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CC 12-05-23 Item No. 1 Receive presentation regarding revenue tax measure options_Written CommunicationsCC 12-05-2023 Written Communications Item No. 1 Receive presentation regarding revenue tax measure options From:Kitty Moore To:Pamela Wu; City Clerk; Kirsten Squarcia Cc:Matt Morley Subject:Dec 5 Study Session Item 1 Staff Questions also submitted for Written Communications Date:Monday, December 4, 2023 7:07:33 AM Attachments:Budget Balancing Strategies Pages from FY_202122_Adopted_Budget.pdf VallcoRise Plan check from FY_2023-24_Adopted_Budget.pdf Budget Balancing Pages from FY_2023-24_Adopted_Budget2.pdf Hi, The following questions/comments are regarding Item 1 of the December 5 Study Session for Staff and submitted for Written Communications: Thank you for providing the revenue generating strategies for Tax Measures. Attached please find the Budget Balancing Strategies from FY 21-22 which has more data estimates and the Vallco/Rise Plan check fee estimate. Question 1: Business Operations Tax: Palo Alto, Mountain View, Santa Clara, and Sunnyvale each receive a significant amount of annual revenue from this source and have large business presences in their cities. Could there be more explanation for why this is not a recommended strategy when 95% of cities impose one or more of these taxes, and what are the special purposes the local and statewide cities are using these funds for? Question 2: With regards to the Vallco/Rise Plan check fee estimate, how much of the $30M estimate is a pass through to the plan check contractor who would be responsible for that work, how much would go to funding City Staff, and what would be the left-over portion? Is it General Fund or assigned? When the Development Impact Fees are deposited with the City for this project, those funds are restricted to their various accounts, is that correct? For instance, Transportation Impact Fees must be used for transportation impact and cannot be reallocated to salaries as these are AB 1600 funds. Question 3: In FY 21-22 the TUT increase was estimated at $4M and this year it is estimated at $5.4M when the total Sales Tax is estimated at $9M. I suggest that this estimate be reviewed and revised significantly downward, and please provide the calculation assumptions. If we are currently at $9M, receiving 1%, increasing to !.25% will not bring in over 50% more sales tax revenue (the $5.4M). Please also explain what purchases we make which will have this increase (when we buy online, in person in Cupertino, etc.). Question 4: At the previous Council meeting, the 4th of July fireworks were canceled to save approximately $140k without looking at Budget-Balancing Strategies as a whole which would be a combination of Revenue and Expenditure modifications. This Study Session contemplates only taxing the community. Are we going to have a meeting discussing a more holistic approach to Budget Balancing and/or provide a recap of what has been done so far? Question 5: What calculations have been made with regards to square footage parcel tax? Specifically, please show the assumptions ($/sf, square footage) and calculations. It is my understanding that all properties are treated equally when applying a square footage parcel tax, whether commercial or residential, is that correct? Thank you, Kitty Moore Kitty Moore​​​​ Councilmember City Council KMoore@cupertino.gov (408) 777-1389 Budget-Balancing Strategies Historically, the City’s budget has been structurally sound, with revenues exceeding expenditures in most years. When revenues have exceeded expenditures, the City has transferred the excess fund balance to the Capital Reserve per the City’s One Time Use and Reserve Policy. The current 5-year and 20-year forecasts anticipate operating deficits beginning in FY 2026-27. The operating deficits are projected to increase as revenues grow at a slower pace than expenditures. As a result, the following strategies may be used to assist in balancing the budget over the next 20 years. Strategy Description Potential Impact Expenditures Section 115 Trust The City established a Section 115 Trust, or Pension Rate Stabilization Program, to reduce pension rate volatility when CalPERS investment returns are below the discount rate or when CalPERS changes assumptions. The City can also use it to offset pension costs in any given year. The fund is currently at $17 million. Economic Uncertainty Reserve The City has $19 million in its Economic Uncertainty Reserve (General Fund). The fund is currently at $19 million. Additional Potential Strategies Although not recommended at this time, the City may consider the following potential strategies in future years if sharp declines in revenues or increases in expenditures cause large structural deficits. Potential Strategy Description Potential Impact Revenues Transaction and Use Tax (1/4 cent) Voter approval required, could bring sales tax from 9% to 9.25% for the City.