Staff ReportMEETING DATE: 05/19/15
ITEM NO: 9 SOS cA °' COUNCIL AGENDA REPORT
DATE: MAY 12, 2015
TO: MAYOR AND TOWN COUNCIL
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FROM: LES WHITE, INTERIM TOWN MANAG
SUBJECT: APPROVAL OF LOCATION AGREEMENT FOR SALES TAX SHARING
BETWEEN THE TOWN OF LOS GATOS AND CALIFORNIA DEVELOPMENT
GROUP AND U.S. CONCRETE INC.
RECOMMENDATION:
Adopt a resolution approving a Location Agreement for sales tax sharing between the Town of Los
Gatos and California Development Group and U.S. Concrete Inc. to consolidate Northern California
sales offices into one sales headquarters located in the Town of Los Gatos.
EXECUTIVE SUMMARY:
California Development Group is proposing to relocate their client's (U.S. Concrete dba Central
Concrete Supply) entire sales team from various locations in California to one central headquarters
located within the Town. The proposed relocation is anticipated to require no special planning
permits, and minimal office space, with limited permanent staffing and customer traffic. In
recognition of the economic benefits and low impacts upon Town residents, the proposed agreement
specifies that, per the tax sharing formula, the Town will receive the first $500,000 in sales tax
revenue collected (equaling 25% of the first $2 million in projected annual sales tax collected). The
remaining $1.5 million, or 75 %, of the first $2 million in annual sales tax collected will be paid to
California Development Group. The agreement further stipulates that amounts collected annually
beyond the $2 million dollar threshold be shared in accordance with this 25/75 percent split between
the Town and company respectively. The agreement is for a 20 year term but includes cancellation
options for either party with proper notice on an annual basis. The agreement also provides
indemnification and "hold harmless" language whereby California Development Group promises to
hold the Town harmless, providing for reimbursement to the Town should financial liability result
from any court or regulatory adverse decision.
Reviewed by:
Town Manager UOTown Attorney
N:AMGR1AdnihiWorkFi1es\2015 Council Reporls\May 19ASales Tax Agreement Staff Report 150512.docx
PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT: SALES TAX AGREEMENT WITH CALIFORNIA DEVELOPMENT GROUP
DATE: MAY 12, 2015
BACKGROUND:
The Town was recently approached by California Development Group representing Central Concrete
Supply, a large Bay Area construction materials supplier, with a proposal to relocate Central
Concrete Supply's entire regional sales team to one central headquarters located in the Town of Los
Gatos. The company currently has approximately eight regional sales offices (largely one and two
person offices) located throughout the Bay Area and would like to consolidate those offices into one
headquarters, establishing one primary contact point for its sales team and customers. The company
offices would be headquartered in Los Gatos and is anticipated to require approximately 2,000 +
square feet of class "A" office space for approximately 8 to 10 permanent staff. The office space
would serve as a gathering point for sales meetings and other company initiatives on a quarterly
basis. The company is currently looking for suitable office space within the Town, with all costs
associated with the acquisition of office space, relocation of its employees and establishment of
headquarters in the town of Los Gatos being the full responsibility of the company.
The company expects that the impacts to Town residents to be minimal, as there are very few
permanent employees in the office headquarters. Town staff anticipates that no special planning
permits or conditional use permits will be required for this relocation.
In recognition of the company's relocation of its sales team to a new headquarters located in the
Town coupled with the expected minimal traffic and environmental impacts to the quality of life for
Town residents. In addition, there is the direct economic benefit of (S500K annual minimum).
California Development Group proposes that the 1% sales tax allocation of approximately $2 million
annually (Town's allocation of the gross estimated annual sales of approximately $200 million) be
shared between the Town and the company. The proposed sharing formula allocates 25% to the
Town of Los Gatos and the remaining 75% annually to California Development Group. The
agreement further stipulates that the Town retain on an annual basis the first 25% of the estimated
$2,000,000 sales tax collected until a minimum of $500,000 is retained by the Town.
