San Jose Draws Scrutiny From State Leaders, Other Cities Over Tax-Sharing Pact with eBay

The past few years in San Jose have been marked by smug political posturing between business and labor factions over where the line falls between economic development and corporate handout.

When Google announced its interest in redeveloping the western swath of downtown, labor leaders waged an aggressive campaign for community benefits. Mayor Sam Liccardo and his business-aligned colleagues, meanwhile, boasted about how the search-and-advertising giant paid a fair-market price for city land and gleaned nothing in the way of subsidies. “In an era where cities are upping the ante on public subsidy for private corporations,” Liccardo wrote in a Nov. 29 memo to his fellow councilors, “San Jose has had the opportunity to establish a new paradigm—a collaborative model where corporations ‘give and not get.’”

The mayor trumpeted a similar message in national media when Amazon triggered a $5 billion bidding war among US cities over where to build its planned HQ2. “My city won’t be offering incentives to Amazon,” Liccardo declared in a 2017 op-ed for the Wall Street Journal. “Why? Because they are a bad deal for taxpayers.”

A tax-and-fee break for downtown high-rise developers came up for a few-year extension earlier this month, inflaming a ruckus between labor and business and making the historically bipartisan policy a wedge issue. Ahead of a split vote to extend the tax-and-affordable-housing-fee discount, labor decried it as a giveaway to wealthy builders while business interests defended it as a make-or-break incentive for future growth.

When it came time to sign off on a sales tax-sharing deal with eBay, however, San Jose’s de facto political parties put aside their divisive rhetoric.

In a unanimous vote Sept. 24, the 11-member council gave City Manager Dave Sykes the green light to negotiate a 15-year contract with the online marketplace. Typically, when local governments in the US offer their share of what collectively amounts to $80 billion a year in tax breaks and other incentives, it’s to attract new companies or to convince them to stay. San Jose’s accord with eBay did none of those things.

While the arrangement could rake in $440 million in net new taxes for San Jose, it lets eBay off the hook for as much as $150 million with no expectation of new jobs or construction in return.

State Sen. Steve Glazer (D-Orinda), who’s been trying to outlaw such covenants, minced no words when asked about the bargain. “This deal represents the worst kind of corporate welfare,” he told San Jose Inside.

Corporate welfare, however, is in the eye of the beholder.

San Jose Economic Development Director Kim Walesh called the city’s eBay pledge “very different in intent and result from” tax-sharing setups in other cities, giving San Jose “an opportunity for the city to receive” previously unanticipated tax revenue. “This situation arose because of a change in tax law,” she said, “and we believe what we’re doing is appropriate and wise and that we have the authority to do this.”

Home Base

Pierre Omidyar launched his online trading venture out of his San Jose living room in 1995. Originally, eBay served as a platform for auctioning collectibles. Once the company brought Meg Whitman on board, she rebranded the site as a platform for a wide range of markets, forming partnerships with name brands such as GM, Disney and Sun. Getting blockbuster brands to sell on the platform bumped up average sale prices, generating higher transaction fees, which for eBay translated into booming profits.

Omidyar’s brainchild lives in the same general vicinity where it all started. Except now, eBay is one of San Jose’s biggest companies, with a 24-acre campus off of Hamilton Avenue where it employs more than 3,500 people. That’s nearly a third of its global workforce. However, as a so-called “marketplace facilitator” under state law, eBay never had to collect or remit sales and use tax—until this week.

The change stems from a new law, AB 147, penned after the US Supreme Court ruled that states can require businesses of a certain size without a physical presence in its borders to pay and remit sales taxes. Gov. Gavin Newsom signed the bill this past April, just in time for San Jose to revise its 2019-20 fiscal year budget to account for an additional $5 million in tax revenue from e-commerce sales.

That AB 147 would apply to eBay came as a complete surprise, Walesh said. Online retailers began collecting and remitting sales taxes in the spring when the law was passed. “Marketplace facilitators” like eBay, on the other hand—essentially sites where users buy and sell instead of ordering from the platform’s distribution warehouses—had until this month to comply with the new rule.

“When they reached out to us, we were curious and very interested to learn from them the significance of this new marketplace facilitator law,” Walesh said, “and all the investments and changes that they needed to make.”

Armed with enormous leverage, eBay struck up negotiations.

Deal or No Deal?

An estimated 10 percent of California cities have forged the kind of tax-break compacts that placed San Jose at centerstage this week in a statewide conversation about corporate subsidies. But Cupertino pioneered these kinds of pacts in 1997 to keep Apple in Silicon Valley by giving the multinational company a 75 percent rebate on sales and use taxes. The company’s share dropped to 35 percent in 2013. Still, in the 22 years since shaking hands on the stipulation, the city has returned $70 million to Apple—a tally that Cupertino kept under wraps until Bloomberg Tax forced it into the open through the California Public Records Act.

Revenue-sharing settlements take advantage of a 1950s state law that divvies up local governments’ share of sales tax revenue based on where a transaction took place. California’s Constitution, meanwhile, enables municipalities to offer tax breaks to companies in exchange for relocating to a certain jurisdiction, creating new jobs and building new development. That midcentury tax code—pretty straightforward at the time it was authored—became a bargaining chip for big retailers in the digital age.

