CC 12-05-2023 Special Meeting Item No. 1. Revenue Tax Measure Options_Supplemental Report1
CITY COUNCIL STAFF REPORT
SUPPLEMENTAL 1
Meeting: December 5, 2023
Agenda Item #1
Subject
Receive presentation regarding revenue tax measure options for the City’s General Fund and
provide direction to staff on which revenue tax measure(s), if any, to explore for feasibility through
opinion research for the November 2024 election.
Recommended Action
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.
Background:
Staff’s responses to questions received from councilmember are shown in italics.
Q1: 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?
(Councilmember Moore)
Staff response:
The business tax based on employee count was ranked last based on the tax principles applied to all
four tax revenue options. The primary reasons for its low ranking are as follows:
Who Bears Tax Burden/Equity
o Tax burden borne exclusively by local businesses compared to other tax revenue
options that spread burden to non‐residents (TOT) and/or daytime working
population (TUT).
o 80% of the tax revenue generated comes from one business, making the tax revenue
stream highly vulnerable to the business operations decisions of one taxpayer.
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Competitiveness/Equity/Adequacy
o City currently has a very low business license tax rate compared to surrounding
cities as measured on a per capita basis. If an employee count tax is set at top rate in
the region ($75 per capita), the annual tax revenue generated is significantly less
than the 0.25% TUT and it likely requires shifting tax burden to a few very large
businesses.
o There is an unknown potential impact on locational choices of existing and future
businesses that could erode the annual tax revenues.
The following links provide information on examples of business taxes in neighboring
jurisdictions:
o Mountain View
(https://library.municode.com/ca/mountain_view/codes/code_of_ordinances?nodeId=
PTIITHCO_CH18LI_ARTIBULI). See Chapter 19, Article I, section 18.16 (License
tax imposed; method of calculation)
o Palo Alto (https://codelibrary.amlegal.com/codes/paloalto/latest/paloalto_ca/0‐0‐0‐
92047). See Chapter 2.37 (Business Tax), section 2.37.040 (Imposition of business
tax).
o Santa Clara
(https://www.codepublishing.com/CA/SantaClara/#!/SantaClara03/SantaClara0340.
html#3.40.350). See Chapter 3.40 (Business Tax), sections 3.40.350 to 3.40.370
(Business taxed)
o Sunnyvale (https://ecode360.com/42711162#42711162). See Chapter 5.04 (Business
License Tax), section 5.04.110 (License tax – Imposed).
o Los Gatos (https://losgatosca.gov/2800/Business‐License‐Modernization‐2022‐Ball)
Q2: 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.
(Councilmember Moore)
Staff response:
The question is not germane to the agenda item.
Q3: 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.).
(Councilmember Moore)
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Staff response:
A Transaction and Use Tax (TUT) is similar to the normal local agency 1% Bradley‐Burns sales
tax, in that it is an additive sales tax, and the same goods are taxed. However, unlike the Bradley‐
Burns sales tax which is allocated to the jurisdiction where a sale is negotiated, a TUT is instead
allocated to the location where a purchase is delivered or first put into use. This is a very important
distinction because this difference may significantly impact the amount of revenue that a TUT
may generate.
The City can expect to receive transactions tax revenue from normal sales tax‐generating
businesses like retail stores and restaurants in the City. Both residents and visitors alike will pay
the transactions tax on purchases they consume or take possession of at the place of business in the
City.
Moreover, the transactions tax revenue will also be generated from any purchases shipped or
delivered into the City from other places (business, medical and industrial supplies, construction
materials, catalog and internet purchases, furniture, appliances, etc.). Notably, this transactions
tax encompasses vehicle purchases. Specifically, when a Cupertino resident buys a vehicle from a
dealership located outside the city, the dealership is responsible for collecting and remitting the
transaction tax related to registered vehicle purchases. Consequently, Cupertino residents are
subject to this tax, regardless of where the vehicle purchase occurs.
The transactions tax doesn’t apply to goods bought within Cupertino but shipped to users outside
the city, The cityʹs business‐and‐industry sales tax revenue predominantly stems from companies
serving customers statewide, mostly non‐Cupertino residents. Therefore, the California
Department of Tax and Fee Administration audit of a Cupertino taxpayer has a minimal impact
on the TUT estimate.
Q4: At the previous Council meeting, the 4th of July fireworks were canceled to save
approximately $140k without looking at Budget‐Balancing Strategies as a whole which
would be a combination of Revenue and Expenditure modifications. This Study Session
contemplates only taxing the community. Are we going to have a meeting discussing a
more holistic approach to Budget Balancing and/or provide a recap of what has been
done so far? (Councilmember Moore)
Staff response:
Yes, this is one part of multiple conversations that will come together as a budget discussion as
shown in the Budget Roadmap graphic presented to the City Council as part of the FY 2023‐24
First Quarter Financial Report. Based on that graphic, two meetings will be scheduled for late
January 2024 and April 2024. These meetings assume that the Council will have already been
presented with the Service Level Reductions (potential expenditure reductions), Fee Study
(potential revenue enhancement), and Revenue Tax Measures (potential revenue enhancement)
and thus will provide a more holistic approach and budget balancing recap.
Q5: What calculations have been made with regards to square footage parcel tax?
Specifically, please show the assumptions ($/sf, square footage) and calculations. It is my
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understanding that all properties are treated equally when applying a square footage
parcel tax, whether commercial or residential, is that correct? (Councilmember Moore)
Staff response:
For purposes of comparing tax revenue options, a parcel tax of $250 per parcel was used. This
amount was selected based on a balance among three factors:
1. Prior voter approval. Voters approved a $250 per parcel tax for Cupertino Union School
District that expired in 2021. Voters also rejected a reauthorization and increase to $398 per
parcel in 2021.
2. Total revenue generation. $250 per parcel generates estimated revenue ($3.4 million) that is
generally comparable to the other taxes being considered.
3. Comparison to parcel taxes in surrounding jurisdictions. While there are not many non‐
school parcel taxes in surrounding communities, $250 puts Cupertino substantially above
several communities while still below the top non‐school parcel taxes in the region.
For purposes of considering a parcel tax that avoids a flat per parcel rate of $250, the total revenue
generated by the $250 per parcel rate was translated into a per square foot (sf) rate based on the
acreage of all parcels within the city (from the County Assessor roll data). The per sf tax rate that
generates the approximately same amount of revenue was $0.021 per sf.
The above assumptions and calculations are contained on Slide 13 of the presentation.
Parcel taxes that have applied different variable rates across differing types of uses (residential,
commercial, industrial, etc.) have been subject to legal challenge. Uniform rates keep the city
within legal “safe harbor.”
Attachments Provided with Original Staff Report:
A. Presentation