California Grapples with Evolving Sales Tax Landscape Amid E-Commerce Boom

California cities are at odds over how to equitably distribute local sales tax revenue in the age of e-commerce. As consumer preferences shift and technology advances, the existing sales tax laws, many of which were adopted in the 1950s, struggle to keep pace with the complexities of modern retail.

The central debate revolves around the Bradley-Burns 1% sales tax, a significant revenue source for local governments. This tax has become a point of contention as online sales have surged, particularly between 2012 and 2024, where e-commerce saw a growth of 584.4%.

Key points to consider:

• Sales Tax vs. Use Tax: Understanding the distinction between sales and use tax is crucial for proper allocation. Sales tax applies when goods are located in California at the time of sale, while use tax generally applies when the title of goods passes to the purchaser outside of California.
• Allocation Discrepancies: Currently, sales tax is allocated to the retailer’s place of business in California where the transaction occurs. However, use tax is typically allocated to the countywide pool based on the place of first functional use.
• E-Commerce Equity: The City Managers Sales Tax Working Group convened in 2022 to address these issues, focusing on equitable distribution of e-commerce sales tax revenue. Their recommendations aim to balance the contributions of both the point of sale and the destination of goods in generating sales tax.
• Proposed 50/50 Split: One key recommendation is a 50/50 split of Bradley-Burns sales and use tax revenues from e-commerce transactions. This would allocate half the tax to the jurisdiction where the fulfillment center is located and the other half to the destination city. There is also consideration of a plus or minus 10% flexibility.
• CDTFA Data Analysis: According to California Department of Tax and Fee Administration (CDTFA) modeling, a 50/50 split could lead to revenue gains for cities with few storefronts, particularly rural and low-income areas. Cities with warehouses and distribution centers may experience losses.
• Placerville's Stance: The City of Placerville supports the working group's recommendations, emphasizing that the existing regulations create a "have versus have-not situation". They advocate for ensuring that local sales tax revenues benefit the communities where residents pay those taxes.
• Sales Tax Sharing Agreements: There are prospective and targeted limits to sales tax sharing agreements to reduce competition for situs-based sales tax revenue between cities. Changes to these agreements may include a 20-year cap on duration, a 50% cap on rebates to private businesses, and enhanced transparency and public review.
• The City of Placerville could potentially receive approximately 10% to 25% more sales tax which equates to approximately $624,980 to $1,562,450 in more sales tax revenue annually if the proposed 50%/50% split destination based online sales tax reforms were approved.

Legislative Hurdles:

Implementing these reforms may require state legislation or a voter-approved State Constitutional Amendment. The League of California Cities Revenue and Tax Policy Committee will be considering the City Managers Sales Tax Working Group’s proposed e-commerce reform.

The debate highlights the challenges of adapting tax systems to the digital age and the need for equitable solutions that support the fiscal sustainability of all California cities.