HomeMy WebLinkAbout1997-01-30 City Council (4)City of Palo Alto
City Manager’s Repor
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:JANUARY 30, 1997 CMR:130:97
SUBJECT:RESPONSES TO PLANNING COMMISSION QUESTIONS
REGARDING THE ALLOCATION OF SALES AND USE TAX
TO THE CITY OF PALO ALTO FOR THE PROPOSED
STANFORD/SAND HILL ROAD PROJECT
This is an informational report responding to questions raised by Planning Commissioner
Schink during the review of the Stanford/Sand Hill Road Development Agreement.
XE U
During the January 8, 1997 Planning Commission review of the Stanford/Sand Hill Road
Development Agreement, Commissioner Sehink asked some questions related to Palo Alto
receiving sales and use tax from the project. The questions relate to Section 6f, page 14, of
the Development Agreement, in the January 27, 1997 staff report for the Sand Hill Corridor
project (CMR:126:97). (That page of the Development Agreement is included as
Attachment I.) The purpose of this report is to give more information and background about
the use tax.
Back~ound:
The sales tax is imposed on all retailers for the privilege of selling tangible personal property
in California. Sellers of goods remit sales tax to the State, and must obtain a seller’s permit
from the State Board of Equalization (SBOE) for each place of business that they operate.
The use tax is a component of the sales tax, and is imposed on the purchaser of goods for
those transaetious in which the sales tax is not collected. This includes the purchase of
materials by contractors for use at coustmction sites in those instances where contractors do
not pay sales tax to their own suppliers, but rather have applied for a seller’s permit from the
SBOE.
CMR:130:97 Page 1 of 4
The current sales and use tax rate in Santa Clara County is 7.75 percent, or 7.75 cents per
dollar of sales. For goods identified as sold in Palo Alto, the City of Palo Alto receives one
cent of the 7.75 cents collected in tax. Some sales are not identifiable to a specific
jurisdiction. In these situations, the County in which the sale took place receives the sales
tax and passes a specific share of that sales tax to each jurisdiction in the County. The
County itself and all cities get a share.
Many construction contractors purchase materials from their suppliers much like the typical
consumer does. In that case, those contractors remit sales tax directly to their supplier, and
the city in which the supplier is located receives the one cent of sales tax. Alternatively,
some construction contractors are considered sellers of finished goods, and they pay sales tax
in a different manner. In this ease, they would have a seller’s permit, and would pay a use
tax on the materials they purchase to be used at the construction site. They would remit that
use tax to the County in which the job site is located, along with all other jobs they perform
in that County that month.
The typical transaction for use taxes paid to the County is that the County places those
receipts in a pool for reallocation to all jurisdictions within the County. In the transactions
that go through the County pool, Palo Alto would get a lesser .share of the tax collected,
roughly 6.2 percent of one cent. Note that this is 6.2 percent of the amount of sales tax it
would receive for the typical Palo Alto based sale.
It is possible for jurisdictions to work with developers to have their construction contractor(s)
and subcontractors obtain a subpermit to their normal seller’s permit from the SBOE. By
doing that, the contractor(s) designate the specific job site as a temporary business point of
sale. By making this arrangement with the subpermit, the jurisdiction in which the job site
is located, in this case Palo Alto, receives the full one cent of use tax that accrues to that
location, rather, than having the use tax flow through the County pool for reallocation.
How does a contractor a_~t~ly for a permit to desi_maate the job site as the point of sale, and
how difficult is the permit to obtain and file?
The contractor obtains a subpermit to its regular seller’s permit and declares the job site as
a point of sale for the materials used on that job site. The subpermit, a standard form from
the SBOE, is one page in length per job site.
How much recordkeet~in would be required of a contractor that declared Palo Alto its lob
According to the sales tax consultant the City uses for revenue tracking purposes, the SBOE
does not require extensive recordkeeping from the contractor to document or justify how the
estimate of the materials used at the job site was calculated. The contractor would need to
have a rational basis for allocating those materials that it used on the Stanford job site, and
CMR:130:97 Page 2 of 4, ’
would need to demonstrate that rationale to the SBOE if the contractor were audited.