$4 million Transient Occupancy Tax Measure Voter approval required, could bring rate from 12% to 14% •$1.7M @ $10M base •$1.25M at $7.5M base •$833k at $5M base FY 2021-22 Adopted Budget Financial Schedules 177 Parcel Tax Voter approval required •$3.5M flat rate per parcel •$3.6M variable rate per SF Expenditures Salary and benefit savings through attrition Keep non-essential positions unfilled as they become vacant. Approximately $180,000 per position on average Employee cost-sharing of increases to CalPERS Negotiate to share costs of increases to CalPERS employer rates with employees. $250,000 approximate based on 5% rate increase No new positions Cost containment strategy $0 Furloughs Employees would take up to 20 hours or the equivalent of a 1% decrease in pay in exchange for 2.5 unpaid furlough days $300,000 approximate based on 1% decrease Deferring or eliminating negotiated increases The City has negotiated a 3.5% increase effective the first pay period in July 2020 and a 3% increase effective the first pay period in July 2021. Deferring or eliminating negotiated increases would require agreement from the bargaining units. $300,000 approximate based on 1% decrease Reduction in force The City would identify what positions could be reduced (laid off) based on provisions in the MOUs where appropriate and service level needs in the City. Approximately $180,000 per position on average Reduction in capital outlays and special projects Cost containment strategy Up to $1.5 million Reduction in contingencies Cost containment strategy Up to $850,000 FY 2021-22 Adopted Budget Financial Schedules 178 Apple Park and large residential projects (Rosebowl, Biltmore expansion, Main Street) generated significant permiHing revenues in FY 2013-14. Since then, activity has slowed until FY 2018-19, when revenues came in 48.8% higher. Although this revenue source is relatively consistent from year to year, fluctuations may occur depending on the timing of projects being completed. The $34 million estimated amount in FY 2022-23 is due to Vallco Town Center (renamed The Rise) and its scheduled commencement in FY 2022-23. However, due to the developer's need to hire a new architect to complete the buildout plans and to value engineer the original design, the $30 million plan check fee revenues will be carried forward and recognized in FY 2023-24. Use of Money and Property The use of money and property category is comprised of General Fund interest earnings as well as facility and concession rental income of City-owned property. As of March 31, 2023, the City's portfolio included $21.3 million invested with the Local Agency Investment Fund (LAIF) and $149.7 million invested with Chandler Asset Management. As of March 31, 2023, the City also had $18.3 million in its Section 115 Pension Trust. Fluctuations in this revenue category are a result of investment earnings, as rental income is fairly steady. Investment earnings were higher in FY 2019-20 and FY 2020-21 due to investment gains in the City's Section 115 Pension Trust. Investment earnings fell in FY 2021-22 due to mark-to-market adjustments to account for unrealized losses in the City's portfolio. The portfolio's market value fluctuates depending on interest rates. When interest rates decrease aOer an investment is purchased, the market value of the investment increases. In contrast, when interest rates increase aOer an investment is purchased, the market value of the investment decreases. At the time of purchase, the City FY 2023-24 Adopted Budget General Fund Financial Schedules 153 Potential Budget-Balancing Strategies Historically, the City has maintained a structurally sound budget, with revenues surpassing expenditures in most fiscal years. During periods of excess revenue, the City has transferred the surplus fund balance to the Capital Reserve Fund in accordance with the City's Fund Balance and Use of One-Time Funds Policy. However, the forecast shows a potential structural deficit resulting from the anticipated decrease in sales tax revenue due to the CDTFA audit. A structural deficit occurs when recurring expenditures consistently surpass recurring revenues, leading to an ongoing imbalance that cannot be remedied through short-term solutions. Potential Strategy Description Potential Impact Currently Recommended Section 115 Pension Trust In FY 2017-18, the City established a Section 115 Pension Trust to mitigate pension rate volatility when CalPERS investment returns are below the discount rate or when CalPERS changes assumptions. The City can also use it to offset pension costs in any given year. The City established a Section 115 Trust to reduce pension rate volatility when CalPERS investment returns are below the discount rate or when CalPERS changes assumptions. The City can also use it to offset pension costs. The fund has a balance of $19.1 million.Yes Section 115 OPEB Trust In FY 2009-10, the City established a Section 115 OPEB Trust to help fund its retiree health obligations, also known as other post-employment benefits (OPEB). The OPEB plan is fully funded. Starting in FY 2022-23, retiree health costs will be funded by the OPEB Trust rather than the General Fund. The fund has a balance of $34.7 million.Yes