DISCUSSION
Under California law, sales taxes must be allocated, on a "situs" basis, to the place of business of the
retailer. Generally, this is the place where the transaction occurs. However, if a seller has more than
one place of business and the sales and delivery of a product occur at separate locations, State Board
of Equalization (BOE) regulations require that the sales be allocated to the site of the principal sales
negotiations. U.S. Concrete dba Central Concrete Supply desires to consolidate and relocate to Los
Gatos and therefore sales taxes would be allocated to the place where the principal sales negotiation
takes place. By consolidating all of its sales into just one office, the Town can benefit from all the
statewide sales of the business.
There is no law or regulation that specifically authorizes local governments to provide rebates or
financial incentives. Local governments have been relying on the authority granted to them in the
California Constitution concerning how they conduct their municipal affairs. Local agreements
involving sales tax rebates typically reference one or more municipal purposes, such as additional
PAGE 3
MAYOR AND TOWN COUNCIL
SUBJECT: SALES TAX AGREEMENT WITH CALIFORNIA DEVELOPMENT GROUP
DATE: MAY 12, 2015
DISCUSSION (cont'd):
revenue, more jobs, or the general well -being of the community. As of this date the Town has no
active sales tax sharing agreements with any of its businesses located within the Town. HDL
companies, a leading consulting firm used by many California cities in sales tax matters, reported in
December 2013 that there is anecdotal evidence indicating over 20% of the local sales tax collected
state -wide is shared in these types of agreements. This trend is continuing and is especially popular
in Southern California.
In this case, if the Town were to enter into a sales tax rebate agreement, the local taxes would still be
allocated by the Board of Equalization (BOE) to the Town, which would then rebate the agreed -to
portion to the business. Given the lack of state -level involvement, there is no comprehensive
information regarding the frequency and magnitude of sales tax rebates and other forms of financial
incentives. However, our preliminary research has determined there are numerous California cities
with similar sales office agreements throughout the state, with the percentage of sales tax sharing
varying, but 75% seems to be the norm.
Although there is no law or regulation that specifically authorizes local governments to provide
rebate or financial incentives the legislature has restricted use of rebates and incentives for certain
relocations. The Town may not enter into any sales tax sharing agreement with a vehicle dealer or big
box retailer which is relocating from the territorial jurisdiction of another local agency within the
same market area. In addition, the Town may not enter into any sales tax sharing agreement if said
agreement would result in reduced sales tax revenues received by another local agency from a retailer
that is located within the territorial jurisdiction of that other local agency and the retailer maintains a
physical presence in the territorial jurisdiction of that other local agency. California Government
Code Section 53084 and 53084.5.
The proposed agreement is for the relocation of all primary sales originations for the company from
eight regional offices into one central sales headquarters. The proposed agreement involves no
movement of retail outlets. Staff has been assured by U.S. Concrete and California Development
Group that California Government Code Section 53084 and 53084.5 are not applicable to our
situation. If in fact it was determined otherwise, the terms of the Location Agreement provide that
they will indemnify the Town for any legal defense of the agreement and will reimbursement for
return of any revenues to the original taxing jurisdictions in the event of an unforeseen legislative or
court imposed nullification of any or part of this agreement.
The company has advised staff that there are currently eight cities with regional sales offices where
sales tax is currently credited. The two largest jurisdictions are the City and County of San Francisco
and the City of San Jose. Each of those cities receives approximately $500,000 per year in annual
sales tax under the current sales office organization —this represents a very small percentage of those
two jurisdictions total annual sales tax revenues, generally, well under one percent. One other Santa
Clara County city has a regional office with a very small amount of approximately $20,000 per year
PAGE 4
MAYOR AND TOWN COUNCIL
SUBJECT: SALES TAX AGREEMENT WITH CALIFORNIA DEVELOPMENT GROUP
DATE: MAY 12, 2015
DISCUSSION (cont'd):
credited to that locality. With the approval of the agreement the company expects to phase the
closeout of these regional offices over a period of time. to minimize any operating budget impacts.
