Cupertino Facts

Cupertino Anticipates Financial Deficit – Impacts Remain Unknown

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Cupertino financial woes got a reality check when last-ditch efforts at the governor’s office failed to save its lucrative tax revenue sharing agreement with Apple. On October 17, 2023, staff proposed to set aside a $56.5M sales tax reserve, further worsening Cupertino’s impending budget deficit.

Background

Since 1998, Apple has assigned Cupertino as its point-of-sale location for all online purchases of its products in California. According to Bloomberg Tax, the appropriate point-of-sale location for internet sales is determined by where an item is “picked, packed, and shipped.” Because Cupertino is not a distribution center for Apple products, the California Department of Tax and Fee Administration (CDTFA) warned the City in December 2021 that its sales tax revenues might have been improperly allocated.

Like all public money, Cupertino’s tax dollars are subject to redistribution. While the State of California has been questioning tax sharing agreements that divert money from other municipalities, there are also arguments for keeping these agreements. Tax revenue sharing agreements, such as the one Apple argued was essential to its survival during a lean period in the 1990s, are enacted to help struggling businesses thrive and benefit the greater economy. Apple has received over $107.7 million of California’s sales tax revenue since its revenue sharing agreement with Cupertino was first enacted in 1998.

Over the years, Cupertino has become increasingly dependent on Apple for its sales tax revenue, which City staff expects to drop from $42.1M to $9.4M (the $42.1M likely includes Apple’s portion per the agreement). Additionally, Apple-owned properties also account for about a quarter of the City’s real estate tax revenue.

Budget Deficit Worsens

Although copious information is available through Bloomberg Tax, the current Council majority (which took office December 2022) only recently began discussing the fiscal crisis that it was repeatedly warned about by the prior Council. The City’s response to the CDTFA’s threat to terminate the Apple agreement and to repay the taxes dating back to April 2021 has been sluggish.

On October 17, 2023, staff proposed to reserve $56.5M to repay the taxes. Then, on October 25, City Council met in closed-session to discuss litigation against the CDTFA. City Council is expected to reveal the outcome of that meeting at the next City Council meeting on November 7. Meanwhile, the debt will grow as Cupertino continues to receive disputed funds from the state. Accounts payable data indicates that the City ceased reimbursing Apple its share in January 2023.

Moving forward, City spending has continued unabated. The budget allows for an 11% increase in employee headcount since 2019 (203 to 225), while Cupertino’s population has declined 8%. Cupertino is already in debt from the construction of the Library and the Community Hall, pegged at $2.7M annually until 2030. Given the impending structural deficit, the City is unable to able to issue more municipal bonds because it does not have a reliable revenue stream to repay them.

At a time when Cupertino needs it most, the current Council majority canceled the Economic Development Committee at the beginning of this year. Meanwhile, Mayor Wei has not asked for budget cuts, instead advocating for a new City Hall that the City can’t afford.

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