Capital Projects Reserve The General Fund Capital Projects Reserve may be used to fund capital projects. The reserve has a balance of $10 million.Yes Economic Uncertainty Reserve The General Fund Economic Uncertainty Reserve may be used to mitigate potential shortfalls. The reserve has a balance of $24 million.No As of June 30, 2023 1 1 1 FY 2023-24 Adopted Budget General Fund Financial Schedules 188 Expenditure Reduction Strategies Potential Strategy Description Potential Impact Currently Recommended No new positions Cost containment strategy $0 Yes Vacancy control Keep non-essential positions unfilled as they become vacant. Approximately $186,000 per position on average Yes Employee cost-sharing of increases to CalPERS Negotiate to share costs of increases to CalPERS employer rates with employees. Would be subject to bargaining unit agreement. $250,000 approximate based on a 5% rate increase No Defer or eliminate negotiated increases Would be subject to bargaining unit agreement. Approximately $0.3 million savings based on a 1% decrease No Furloughs Employees would take up to a 10% decrease in pay in exchange for 1 unpaid furlough day per pay period. Would be subject to bargaining unit agreement. Approximately $3 million savings based on a 10% decrease No Reduction in force Identify positions to be reduced (laid off) based on MOU provisions and service level needs. Approximately $186,000 per position on average No Reduction in capital outlays and special projects Cost containment strategy Up to $4 million Yes Reduction in contingencies Cost containment strategy Up to $400,000 Yes Defer or cancel capital projects Cost reduction strategy Varies Yes Reduction of Community Funding and Historical Society Funding Cost reduction strategy Up to $110,000 Yes Reduction of festival fee waivers Cost reduction strategy Varies Yes FY 2023-24 Adopted Budget General Fund Financial Schedules 189 Revenue Generation Strategies Potential Strategy Description Potential Impact Currently Recommended ¼ Cent Transaction and Use Tax (TUT) Voter approval is required Could increase sales tax from 9.125% to 9.375% $5.4 million No Transient Occupancy Tax (2% increase) Voter approval is required Could increase transient occupancy tax from 12% to 14% $1.7M @ $10M base $1.25M at $7.5M base $833k at $5M base No Parcel Tax Voter approval is required $3.5M flat rate per parcel $3.6M variable rate per SF No Other Revenue Tax Measures Urban Futures, Inc. (UFI) has been contracted to analyze potential revenue tax measures.Varies No Increase fees and cost- recovery Matrix Consulting Group has been contracted to conduct a fee study, which is scheduled to take place from April to July 2023. The study aims to assess the potential for fee increases and cost recovery. Varies Yes Sale of City-owned Properties or Assets The sale of city-owned assets would generate one-time revenue.Varies No HdL estimate as of July 2023 Development Revenue Estimates The City's current forecast does not incorporate potential significant development projects that are pending approval and permiHing. However, once new development projects receive approvals and permits, staff will update the forecast accordingly. The table below shows our best estimates of potential development revenue. These figures serve as rough approximations and are intended to give you a general idea of what to expect. The timeline for each project represents the Community Development department's best estimate of when commencement is anticipated. It is crucial to note that these estimates are subject to adjustments as we gather additional information over time. 1 1 FY 2023-24 Adopted Budget General Fund Financial Schedules 190 From:Rhoda Fry To:City Clerk; City Council Subject:December 5 2023 "Study Session" increasing sales tax and TOT and PARCEL TAX Date:Thursday, November 30, 2023 4:13:08 PM CAUTION: This email originated from outside of the organization. Do not click links or open attachments unless you recognize the sender and know the content is safe. Dear City Council, Regarding December 5 2023 "Study Session" increasing sales tax and TOT. SALES TAX There are 15 cities in Santa Clara County. Only 4 have higher sales taxes than Cupertino. If Cupertino were to raise sales tax, it would be among the top third sales-tax rates in our County. Cupertino would be in the THREE HIGHEST SALES-TAX rates in SANTA CLARA COUNTY. Please explain how $5.4 million annually could be raised with an additional 0.25% tax. My understanding is that we are anticipating sales-tax income to dip to $11M. That means that the gross sales would be $1100M (since $11M sales tax income is derived from 1% of sales). 