As part of a statewide investigation into revenue-sharing pacts, Bloomberg Tax unearthed tax rebate programs similar to Apple’s in primarily economically depressed jurisdictions throughout the Inland Empire and agricultural heartland. Dinuba, an impoverished Central Valley town, refunded $9.5 million to Best Buy from 2016 to 2018 in exchange for keeping its distribution center local. The Southern California town of Corona reportedly paid multi-level-marketing leggings company LuLaRoe $1 million in sales tax refunds from July 2017 to December 2018.

QVC shopped around city to city before cutting a lucrative deal with the city of Ontario, a San Bernardino County suburb that agreed to pay the e-commerce giant 55 percent of its local share of sales tax revenue every year for the next four decades. To uphold its end of the bargain, QVC made Ontario the site of its West Coast distribution center.

San Jose’s eBay compromise is structured the same way—just for different reasons.

“We’ve never done tax-sharing agreements to encourage a company to come here or expand,” Walesh explained. “We don’t do those kinds of incentives.” Rather, she said, San Jose’s concordat was about “aligning and supporting eBay as it makes significant investment and change.”

Tax Broke

Though unified on the issue here at home, San Jose leaders put themselves at odds with almost the rest of the state—including the League of California Cities, which represents more than 400 other municipalities and supports Glazer’s SB 531 to ban these revenue sharing agreements going forward.

In a Sept. 12 letter urging Newsom to sign the bill, the league’s Deputy Executive Director Daniel Carrigg cautioned that tax-rebate pacts promote “a race to the bottom that ends up harming all cities.”

“With the increasing volume of internet sales, a tremendous amount of sales tax revenue can be concentrated in a retailer’s warehouse, sales office or fulfillment center, which makes locating the facilities an enticing prospect for local agencies,” he wrote. “An agreement that benefits one agency by shifting the point of sale can come at the fiscal harm to many others.”

Glazer echoed Carrigg’s concerns, saying that what’s a win for San Jose is a huge hit to communities that get nothing out of the deal.

By “manipulating a quirk in our sales tax system,” the lawmaker said, San Jose stands to siphon up to $40 million a year from cities across the state and then keep $10 million of that for itself “with no economic benefit and no jobs created,” he added. “The city may be acting in its own interest, but it is doing so at the expense of every other community in the state,” he added. “This scheme is a perfect illustration of why we need to ban these deals going forward."

Glazer’s SB 531 awaits Newsom’s blessing to render it law in 2020, as does AB 485, which would allow tax-sharing incentives between cities and companies as long as they’re transparent to the public. The governor has until Oct. 13 to sign off on the bills.

Back in San Jose, by contrast, the local powers that be—Liccardo included—framed the eBay news as a win-win with nothing to lose.

The mayor snubbed an interview request for this story, referring back to Walesh’s expertise and his own comments from the dais—none of which addressed his justification for denouncing some kickbacks and celebrating another.

His message last week? That San Jose—which has long reaped a much lower per-capita sales tax rate than its more affluent neighbors in Sunnyvale, Palo Alto and Santa Clara and long held the distinction of being one of the most thinly staffed major cities in the US—should rejoice at the chance to generate more revenue for critical public services like police, fire and pothole repairs. Basically, the same some-taxes-are-better-than-none argument one could apply to any incentive.

During that same council discussion about the contract, Jeffrey Buchanan, a policy director at labor-backed think tank Working Partnerships, applauded the windfall of revenue as a way to fund much-needed affordable homes. Eddie Truong, his counterpart at business-boosting Silicon Valley Organization with whom he virtually never sees eye to eye, called it “an effective partnership that will strengthen San Jose’s tax base.”

Ashley Settle, a spokeswoman for eBay, lauded the deal as a way to deepen the company’s ties with the city it’s always called home. “This opportunity continues to evolve our relationship, enabling eBay and San Jose to continue supporting one another for the benefit of San Jose’s economy and residents,” she wrote in an email to San Jose Inside. “Thousands of eBay employees who work at one of our two San Jose campuses call San Jose their home, and we are deeply invested in our community.”

Locally, the only controversy over the eBay treaty involved how, exactly, to divvy up the money once it starts pouring into the city’s coffers.

On that issue, labor and business staked out dueling positions last week, with the former clique rallying for the new revenue to fund below-market-rate housing and the latter saying that’s something to decide through the usual budget-making process.

“I think it’s really important that we stand behind this pot of money,” business-backed Councilwoman Pam Foley said last week, “and not politicize it in any type of way.”

Jennifer Wadsworth is the news editor for San Jose Inside and Metro Silicon Valley. Email tips to [email protected]. Follow her on Twitter at @jennwadsworth.

One Comment

  1. This article is so confusing regarding this issue that most readers will be lost in the weeds. For instance, the article keeps stating that the deal made by San Jose comes “with no economic benefit and no jobs created.” But the article completely misses the point, that is, San Jose will reap millions of dollars of taxes that it would NOT HAVE received otherwise. The increased tax revenue IS the motivation for San Jose to enter the deal. The “no economic benefit and no jobs created” is a red herring for sure and is totally misplaced criticism at best — and just factually false at worst. Then the article compares the San Jose deal with multiple other deals with other companies that have nothing to do with the San Jose deal NOR how it was structured.

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