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Issue date: February 25, 2000

City sales tax revenue plummets; Internet sales may be a factor City sales tax revenue plummets; Internet sales may be a factor (February 25, 2000)

Officials concerned by $5 million income drop in last 3 years

By James Weissman

While Mountain View enjoys a boom in e-commerce development, taxable sales -- which generate a substantial portion of the city's income -- have moved in the opposite direction, marching steadily downhill for the last three years.

According to Finance Director Robert Locke, the city is experiencing a "substantial decline in sales tax" amounting to nearly $5 million since the 1996-'97 fiscal year. Mayor Rosemary Stasek characterizes the revenue drop in the last year alone as "precipitous." This year, expected sales tax revenues will be almost 10 percent less then the budgeted $20 million.

Since sales tax represents 30 percent of the total general revenue, the shrinkage has become an important local issue. Some city officials believe Internet transactions are the likely cause of the downturn, although the reasons for the drop are not definitive. Stasek says that "we can't account for 80 percent of our decline" and even Locke admits "we can't quantify the amount we've lost to e-commerce."

The retail sales tax on consumers is just one part of the total sales tax revenue the city collects. Almost half (40 percent) of this tax falls into the category of 'business-to-business.'

When a local company makes a large purchase from a supplier, the supplier does not charge sales tax, but the buyer pays a "use tax" to the municipality where the sale takes place. But if a company has various locations, determining the site of the sale can become somewhat slippery.

For example, Locke says that Sun Microsystems and Hewlett-Packard, two companies from which Mountain View derives "substantial revenue," are now allocating the point-of-sale of some purchases to other locations. Thus, while use tax may be collected, it does not come to Mountain View.

Actually, even when you make a supposedly tax-free purchase on the Internet from an online supplier, you are legally responsible for the use tax. But, according to Mayor Stasek, while there is "no way we are going to collect use tax" from a citizen, the city has been "very successful in collecting from corporations."

With the ability to change the point of sale, corporations now have what Stasek characterized as a "legitimate out" which raises the classic issue of illegal tax evasion versus legal tax avoidance. Locke agrees that the corporate use tax is "most vulnerable."

Locke says that another source of sale tax decrease can be attributed to firms relocating out of Mountain View due the lack of available land. While these factors explain "the majority of the decline" there is still the "suspicion" that e-commerce sales may explain the rest, Locke said.

Part of the problem in determining the impact of electronic transactions is that, according to Locke, the state Board of Equalization, which administers the sales tax, neither collects any statistics on e-commerce nor requires transactions to be noted as such. Locke thinks the board "needs to clarify the rules," which sometimes make it hard for well-intended merchants to pay at all.

For example, one city may tax toothpaste, another doesn't. One city may have a BART tax, while another has a different or even no transit tax. Stasek say the industry is essentially saying, "We will collect sales tax only we cannot handle 36,000 different regulations." She believes that the only way to fix this is to implement a consistent tax on a national level.

Would such a national sales tax be acceptable? The mayor thinks it is "certainly the lesser of evils" but, "it must be coupled with a serious look at how we fund municipalities. Cities are so far down the revenue totem pole they are forced to grub for every penny of sales tax they can get," she said.

Indeed, the sales tax issue is probably just a symptom of a deeper problem: how municipalities are funded and the control they have over these funds.

Stasek says that for Mountain View, like many cities, "more and more of our money is non-discretionary." For example, the "Educational Revenue Augmentation Fund" (ERAF), established in 1992-'93, allocated funds from property taxes directly to schools.

The net effect was a reduction in non-school local agency discretionary funds by as much as 50 percent to some cities. She asks, "When a larger and larger percentage of revenue comes with restrictions, how do we fund the other projects?"

Stasek notes that cities are "seeing the need for services increase while revenues decrease." She adds that government services that are most visible to citizens, such as police, fire, and parks, are all provided by local government. She finds it ironic that these services, which seem to be appreciated the most, are "funded by the entity that gets the least."

While the city may not be able to control the state and national regulations, the City Council has gone on record opposing the Internet Tax Freedom Act, as it is currently being applied. The act put a three- year moratorium on certain Internet access taxes and taxes on electronic commerce.

Former Mayor Mary Lou Zoglin says this has had "a devastating effect on cities" and feels this constitutes "a major revolution in public funding for the entire country." Zoglin notes that the municipalities are not seeking a tax on the Internet or access to the Internet, "but a tax on things we've already been taxed on." Like Stasek, she thinks that citizens are willing to pay for services they receive.

Mayor Stasek laughs at the idea that the Internet needs protection. As an employee of Microsoft, she has a reasonably good vantage point on the e-commerce arena. "There are many industries we need to protect; the Internet is not one of them," she said. City of Mountain View Annual Sales Tax Revenues Fiscal Year "Conservative" % Change 1994-95 16,356,000 15.2% 1995-96 20,108,000 22.9% 1996-97 22,940,000 14.1% 1997-98 21,761,000 (5.1%) 1998-99 * 19,645,000 (9.7%) 1999-00 ** 20,103,000 2.3% 1999-00 18,121,000 (9.9%) * Actual Unaudited **Budget Estimate 


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