0.25% x $1100M = $2.75M. Please explain why I’m figuring $2.75M and the report is figuring $5.4M. TOT Strangely, the staff report seems to be less eager to raise the TOT on the basis of Cupertino having a high tax rate than neighboring cities. Why isn’t the same argument being made for a sales-tax hike? While TOT would not raise as much as sales-tax, I certainly think that it is worth exploring. When the tax issues began, I spoke with folks from the Chamber of Commerce and a few Hotels, and neither seemed terribly concerned about a TOT hike. Looking back at some pre-COVID annual reports, there has been a variance of between $6M and $9M of tax collected. Can you please provide some more data as to the past TOT revenues and anticipated revenues. I’ve seen quite a range in the City’s Annual reports (ACFR) and I’d like to see more transparency in the staff report as to the assumptions made in revenue generation. I’d like to hear from the hotels about their take on adding to the TOT. PARCEL TAX I am not in favor of parcel taxes because they are regressive as the report stated. I will be writing about the business tax in a later email. Thanks, Rhoda Fry From:Rhoda Fry To:City Clerk; City Council Subject:City Council Public Comment - 12/5/2023 - Information on Sales-Tax Distribution Date:Thursday, November 30, 2023 1:14:04 PM Attachments:Cupertino Sales Tax Fact Sheet.docx Letter of support - sales tax - Cupertino.docx Apple Agreement.pdf scan_highlasl_2023-11-14-09-05-58.pdf CAUTION: This email originated from outside of the organization. Do not click links or open attachments unless you recognize the sender and know the content is safe. Dear City Council and General Public, I am sending this email so that you can better understand what is going on with our sales-tax situation. Our City Council is likely aware of first two attachments, however I am attaching them for the general public to understand what Senator Cortese’s office was asking for earlier this year in order to save Apple’s internet sales-tax sharing agreement with Cupertino. The agreement directs all sales taxes on internet sales of Apple goods in California to Cupertino. That’s $1 for every $100 of product purchases. Cupertino then rebates 35% to Apple. In fiscal years 20/21 and 21/22, Cupertino rebated Apple about $14M. That means that Cupertino received about $26M in sales-tax revenue from this agreement. The third attachment should be the most recent version of the agreement. To learn more about how sales taxes are allocated to cities, I highly recommend watching the following video and reading the last attachment. This is from the November 15 State Assembly hearing, “Following the Money: How Local Sales Tax Revenues Are Allocated Among California Cities.” You can watch the video here – the video starts just before minute 31. https://www.assembly.ca.gov/media/assembly-revenue-and-taxation-committee-20231115 Regards, Rhoda Fry Protecting Critical Revenues for Local Public Services and Safety BACKGROUND A major force changing the sales tax system is increased online (remote) purchasing by consumers and businesses alike, particularly from ‘all online’ companies with little to no brick and mortar (storefront) presence. Unsurprisingly, online shopping skyrocketed during the COVID-19 stay-at-home orders. In 2018, the United States Supreme Court decided South Dakota v. Wayfair. Wayfair expanded how states can tax sales of goods to California buyers by out-of-state businesses and sellers over the internet. The Legislature rightfully updated state law (AB 147;2019; Marketplace Facilitator Act) to match the modern economy with the added fiscal benefit to the state and its local governments. The law also advances California’s position as the hub of technology and innovation. Since Wayfair, the Marketplace Facilitator Act treats online platforms (now called Marketplace Facilitators) as “retailers” for purposes of state and local sales and use taxes and requires them to pay sales tax. Local governments have begun to rely on these revenues to provide basic and critical services. Importantly, these revenues were key to ensuring cities could prevent major service cuts and layoffs during the height of the COVID-19 pandemic because of the capturing of online sales revenues. PROBLEM In 2021, CDTFA issued updated guidance on local tax reporting for online retailers without clear discretion to do so by the Legislature. In this guidance, the department purported to ‘clarify’ the definition of “participation” in a sale which determines which local governments receive the online sales tax revenue. CDTFA insists that retailers must engage in “genuine physical human interaction” with every sale at a California place of business to be subject to sales taxes – despite the significant physical footprint of a company within a jurisdiction – a position that rests an out-of-date, decades old policy that is not suitable for the current landscape of online shopping. Furthermore, the Legislature has never adopted such a rule, and the CDTFA’s own regulations state that participation in the sale in any way by a retailer’s California place of business is sufficient to trigger the sales tax. Following this guidance, CDTFA has begun to audit and issue historic notices sales tax reallocation away from cities with online retailers that have in their view ‘improperly reported’ sales tax revenues based on ‘participation’ criteria. This change has severe consequences to the services and labor forces of impacted cities, all without clear direction