However, additional recordkeeping is required of the contractor to self accrue the use tax, if
that contractor typically pays sales tax directly to the vendor(s) he or she uses. That is, for
a contractor that does not normally accrue use tax, he or she would need to keep records of
materials purchased for which sales tax had not been paid, and then file and pay the use tax.
Which contractor(s) would be eli#ble to apply for a subpermit at the job 8ire?
The SBOE only allows contractors and subcontractors for large jobs, i.e., those in which at
least $5,000,000 in materials will be used, to apply for a subpermit at the job site. The
$5,000,000 threshold is on each contractor and subcontractor, not the sum of all
subcontractors at a job site.
Why would a contractor want to take on this additional administrative burden?
There are two reasons why a contractor might want to apply for a subpermit. First, according
to the City’s sales tax consultant, the contractor has 90 days to pay use tax for a job site,
which is longer than the normal 30 day payment requirement for the normal use tax. This
extra time allows the contractor to use its cash for other purposes, or to eam additional
interest income. Second, the contractor is providing additional tax dollars to the local
community, and that can support the fn’m’s civic image in the eyes of the public.
How much in additional tax dollars would re~iert to Palo Alto if the major contractor(s) for
the Stanford/Sand Hill Road pro_iect a_~t31ied for a subpermit?
The fiscal analysis for the Stanford project estimated that potentially $44 million in materials
might be eligible for Palo Alto use tax (Stanford SandHill Road Corridor Projects, Fiscal
Impact Analysis, June 18, 1996, page 16 (Attachment II). The difference between the
revenue that would revert to Palo Alto if the contractor(s) applied for subpermits at the job
.site, versus the amount that Palo Alto would receive if the. tax were allocated through the
County pool, would be a maximum of about $400,000. The calculation is as follows:
If sales tax is specified for the
job site in Palo Alto
If Palo Alto is not specified as
the job site and the tax goes
through the County pool
One cent in sales tax $44 million x .01
6.2% of one cent in
sales tax
$44 million x
.00062
$440,000
= $27,000
Potential gain forPaloA~o:= $413,000
CMR:130:97 Page 3 of 4- "
Do other cities take advantage of the subpermit to have additional use tax allocated to them?_
According to the City’s sales tax consultant, several cities have pursued subpermits with
developers or contractors for large projects. For example, Martinez used this method, when
a major oil refinery was constructed; Alameda used it when building its own civic center; and
San Jose used it for an Intel Corporation expansion.
_uire f e " 9
It would be optimal to have a point person or persons who would work with the Stanford
construction management office to work jointly with the largest project contractor(s). Most
of the effort would be outreach and communication, with customer service followup to
ensure that the contractor(s) are not having difficulties with the SBOE. It might be cost
effective to utilize a sales tax e0nsulting firm to be that point of contact, in thatthey may
have more outreach experience and have the.in-depth experience to follow through if there
are any difficulties with the SBOE.
ATTACHMENTS:
Attachment I: Page 14 of Stanford Development Agreement
Attachment II: Page 16 of Stanford Sand Hill Road Projects, Fiscal Impact Analysis
PREPARED BY: Jim Steele, Manager of Investments and Debt
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
CC:.Planning Commission
Stanford Management Company (Curtis Feeny)
Stanford University (Larry Horton, Andy Coe)
Deputy City Manager,
Administrative .~ices
ClVIR:13(}:97 Page 4 of 4 ’
ATTACHMENT I
by providing information required by LAFCO or City, acting as the
conducting authority, and by attending LAFCO and City hearings and
testifying in favor of the annexation. Stanford shall not be
required to pay any of the costs of the annexation other~ than
compensation of its staff and retained experts necessary to comply
with the provisions of this section 6(e).
(f)Designation of Job Site for Sales and Use Tax
Purposes. Stanford shal~ designate and shall require its
contractors and subcontractors to designate the PropertY as the
place of sale of "fixtures" furnished and installed by them for the
Project, and also to designate and require its contractors and
subcontractors to designat@ the Property as the place of use of
"materials" used in construction of the Project. Stanford agrees
and shall require its contractors and subcontractors to complete
and file any forms as the State Board of Equalization may
reasonably require to effect the designations required by this
section 6(f), pursuant to Regulation 1806 of the State Board of
Equalization.
