HomeMy WebLinkAbout0306.093-
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May 20, 1953
THE HONORABLE CITY COUNCIL
Palo Alto, California
Members of the Council:
:!.I;port in Brief
This report provides an update on the City's liability under the
1990 Aerospace decision. A Supreme Court decision upheld a three
year rather than a s.i.x-ye.ar st<lti..lte of limitations for repayrr.ent of
sales tax on govern:nent contracts. The City will be r-equired to
repay an estimated $1 32 million to the federal government.
Negotiations with the federal government are s~il1 going on as to
the period over which repayment ... ill be made, W'i-t:h local govern
ments pursuing a ten-year ten!!. Thia is an informational report
ar.d no Council action is required.
Backqr-ound
In March 1990, the stat.e Court of _~ppea Is upheld a judgement that
governr:ent contractors ,",ho paic. sales taxes on ovel:'h~ad materials
'Were entitled to a refund of those taxes. Senate Bill (S5) 992,
passed at tr.e e.nd of the 1992 legislativE. sessi·on~ set out the
details of the payment of the refunds including the timing of
repayment and a formula for distributing the liability among cities
and counties (CMR:425:92, "Effect of 1992-93 State Budget").
In November 1992. staff reported to Council that the total a~our.t
of the roe-funds under the Aerospace Decisi on ... ·as subject to change
depend.ing on the outcome of the Supreme Courtls hea:!'ing of United
St:ates v. State of California (CMR: 501: 92, "Aerospace Decision
Refund: sa 992"). The United States Supreme Court has ruled that
the State's three vear statut-e of limitations • ... 'ill be used for
Aerospace refunds ·instead of the six-year federal statue. J..
CMR:306:93
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d~cision in the federal government's favor could potenti311y have
<!Dubled the City's liacility.
Estimatad Liability
sa 992 provided an allocation formul a and IO-year !."e:pa}"ment
schedule for local governments. The legislation also i~cluded a
provision that the Leag~e of California cities could develop an
alternative formula no later than April 1993.
The League of California Cities refined the original fc,rmula for
distributing the refunds. Using the. "epicenter" methodology
described in C~.R:5CJ1:92 .. the revised fo:r-mu12 places a greater
emphasis on aerospace-type vendor sales versus all uthc.r sales,
such as retail shops and fast food. The ne~ formula was tested and
proved to be mo~e accurate than the original formula outlined in SB
992. The Board of Equali~ation, League of California Cities l and
the california State Association af counties has adopted this
improved formula in accora;:"nce wt'ith SE 992. The revised estimate
for Falo Alto's liability is $1.32 million.
Negotiation. of" Repayment 'l;'..im~ Feriod
At this titr,e, it appears that Cities ",;il1 be able to spread the
refund ove~ a ten year period as outlined in SB 992. Ho~ever~ this
is partially dep~ndent upon negotiations with the federal govern
ment which have not been finalized.
A liability of $132,000 ~il1 be included in the Exhibit B adjust
ments of the 1993-1994 Proposed Interim Budget.
Respectfully submitted I
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KICH1.EL S. FRANK
Senior Financial Analyst
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R~lated staff Reports:
CMR:306:93
CMR::425:S2
CMR:501:92
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