Cupertino Considers Increasing Sales Tax Rate

On December 5, 2023, City Council voted to explore raising Cupertino sales taxes by 0.25% (to a total of 9.375%). The decision follows staff recommendations, and would poll the business community to understand whether they would be willing to vote for a 0.25% tax hike on the November 2024 ballot.

Background

Presently, Cupertino receives approximately $0.65 for every $100 of products purchased from Apple online in California. However, the State recently decided to rescind Apple’s practice of directing online sales tax revenue to Cupertino. 

The City has contemplated the loss of its lucrative Apple deal since at least 2006. The annual budget cautioned:

‘Our largest sales tax producer, Apple computer, comprises 26% and given the volatility of the high tech industry, this fact alone has put this revenue source in an “at risk” situation. To add to this concern, the State is continuing its efforts to change the way Internet sales are reported and, if they are successful, will dramatically affect the amount of sales tax revenue currently received from Apple.’

When online sales surged during the height of COVID-19, so did Cupertino’s net sales tax income, which peaked at $42.6M in fiscal year 2020/21. The average sales tax income was $23.3M in the fiscal years 2015/16 through 2018/19. If the State nullifies Apple’s agreement with the City, sales tax income is estimated to plunge from $11.4M to $9M in 2023. While the City appeals this decision, it is finally preparing for the worst-case scenario. 

Muddy Messaging

In May 2023, the City anticipated a $31M or 73% decline in sales-tax revenue. Recently, the budget gap was reduced to a more realistic $15M. However, with the exception of some smaller cuts, such as cancelling 4^th of July fireworks next year, the City has not significantly curbed spending since receiving its first warning letter from the California Department of Tax and Fee Administration (CDTFA) in December 2021. To the contrary, the current annual budget has increased to $113M, from an actual spending of $89M in 2018/19. 

Accordingly, subsequent budgets listed various “budget-balancing” strategies, among them, taxes on sales (Transaction and Use Tax), hotel stays (Transient Occupancy Tax), parcels, and businesses (Business Operations Tax).

City Staff Pushes for Sales Tax Increase

At the December 5, City Council Study Session, staff asked Council to provide “direction to staff regarding exploring the feasibility of one or more potential revenue tax measures – Transaction and Use Tax, Transient Occupancy Tax, Parcel Tax, and/or Business Operations Tax-through opinion research for the November 2024 election.” City Staff and Urban Futures Inc (UFI) presented these four options, but the Transaction and Use Tax was the pre-determined winner: as of October 2023, the City had already entered into a $170K contract with TeamCivX for sales tax revenue measure polling and consulting services.

The following list describes the new tax proposals and compares them with information from the 2020/21 Budget.

1. Transaction and Use Tax (TUT): A new 0.25% Transaction and Use Tax would increase the Cupertino sales tax rate from 9.125% to 9.375%, meaning that a purchase of $100 in taxable goods would cost $0.25 more. This tax is estimated to raise $5.4M, a significant increase from the 2020/21 Budget estimate of $3M to $4M. This tax would be levied on taxable purchases made in and/or delivered to Cupertino and would not be shared with County tax pools. Only three of Santa Clara County’s fifteen cities have a tax rate this high, Campbell, Milpitas, and San Jose. Some Bay Area cities have higher rates.
2. Hotel Tax: The City’s Transient Occupancy Tax (TOT) of 12%, imposed on Hotel stays and Airbnbs, could be increased to 15% (for an estimated $1.875M in revenue). A hotel representative balked at the proposal, leaving Council Members mystified as to why neither the Chamber of Commerce nor Cupertino hotels had been consulted. The 2020/21 Budget did not consider a tax this high and estimated that an increase from 12% to 14% would raise an additional $1.7M.
3. Parcel Tax: A parcel tax would add $250 to each parcel in the City, regardless of whether it is a small single-family home or an immense industrial complex. A flat tax was considered more straight forward than the more equitable graduated rates of $27 to $613. The graduated rates seem to have been selected so that the amount of money raised for the City would be about the same, $3.7M.
4. Business Operations Tax: A revised Business License Tax would raise $4.3M, less than half of the $10M estimate in the 2020/21 Budget. No details were provided on how the tax would be calculated. The staff report confirmed that Cupertino has a “notably low business license tax rate compared to neighboring cities on a per capita basis” and warned that a tax-increase could deter existing and future businesses.

Next Steps

In January and February, the City will poll the business community for its opinions on a higher sales tax. Outside of the limited poll, it is unclear what communications the public will receive around a potential sales tax ballot measure. A majority vote on the November 2024 ballot would be needed to enact a new 0.25% sales tax. 

City staff will also discuss budget cuts. Just after the December council meeting, City Staff contracted with Voler Strategic Advisors (VSA) for $42K to “Develop a media strategy on key issues such as the budget or major developments.” As such, the public can potentially expect to receive professional messaging around the budget cuts.