(g) E1 Camino Park Stanford currently leases to City
certain real property known as "El Camino Park." The current lease
term expires on February 26, 2013. The parties hereby agree that,
as of.the date of issuance of the first building permit for the
Project, the rent for all of E1 Camino Park shall thereafter be set
at the rental rate in effect on that date, and shall not increase
until the expiration of the current lease term.
As of the date ofexpiration of the current lease
term, the City will retain an independent appraiser, who will
appraise that certain 12o19 acre portion of E1 Camino Park known as
"El Camino Ball Park," based on its then "highest and best use" for
low density, multiple-family residential use, in accordance with
the then applicable codes and regulations (the "Appraised Price").
If Stanford does not agree with the City’s appraisal, it may retain
its own independent appraiser for purposes of the appraisal.~ If
the parties cannot agree on one of the appraisals, the two
appraisers shall appoint a third appraiser, whose appraisal shall
be accepted by both parties as~ the Appraised Price. Stanford
agrees to extend the lease for E1 Camino Park for an additional 20
years, expiring on February 26, 2033, and to retain the current
formula for determining rent; provided, that the rent for the 12.19
acres shall be determined based upon the Appraised Price. There
shall be no .change in the basis for the rent for any other property
within the E1 Camino Park lease, including Holiday Inn, MacArthur
Park, Red Cross and Caltrain Depot lease areas°
9701221ac 0031492 Page 14 of 35
ATTACHMENT II
condominium units will be sold subject to a long-term (50- to 55-year) ground lease.
Stanford has projected an average selling price of $500,000 per unit, or an aggregate retail
value of $194 million, for the senior housing component.6 The unit sales prices include the
land value in the form of an up-front payment of ground rent, but exclude the cost for any
health care services.
The aggregate estimated value of the 388 independent living residential units of $194 million
(388 x $500,000) will result in a one-time property transfer tax of $640,200 accruing to the
General Fund when the individual units are initially sold, as shown in Exhibit 2.
Sales and Use Taxes. Sales and use tax revenues will also be collected by the City of Palo
Alto during project construction. For tax purposes, building contractors provide services
under three classes of contracts: lump sum, cost plus, and time and materials. Sales and use
taxes apply differently to each class of contract. When const~’uction contractors sell materials
that they install, the sale of the materials is a retail sale and is subject to tax on the amount
on which tax reimbursement is charged. Construction contractors are generally also the
retailers of fixtures that they furnish and install. According to State Board of Equalization
Pamphlet No. 9, ’Tax Tips for Construction and Building Contractors," dated April 1992, the
job site is regarded as a place of business of a construction contractor or subcontractor. It is
here that the sales of the fixtures and the use of the materials occurs.
Pursuant to these guidelines, the construction of the Project should generate substantial
sales tax revenues collected by the State of California, a sizable amount of which should
accrue to the City of Palo Alto. The Project’s hard construction costs (excluding labor) subject
to this tax is estimated to total approximately $43,990,000 (see Exhibit 2 notes). This estimate
was derived from figures pro.vided by Stanford Management Co. with adjustments made
by SKMG to reflect only the hard costs subject to sales and use taxes in Palo Alto. These costs
.incorporate a number of factors, including cost of materials and fixtures.
For analytical purposes, SKMG estimates that only a portion of the project’s hard
construction costs will reflect taxable materials. The percentage was derived from analysi~
of information provided by several Bay Area contractors, construction services consultants,
and construction industry trade groups. It is unrealistic to assume that., each project
contractor or subcontractor will report Palo Alto as the location of the job site for tax
purposes. Therefore, SKMG conservatively assumes that only a portion of these sales will
be accurately recorded as transpiring in Palo Alto. Based upon this assumption, the project
is-estimated to generate $43.9. million in taxable retail sales occurring in Palo Alto. At the
City’s 1.0 percent sales tax rate, this would result in $439,900 in retail sales tax collected by
Palo Alto over the course of Project construction (see Exhibit 2)~
6If a portion of the senior condominiums are made affordable to moderate income seniors, the
property transfer tax could be less than that noted here.
STANFORD FISCAL IMPACT ANALYSIS 16 JUNE 1996