We were tipped off the other day that the kind of accounting shenanigans we were supposed to be honoring IKEA for avoiding when they agreed to never divert their sales taxes in return for 1/2 of our increased sales-tax revenue are, in fact, already illegal.
So what was it that the new city manager urged the council members to ratify? That IKEA would agree to not do something illegal if we only give them back 1/2 of the new sales-tax increase as a rebate? That was mighty honorable of them yes, a very decent deal.
Thank goodness Dr. Gordon prevailed instead.
What used to happen is that many companies (mostly from out of state, that’s how it best worked) would have a warehouse or a big store somewhere in California, and they’d normally have to hand over their sales tax to the Board of Equalization for the host city to get its share. But what they’d do instead is set up a phony office or store in another town that they’d already cooked up a rebate deal with. If the home town wouldn’t play ball with such an idea (like what our own Burbank staff wanted to do with IKEA on Tuesday night), the other town would.
The company would then credit their sales to the other town, and get most of the sales-tax kicked back to them later on. The phony town would keep a small percentage of it for their efforts.
Pretty clever, or so these companies thought. At least it was until 2009, when the Legislature eliminated this practice in an “urgent” bill passed by a full 2/3 vote– something that no one was informed about until Dr. Gordon revealed to the public on Tuesday night that the Board of Equalization told him the practice was illegal.
Here’s why it’s illegal:
Senate Bill No. 27
An act to add Section 53084.5 to the Government Code, relating to local government, and declaring the urgency thereof, to take effect immediately.
[ Approved by Governor June 05, 2009. Filed with Secretary of State June 05, 2009. ]
LEGISLATIVE COUNSEL’S DIGEST
SB 27, Hancock. Local agencies: sales and use tax: reallocation.
Existing law prohibits a redevelopment agency or a local agency, as defined, from providing any form of financial assistance to a vehicle dealer or big box retailer, or a business entity that sells or leases land to a vehicle dealer or big box retailer, that is relocating from the territorial jurisdiction of one community or local agency to the territorial jurisdiction of another community or local agency, as specified.
This bill would, on or after the date this act takes effect, prohibit a local agency from entering into any form of agreement with a retailer, a consultant or agent representing a retailer, or any other person that would involve the payment, transfer, diversion, or rebate of any amount of Bradley-Burns local tax proceeds for any purpose if the agreement results in a reduction in the amount of revenue that is received by another local agency from a retailer that is located within the territorial jurisdiction of that other local agency, and the retailer continues to maintain a physical presence within the territorial jurisdiction of that other local agency, with specified exceptions.
This bill would declare that it is to take effect immediately as an urgency statute.
Vote: 2/3 Appropriation: NO Fiscal Committee: NO Local Program: NO
This is what Dr. Gordon was getting at the other night. The Burbank City Council was being urged to agree to a lucrative kickback deal for IKEA in (partial) return for IKEA agreeing not to do something that’s been illegal since 2009.
Now there may be other, more clever ways that IKEA can divert sales tax away from Burbank, but we don’t see how. The scheme above mostly worked for out-of-state companies that could finagle different end points in California. IKEA’s sales will be coming straight out of Burbank as direct, on-site purchases.
And if there are other ways to evade Burbank sales taxes, neither staff nor the CM could spell them out on Tuesday night.