HomeMy WebLinkAbout0501.092November 5. 1992
THE HONORABLE CITY COUNCIL
Palo Alto. california
AlROSPACI DECISION REF~: SS 992
Attention: Finance Committee
Members of the council:
~rt in Brief
st.aff has just received iniC1rmation from the State Board of
Equalization (SBOE) , which provides estimates for planning purposes
only, of the City of Palo Alto's liability under the Aerospace
co~or~tiop v~ state Board of Equalization (~erospace) decision.
Althouqh there are a number of unknowns that may change the initial
e.stimate, the SBOE is estimating that Palo Alto will be allocated
$1.1 million of the total $829 million still unpaid in refunds.
Because the exact amount and the timing of the refunds is still
uncertain, staff is not recommending any council action at this
time.
:S .. ckgroun~
In March 199G, the california Court of Appeals upheld a trial court
judgement that government contractors who paid sales taxes on
overhead materials (e.g. light bulbs, office supplies a~d mainte
nance materials) were entitled to refunds of those taxes.
In the closing days of the 1992 lsgislative session, the Governor
signed Senate Bill 9~2. This bill was described in the staff
report to the Council on the impact of the state budget
(CMR:425:92). Briefly, the bill provided options for a city to
=:501:92
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repay its l~ability fro~ the Aerospac~ decision. Cities would be
permit~ed to pay refunds as quarterly deductions from their sales
tax allocatior. ove~ a ten-year period; obtain debt financing for
the obligationi or mak.e the payment in any _ray that it decided ... as
appropriate under existing law. S8 992 also established a
simplified form...:la for distributing tr.e refunds among ·::;ities and
counties which W'ere liable • ..,ith a proviSion that th€. League of
California Cities develop an al ternati ve for-ntulell no later than
April 1993. sa 992 recognized that the SBOE ~ould need to
negotiate a settl'=:me:!t with the .federa 1 9\:lvermnent and the
contractors involved, including provision of a ten-year. payback
period for the refunds.
estimated Liability
up until this point, st~ff has oeen unable to estimate the City's
liability under the Aerospace decision. Without having extensive
information on the activities of government contractors in Santa
Clara County, it was not possible to calculate a dollar figure tor
Palo Alto's ~share.~ This is because allocation of refunds under
SB 992 would be calculated using an ftepicenter" methodoloqy~ This
uses information from actual audits in the respective counties and
establishes four categories for allocating refunds:
o The local jurisdiction in -whir::h the prime contractor
(epicenter) is located (28 percent);
o Those cities in the same county as the epicenter city (35
percent) ;
o Tho~e cities in adjacent counties to the county contain
ing the epicenter {JJ percent); and
o All other cities and counties throughout the state (3
perc-ent) •
The SBOE has now provided a dollar esti!l'.ate: Palo Alto's "share"
of the refunds is placed at $1,078,654.
statute of L~mitations
Th€ total amount of the refunds, currently estimated at $829
million still unpaid state~ide. is subject to change depending en
the negotiations 'With the federal govern:rnent. The federal
government has a: six-year statute of I imi tations under certain
cirCuIDstar.ces l and is arguing that it should apply in the Aerospace
decision J rather than the State's three-~'ear statute of limita
tions. The U.s. Supreme Court recently agreed to hear the federal
government's claims. The SBOE says it is unable to estimate the
impact of the federal government prevailing in this litigation.
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Conclusion
until neqotiations with the federal government are completed, it is
uncertain how the city will ~ake the refund payments (e.g., lump
sum versus credit against the Ci~y's quarterly sales tax alloca
tion) , whether they will be allo107ed to be spread over a ten-year
period, or whether the $1.1 million estimate is accurate or ~il1
need to be substantially revised. Staff will return to the Council
with additional inf~raation when it is available. with a reco~en
dation at that time as to any needed changes to the city's budget.
Director of Finance
~ Interim city Manager
Related staff Reports: CMR:425:92
CMR;501:92
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