Use Tax and Its Impact on City Development

Is your city considering approving a major construction project in the next year? Do you want to get the full tax benefit out of it? If you answered yes to both of these questions, you may want to consider creating a Business Cooperation Program to ensure your city gets its fair share of use taxes from the project.

Created as a way to solve complexities on out-of-state purchases, use taxes are simply a tax on property purchased from out-of- state vendors, but used, stored or consumed in the state. Use taxes are typically reported and distributed by the California Board of Equalization (BOE) through countywide pools, which then distribute a portion of that to the city where the property is being used, stored or consumed. Unfortunately, on major construction projects, a city could lose out on up to 90% of its entitled use tax by having it go through the countywide pool.

“Many times, a city will miss out on the opportunity to gain tens of thousands of dollars in tax revenue on major developments in their jurisdiction because applicable use taxes have been distributed to every jurisdiction in their county rather than the location of the project,” said Janis Varney, vice president of sales and use tax at MuniServices. “Every year, we see millions spent on fixtures, materials and equipment purchased out-of-state for city development projects. And, every year, we see where a city didn’t reap the benefit of the increased portion of use taxes from those purchases.”

There is another option though. Cities can create a Business Cooperation Program (BCP) to enter into agreements with project developers and contractors to re-route the use tax from the countywide pool. Companies and contractors in a BCP agreement – that make out-of-state equipment, material and fixture purchases – would remit their use tax to the BOE through a: Direct Pay Permit or registered sub-permit for the jobsite. The vendor or contractor would specify the city as the first function use of the equipment, materials and fixtures, then report the use tax directly to the identified city.

“We are very cognizant of the impacts use taxes have on our city, and wanted to ensure we were maximizing our revenue opportunities,” said Wade McKinney, city manager for the City of Indian Wells. “Creating a Business Cooperation Program made sense for us, and it continues to help fuel local development.”

In Indian Wells, the City is using the BCP model on the expansion of the Indian Wells Tennis Garden, home of the BNP Paribas Open, the fifth most attended tennis tournament in the world. Through the $90 million project, Tennis Ventures, the company that owns the Tennis Gardens, is building a third stadium to increase the Open’s maximum attendance rates from 450,000 to 600,000. Through it, contractors are expected to spend millions on seating, lighting and signage, much of which is purchased out-of-state then furnished and installed on site.

“The BCP model make a lot of sense for cities to create and have on hand when needed,” said Varney. “Depending on the size of the project, a city could realistically generate up to $100,000 or more in additional tax revenue for its general fund. But more than that, a BCP gives them the ability to incentivize developers for doing business in their city.”

Over the past 19 years, the BCP model has been a great benefit maximization tool for many cities. What many don’t know is they have MuniServices to thank for it. In 1996, MuniServices worked with its partners, and then-Senator Ralph Dills, to draft SB 110, the legislation that formed the BCP model by allowing companies to obtain direct pay permits for use tax remittance. Through many hard fought wins, Governor Pete Wilson signed SB 110 in 1997.