from the legislature or Administration. This ex-post-facto regulation threatens the viability of public services, public sector jobs and the ability of state to keep major retailers from relocating to competitor states. SOLUTION While final determinations on the proper allocation of online tax revenues will take several years, which may be prolonged by litigation, the impacted local governments should be allowed to maintain the revenues received under current law: • Prevent redistribution of pre-2023 revenues. • Protect local revenues derived from online retail sales until 2035 . This fix will provide fiscal certainty to the cities, their labor forces, and state programs contingent on local funds (incl. homelessness programs)– otherwise, these funds will be ‘lost’ and ‘locked’ until final determinations are made in several years. The proposed changes to section 7209 of the Revenue and Taxation Code will ensure that the affected cities will be allowed to maintain millions in general sales tax revenue including funds received prior to the CDTFA’s notice of proposed redistribution that were spent serving the critical needs of the community during the COVID-19 pandemic. This approach does not undermine the ongoing audits and lengthy legal process that will ensue between CDTFA and affected cities. Rather, while those disputes are resolved, local governments will continue to provide critical public services – including housing and homelessness programs, 911 and fire response, parks and libraries. Importantly, none of the proposed changes impact sales tax revenues allocated to the state general fund or county realignment funds used for public safety and mental health programs. Letterhead August 16, 2023 The Honorable Gavin Newsom c/o Christy Bouma 1021 O Street, Suite 9000 Sacramento, CA 95814 Re: Protecting Critical Revenues for Local Public Services and Safety Dear Governor Newsom I am writing to request an urgent amendment to California’s Revenue and Taxation Code that will protect the financial health of, and ensure the maintenance of vital services by, local governments in Santa Clara County. The rise of online purchasing has dramatically altered the state’s sales tax landscape. The United States Supreme Court’s 2018 decision in South Dakota v. Wayfair allowed California to tax sales of goods to California consumers over the internet when the sales are made by out-of-state businesses. The Legislature promptly updated state law in 2019 – through AB 147, the Marketplace Facilitator Act – to adapt to this new constitutional rule and ensure that large online retail platforms ensure the prompt payment of all taxes due. Local governments in Santa Clara County rely on the new revenues generated from online sales taxes to provide essential services. These revenues also played a pivotal role in preventing service cuts and layoffs during the challenging times of the COVID-19 pandemic, offering a lifeline to our communities when they needed it most. However, recent guidance issued by the California Department of Tax and Fee Administration (CDTFA) on local tax reporting for online retailers has raised significant concerns. The CDTFA’s regulations state that, to trigger sales tax, a California office of the retailer must participate in the sale “in any way.” The CDTFA is now insisting that to qualify as “participation,” there must be “genuine physical human interaction” with the sale at a California office – a test that makes little sense in a world where sales processes are increasingly automated. The CDTFA’s new approach to online sales is not in line with the Legislature’s intentions, it is inconsistent with the CDTFA’s own regulations, and it poses a serious threat to the revenues local governments depend on. Relying on its proposed “genuine physical human interaction” rule, the CDTFA has initiated audits and issued notices to reallocate sales tax revenue away from cities that are home to online retailers and from Santa Clara County itself, leading to uncertainty and potential financial hardships for the communities these governments serve. The lack of clear direction from the Legislature and the Administration only exacerbates the situation and leaves local governments struggling to maintain critical public services and retain valuable public sector jobs. Therefore, I urge you to consider the proposed solution outlined below to address the current challenges created by the CDTFA’s actions and to provide fiscal certainty to the affected cities and to Santa Clara County: 1. Prevent redistribution of pre-2023 revenues: Ensure that sales tax revenues received by governments prior to 2023 are not subject to redistribution. 