Patterson, California: for years has fought government efforts to tax e-commerce. Now it's poised to pocket millions of dollars in sales taxes paid by California customers.

As part of a pact reached last year with state lawmakers, some online retailers agreed to begin collecting sales taxes this autumn.

About half of the projected $316 million (Dh1.2 billion) raised in the first full year is expected to come from merchandise sold by Amazon, which is also setting up two California fulfilment centres that will employ at least 1,000 workers each.

San Bernardino and Patterson, where the centres will be located, will gain not only jobs but also a tax bonanza: Sales to Amazon customers throughout California will be deemed to take place there, so all the sales tax earmarked for local government operations will go to those two cities.

It's a windfall so lucrative — about $8 million a year initially for each city — that local officials are preparing to give Amazon the lion's share of their take as a reward for setting up shop there.


Talks with Amazon about a so-called sales-tax rebate are still in the early stages. But in Patterson, a struggling Central California community of 21,000, Mayor Luis Molina said he's ready to do what it takes to help his city.

"This is huge. This is monumental, not only for the city but for the county and the region," he said.

"We're up to 20 per cent unemployment, and this is going to make a dent."

But critics worry that any deal would embolden other retailers to demand similar concessions at a time when California cities are scrambling to plug budget holes.

Particularly grating, some said, is the idea that Amazon — whose business model long was based on selling merchandise without collecting taxes — could now profit from those levies.

"The tax is supposed to be supporting government," said Lenny Goldberg, executive director of the California Tax Reform Association. "Instead, it's going back into Amazon's pocket."

Amazon did not respond to repeated requests for comment.

The potential pact is already attracting the attention of some California legislators seeking to ban so-called sales-tax rebates.

Once used to attract sizable retailers such as car dealerships, these incentives are mushrooming as cash-strapped communities compete with one another to land big sales-tax generators.

That arms race is cheating taxpayers, who want their money spent on parks, police and street repairs, said Democrat Senator Mark DeSaulnier, who is considering introducing a bill this session to address the issue.

Latest dust up

"It seems like the private sector finds a way to pit one city against the other," said DeSaulnier, a former city councilman and mayor. "You can't give away sales tax in this manner."

The proposed rebates are just the latest dust-up involving Amazon and sales taxes.

The company for years took advantage of a US Supreme Court decision that exempted it from collecting sales taxes on most online purchases in states where it had no stores or warehouses. That enabled Amazon to undercut prices charged by its bricks-and-mortar competitors, such as Wal-Mart and Target.

Pressure from traditional merchants, combined with state budget woes, prompted California and other states to pass legislation requiring online sellers to begin collecting the levies from their customers.

Amazon last year launched a costly campaign to try to overturn California's 2011 law with a ballot measure. The company backed off after the state agreed to delay implementing the measure until September 15 of this year.

In California, about one-tenth of the statewide standard sales-tax rate of 7.25 per cent goes to the city or jurisdiction where the retailer operates, with the rest going to the state and county.

Amazon currently has no physical warehouse operations in California. So initially, all of the state's cities will split those taxes, based on their residents' share of Amazon purchases.

‘Point of sale'

That will change next year, however, when the fulfilment centres open in Patterson and San Bernardino.

California law allows some merchants to designate a legal "point of sale", permitting them to direct 100 per cent of the city share of sales taxes to a specific community where they have a physical presence.

"The incentive to compete and to steal tax dollars from other jurisdictions is really, really high," said Geoffrey Propheter, a research assistant at George Washington University's Institute of Public Policy who studies municipal government finance.

For Patterson, dubbed the Apricot Capital of the World and located just off Interstate 5 in Stanislaus County, the projected bonanza is nearly as big as its entire general fund.

City manager Rod Butler said the city is considering rebating as much as 75 per cent of its share of sales-tax revenues to Amazon. He reasons that even a reduced share of those taxes would enable the city to balance its budget and pay for city parks, streets and garbage collection.

Patterson "is not ashamed about taking advantage" of any legal tools available for economic development, he said, in part because rival communities are doing the same thing. In December, the nearby city of Tracy expanded its existing sales-tax-sharing plan to include e-commerce warehouse and shipping facilities in hopes of attracting Amazon.

— Los Angeles Times