If the Town were to approve this agreement, staff anticipates a total of $10 million to be collected
over the proposed twenty year life of the agreement. Recent updates to the sales tax forecasts for
FY 15/16 indicate a reduction in sales tax estimates from the mid- year forecast of $8.8 million to a
revised amount of $8.3 million, a drop of $500,000 from the most recent forecast provided to
Council as part of the FY 14/15 mid -year budget review. In terms of immediate impact, increasing
the sales tax estimate for the proposed agreement would likely fill the anticipated budget gap between
fiscal year 2015/16 revenues and expenditures. Ultimately, this sales tax revenue source would
constitute the second largest source of sales tax in the Town.
CONCLUSION:
Due to the economic benefit from the additional operating revenues of approximately $500,000 or
more per fiscal year being added to the Town's operating revenues, helping to provide ongoing
General Fund revenues and the expected minimal impact to the town's local environment, staff
recommends that Town Council consider approving the proposed sales tax agreement with California
Development Group. Furthermore, California Development Group has indicated it will consummate a
tax agreement with the Town or, if not Los Gatos, then in some other local government jurisdiction.
ALTERNATIVES:
Alternative A: Do not approve the agreement.
The advantage of denying approval of this agreement is from a public policy perspective. In general
local governments lose revenues when looking at these type of agreements on a state -wide basis.
Without sales tax sharing agreements in place, the entire I% allocation to local governments stays
with the local governments. Taken as a whole, while these agreements may be beneficial for one
municipality it is often at the expense of another and is basically a transfer to corporate coffers and a
drain of local government revenues. Also because these types of agreements may be under future
audit or legal scrutiny by the State, the Town could avoid any potential future legal and legislative
impacts related to the possible abolishment of such agreements.
The disadvantages of this alternative are that the Town will forgo the opportunity to receive an
additional annual revenue increase of approximately $500,000. Many cities in the state participate in
such agreements (current estimate is that nearly 20% of total state sales taxes collected for all local
governments participate in sales tax sharing agreements) and if the Town does not participate in such
agreements Town sales tax revenue will likely continue to lag behind the rest of the state.
PAGE 5
MAYOR AND TOWN COUNCIL
SUBJECT: SALES TAX AGREEMENT WITH CALIFORNIA DEVELOPMENT GROUP
DATE: MAY 12, 2015
ALTERNATIVES (cont'd ):
Alternative B: Do not approve the agreement and direct staff to renegotiate terms of the agreement.
The advantage to this alternative is that staff can attempt to gain more favorable terms for the Town
such as negotiating an increase in the Town's percentage share from 25% to a higher percentage
share, as one example, thereby increasing revenues received by the Town.
The disadvantages to this alternative are that the company has informed staff after several requests to
increase the Town percentage that this is their best and last offer. Staff has had a number of
conversations discussing terns and anticipates that the company will not be willing to change terms
offered and would likely seek agreement on similar terms with another Bay Area local government.
The company did agree that the first $500,000 of the estimated annual $2,000,000 sales tax revenue
in any year would accrue to the Town and the next $1,500,000 would accrue to the company with any
amounts above $2,000,000 estimated local sales tax revenue split 25% to the Town and 75% to the
company.
COORDINATION:
This staff report were drafted in collaboration with the Departments of Finance and the Town
Manager's Office and reviewed by the Town Attorney.
FISCAL IMPACT:
Approval of this agreement is anticipated to add an additional $500,000 per year to the Town's
present estimated revenue of $8.3 million for FY 2015/16, increasing the projected revenues by 6%
totaling approximately $8.8 million for fiscal year 2015/16 and an estimated $10 million over the
course of the contract
ENVIRONMENTAL ASSESSMENT:
This is not a project defined under CEQA, and no further action is required.
Attachments:
1. Resolution approving a Location Agreement for sales tax sharing between the Town of Los Gatos
and California Development Group and U.S. Concrete Inc. with Exhibit A