2. Protect local revenues derived from online retail sales until 2035: Allow impacted governments to maintain revenues generated from online sales until January 1, 2035. Implementing these changes will maintain the fiscal health of the affected cities and Santa Clara County and protect their labor forces and state programs reliant on local funds, including critical homelessness programs. I request that Revenue and Taxation Code 7209 be amended to add the following: (b) With respect to any city in the County of Santa Clara, the board shall continue to distribute to that city, and shall not redistribute to any other city or to any county, all tax that a retailer has remitted for distribution to the city prior to January 1, 2035, if the amount the retailer remitted for distribution to the city exceeds three million five hundred thousand dollars ($3,500,000) per quarterly period. The board shall also continue to distribute to the County of Santa Clara all tax remitted for distribution to the County by the same retailer prior to January 1, 2035, and it shall not redistribute that tax to any city or to any other county. For purposes of this subdivision, the term “retailer” includes a marketplace facilitator that is considered a retailer under Section 6043. The revenues previously received by the affected cities have been instrumental in serving the needs of the community during the COVID-19 pandemic, and preserving the revenues that will be received moving forward will ensure continuity in providing essential services such as housing and homelessness programs, emergency response, county transportation programs, and support for public facilities such as parks and libraries. It is important to note that these proposed changes will have no effect on sales tax revenues allocated to the state general fund or to county realignment funds designated for crucial public safety and mental health programs. Moreover, the proposed changes will not forestall future attempts to resolve the underlying dispute with the CDTFA; the CDTFA may address the Wayfair decision and the Marketplace Facilitator Act through the notice and comment rulemaking process, with input from interested parties, and any regulations it might issue – if upheld in court – will apply to the affected cities and Santa Clara County when the proposed amendment to section 7209 expires. And the Legislature, of course, remains free to address these issues directly, at any time. By protecting critical revenue, we can ensure the stability of our local governments and that California remains at the forefront of technology and innovation while continuing to support the essential needs of our citizens. Thank you for your time and consideration on this matter. Sincerely, Cc Senator Dave Cortese EXTENSION OF  AGREEMENT FOR CONSULTATION SERVICES    Page 1 of 3 Pages  OAK #4834‐4562‐8437 v5 Reference is made to (A) the Agreement for Consultation Services (the “Consultation  Agreement”), executed in 2007, by and between ACI Holdings, Inc., a California corporation,  subsequently renamed Baz Industries, Inc. (the “Consultant”), and the City of Cupertino (the  “City”), as in effect immediately prior to the Extension Effective Date (as hereinafter defined) of  this Extension of Agreement for Consultation Services; and (B) the Development Agreement,  dated as of November 19, 2013 (the “Development Agreement”), by and between Apple Inc.  (“Apple”), and the City, as in effect on said Effective Date.  In connection with and pursuant to  the provisions of the Development Agreement, the parties thereto have agreed that the  Consultation Agreement shall be extended pursuant and subject to the terms and provisions of  this Extension of Agreement for Consultation Services (this “Extension”).  For good and  valuable consideration, the receipt and sufficiency of which are hereby affirmed and  acknowledged, the Consultant and the City agree as follows:  1. Effective Date and Interim Extension.  Except for any interim extension of the Consultation Agreement provided for in  this paragraph 1 (which shall become effective without regard to the Extension Effective Date,  as defined in this paragraph 1), this Extension shall become effective only upon the occurrence  of the “Effective Date” of the Development Agreement (as defined therein) and the expiration of  any litigation challenging the Development Agreement and the Project Approvals (as defined  therein) without any litigation pending and with the Development Agreement and Project  Approvals then being in full force and effect (the “Extension Effective Date”); provided,  however, that if the Extension Effective Date has not occurred on or before February 19, 2014  (being the stated expiration date in the Third Extension of Agreement for Consultation Services  heretofore executed and delivered by the City and the Consultant), then without further action  by either the City or the Consultant, the Consultation Agreement as previously extended shall  not expire and shall continue in full force and effect in accordance with its existing terms until  the earlier of the Extension Effective Date or March 1, 2015.  For all purposes of this Extension  (including without limitation any interim extension of the Consultation Agreement preceding  the Extension Effective Date), in the event of any conflict between any provision of this  Extension and any provision of the Consultation Agreement, the provisions of this Extension  shall control and supersede such provision of the Consultation Agreement.  