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AddendumMEETING DATE: 05/19/15 ITEM NO: 9 ADDENDUM COUNCIL AGENDA REPORT DATE: MAY 18, 2015 TO: MAYOR AND TOWN COUNCIL FROM: LES WHITE, INTERIM TOWN MA SUBJECT: APPROVAL OF LOCATION AGREEMENT FOR SALES TAX SHARING BETWEEN THE TOWN OF LOS GATOS AND CALIFORNIA DEVELOPMENT GROUP AND U.S. CONCRETE INC. REMARKS: Provided below are responses to Council inquiries received after the agenda distribution for this item. 1. Please clarify: U.S. Concrete's term of corporate existence; and income and taxable income generated each year. U.S. Concrete, Inc. is a Delaware corporation which was incorporated in 1997. It began operations in 1999, which is the year it completed its initial public offering. U.S. Concrete Inc. is a leading producer of ready -mixed concrete in select geographic markets in the United States. It operates its business through two primary segments: ready -mixed concrete and aggregate products. Its customers include contractors for commercial and industrial, residential, street and highway and other public works construction. Concrete product revenue by type of construction activity for the year ended December 31, 2013 was approximately 64% commercial and industrial, 20% residential and 16% street, highway and other public works. Per staff review of the company's annual reports filed with the Securities and Exchange Commission, annual gross revenue (which appears to equal taxable revenue) is reported in the following table. The oldest data available in the data base is from the calendar year ending December 31, 2001. Reviewed by: V"&' Assistant Town Manager Town Attorney inance N:1MGR\AdminWorkFiles12015 Council Reports\May 191Sales Tax Agreement Staff Report Addendum.docx PAGE 2 MAYOR AND TOWN COUNCIL SUBJECT: SALES TAX AGREEMENT WITH CALIFORNIA DEVELOPMENT GROUP DATE: MAY 18, 2015 US Concrete Calendar Year Ending December 31 Taxable Income 2001 $493.6 M 2002 $503.3M 2003 $473.1M 2004 $438.8M 2005 $505.8M 2006 $589.0 M 2007 $803.8M 2008 $754.3M 2009 $534.5M 2010 $455.7M 2011 $445.8M 2012 $531.0M 2013 $598.2M 2014 $703.7M 2. Paragraph 2.1.13: Please clarify: - the amount payable to the Town is calculated (and "restarts") each fiscal year? - It is the Town that pays California Development Group, correct? - How much does the Town pay CDG? And why since CDG is not the entity generating the income? The amounts payable under the agreement are calculated for each four fiscal quarters beginning the first fiscal quarter that sales tax is credited to the Town. The calculation restarts for each succeeding four fiscal quarters. For example, if the Town were to receive its first credit for sales tax in January 2016, the fiscal quarter ending March 31, 2016 would be the first quarter, June 30, 2016 would be the second fiscal quarter, October 31, 2016 would be the third fiscal quarter, and December 31, 2016 would be the fourth and final fiscal quarter. The following quarter encompassing January 1, 2017 through March 31, 2017 would be the first fiscal quarter of the new calculation period. Per the agreement, the Town pays the sales tax sharing amount to the California Development Group. Per the terms of the agreement, 75% of the local sales tax collected each fiscal year is payable to California Development Group. The percentage share is contingent upon the Town retaining the first $500,000 of local tax collected each fiscal year. If the local share allocated to the Town is less than $2 million in any fiscal year, the Town retains a minimum $500,000 share. For example if local sales tax collected were $1.8M for the FY the Town is credited with a $500,000 share (which translates to a 28% share (500,000 divided by $1.8M) for the Town and a 72% share for CDB. Once annual local sales tax credited to the Town equals or exceeds $2M, the share percentage will be set at 25% for the Town and 75% for California Development Group. California Development Group represents the Central Concrete primarily for reasons of competitive confidentiality. CDG has expertise in advising businesses in how to consolidate operations while maintaining compliance with State Board of Equalization tax "situs" location for the new sellers permit filed by the newly consolidated enterprise. As part of their agreement with Central Concrete, PAGE 3 MAYOR AND TOWN COUNCIL SUBJECT: SALES TAX AGREEMENT WITH CALIFORNIA DEVELOPMENT GROUP DATE: MAY 18, 2015 CDG receives the original payment due from the Town. CDG then forwards the amount due to their client less CDG's agreed upon fee for services rendered. 3. Why does California Development Group retain 75% of the sales tax? As opposed to U.S. Concrete? As stated earlier, California Development Group represents the Central Concrete primarily for reasons of competitive confidentiality. CDG has expertise in advising businesses in how to consolidate operations while maintaining compliance with State Board of Equalization tax "situs" location for the new sellers permit filed by the newly consolidated enterprise. As part of their agreement with Central Concrete, CDG receives the original payment due from the Town. CDG then forwards the amount due to their client less CDG's agreed upon fee for services rendered. 4. What are the "other" 6 jurisdictions receiving tax revenue from U.S. Concrete? And what amount/% are they receiving? The staff report indicated eight cities presently received allocations. The company recently provided more detail indicating ten cities currently receive allocations. The estimated fiscal year sales tax credited to each city is shown below: City and County of San Francisco $608K City of San Jose $528K City of South San Francisco $208K City of Oakland $156K City of Hayward $108K City of Redwood City $96K City of Pleasanton $92K City of Martinez $44K City of Santa Clara $20K City of San Carlos $4K Staff has confirmed that no sales tax agreement is in place for any city listed above, therefore each city is receiving 100% of their locally generated sales tax from Central Concrete and Supply. 5. Over what "period of time" will the company be closing its other offices before the company is consolidated in Los Gatos? Staff has been informed that the company expects to be out of all their sales offices around 360 days after the first calendar quarter where sales tax is first credited to the Town. For example, if the first time sales tax is credited to the Town occurs in January of 2016, the company expects to be fully closed out of its other offices by January 2017.