 2021, this would equate to tens of millions of dollars that Apple would be obligated to hand over.