2. Compliance with Law and Development Agreement.  The terms and provisions of this Extension shall be performed, observed and  administered in compliance with: (a) the laws and regulations of the State of California,  including without limitation the provisions of the Bradley‐Burns Uniform Local Sales and Use  Tax Law; and (b) the terms and provisions of the Development Agreement, as it may be  amended from time to time.  Neither the City nor the Consultant shall take or omit to take any    action that, if taken or omitted, would cause all or any portion of the Consultation Agreement  or this Extension to be determined legally invalid.  For all purposes of the preceding sentence,  acts or omissions to act by the Apple shall be deemed acts or omissions to act by the Consultant.   The parties recognize that the California State Board of Equalization (the “SBOE”) may notify  the City of any proposed reallocation of sales and use tax revenues relating to Apple’s  designation of the City as the point of sale.  Should the SBOE notify the City of any proposed  reallocation of Apple’s sale and use tax revenues away from the City to other government  entities, the City shall give the Consultant prompt notice of the City’s receipt of any such  notification from the SBOE.  Upon being so notified, the Consultant will promptly repay to the  City any such proposed reallocated funds that were paid to Consultant under the Consultation  Agreement or this Extension (“Repayment Amount”), and the City shall place the Repayment  Amount into a third‐party escrow account.  The City and the Consultant shall cooperate in any  effort to avoid, reduce or nullify any such reallocation.  If the SBOE concludes through its  administrative process that the City must repay such tax revenues to the SBOE (or the SBOE  withholds tax revenues otherwise payable to the City in lieu of any City repayment to the  SBOE), the parties agree that the Repayment Amount shall be released to the City in order for  the City to satisfy the SBOE’s reallocation or to reimburse or replace City funds expended for  such reallocation or withheld from the City by the SBOE for such reallocation.  If the SBOE or  another entity with jurisdiction ultimately nullifies or reduces the SBOE’s proposed  reallocation, the City shall return to the Consultant all funds held in escrow (or funds equal to  the amount of the original allocation permitted) plus any interest actually earned on such funds  from the date of deposit until the date of refund.  3. Compensation.  From and after the Extension Effective Date, and notwithstanding the provisions  of paragraphs 2(c), 2(d) and 2(e) of the Consultation Agreement, for each Fiscal Year of the City,  all compensation to the Consultant in excess of $62,500 (which shall be paid by the City to the  Consultant with respect to new local tax revenue not less than $250,000) shall be in an amount  equal to 35% of such revenue in excess of $250,000.  If the Extension Effective Date occurs after  the commencement of any fiscal quarter of the City (currently July 1, October 1, January 1 and  April 1), then the percentage specified in the preceding sentence shall become applicable as of  the commencement of such fiscal quarter of the City.  4. Term.  From and after the Extension Effective Date, the term of the Consultation  Agreement shall end at the close of the next full fiscal quarter following the fiscal quarter in  which the Development Agreement termination occurs for any reason, unless otherwise agreed  by the City and the Consultant in writing pursuant to the provisions of paragraph 6 of this  Extension.  Page 2 of 3 Pages OAK #4834‐4562‐8437 v5     Page 3 of 3 Pages OAK #4834‐4562‐8437 v5   5. Fiscal Year.  For all purposes of the Consultation Agreement and this Extension, each “Fiscal  Year” of the City shall begin July 1 of each calendar year and end June 30 of the succeeding  calendar year.  6. Integration Clause; Modification of Agreement.  From and after the Extension Effective Date, the Consultation Agreement, as  modified by this Extension, shall contain the entire understanding of the City and the  Consultant related to the subject matter of the Consultation Agreement and this Extension.  No  oral agreements, understandings, promises made by the parties or their agents which are not  contained in the Consultation Agreement or this Extension are binding.  Neither the  Consultation Agreement nor this Extension may be modified except by a written agreement  executed by both parties.  IN WITNESS WHEREOF, the Consultant and the City have executed this Extension by  their duly authorized representatives, on the dates set forth below, to be effective as provided  above.      BAZ INDUSTRIES, INC., a California corporation (previously named ACI Holdings, Inc., the  “Consultant”)      Date:   By:      Gene Levoff, Secretary        CITY OF CUPERTINO, a municipal corporation (the “City”)      Date:   By:      David Brandt, City Manager      Date:   By:      Grace Schmidt, City Clerk        APPROVED AS TO FORM:       By:      Carol Korade, City Attorney