Apple’s hometown of Cupertino, California is preparing to set aside $56.5 million to repay California sales tax revenue it may have received improperly from in-state sales of the tech giant’s products, reports Bloomberg Law.

The Cupertino City Council’s plan to tap into reserves to create the repayment fund is the latest step for the city following its announcement in April that state tax officials have determined it is receiving the tax money improperly under a revenue sharing agreement it has with Apple. Council members will consider the plan at a meeting Oct. 10, according to an agenda on the council’s website.

Bloomberg Law says the California Department of Tax and Fee Administration is scrutinizing the agreement Apple has had with Cupertino since 1998. Under the deal, Apple designates all online sales to Californians as taking place in Cupertino, allowing the city to collect all local tax levies. Cupertino then gives 35 cents of every dollar to the company. Apple has received $107.7 million under the arrangement, according to city records.

The California Department of Tax and Fee Administration launched an audit of the arrangement in 2021. The audit focused on how Apple treats online sales. Apple’s arrangement with Cupertino is such that the company “treats all online purchases of products in the state of California as if they were made in Cupertino.” This means that, under California law, “1 percentage point” of the 7.25% sales tax is earmarked for Cupertino. From there, the city passes 35% of its total back to Apple:

Apple treats all online purchases of products in the state of California as if they were made in Cupertino, setting aside the 1 percentage point local portion of the 7.25% state sales tax for its hometown. The arrangement applies to Apple’s online sales to consumers in the state, as well as transactions with other businesses in California, sales at its two retail stores in Cupertino, and use tax on the company’s own equipment purchases, city officials have said.

The company remits all sales tax it receives to the state tax department, which then allocates the local portion to Cupertino. The city passes on 35% of its total to Apple. 

It was reported in 2019 that Cupertino had given almost $70 million in sales-tax collections back to Apple over the past 20 years, with the amounts sharply increasing in recent years, public records show. Per Bloomberg Tax, the payments have been made under a little-known tax incentive deal struck in 1997, when Apple was on the brink of bankruptcy, “and that’s likely to endure until at least 2033.”

Also in 2019, The Mercury News reported that Apple was offering to spend $9.7 million on five bike and pedestrian-oriented transportation projects for the city of Cupertino, a proposal by the company after the city council agreed to put off changes to the business license tax that would have cost Apple $9 million a year.

At that time, the tech giant approached the city after a proposal last year to change the city’s business license tax from a flat fee with a progressive rate based on total square footage, to a tax based on the number of people a business employs. According to The Mercury News, the change would have generated $10 million in annual revenue, most which would have come from Apple, the city’s largest employer with 24,000 workers.

However, the currently-in-place, controversial Apple-Cupertino agreement may be safe for the time being. would be protected until 2035 under legislation a group of lawmakers is asking California Governor Gavin Newsom to pursue, reports Bloomberg Law.

Last month six lawmakers representing Santa Clara County asked the Democratic governor for a bill blocking redistribution of the tax revenue in question away from cities in the county, or the county as a whole, according to a copy of their Aug. 18 letter to Newsom obtained by Bloomberg Law.

The proposed bill would shield Cupertino from a 73% drop in annual sales tax revenue resulting from the California Department of Tax and Fee Administration’s examination of a tax-sharing agreement the city has with Apple. It would also cover a similar arrangement between San Jose and eBay Inc., preempting the department’s actions and carving out an exception for Santa Clara cities that wouldn’t extend to the handful of other cities and counties where similar deals exist.

Newsom’s office has received the letter and is reviewing it, spokesperson Alex Stack told Bloomberg Law. The governor’s office has been in contact with legislators about the issue, he said.

Article provided with permission from AppleWorld.Today