The city of Cupertino in California—Apple Inc.’s hometown—is looking for ways to cope with financial challenges in anticipation of upcoming “significant revenue shortfalls,” according to city officials, after its special tax agreement with the tech giant reportedly came under scrutiny by state regulators.
During an April 13 city council meeting, city staff projected a 73 percent drop in tax revenues—from $42.1 million to $11.4 million—and a 28 percent overall reduction in revenue for the fiscal year 2023–2024.
“This decline in revenue is due to a change in sales tax distributions based on the anticipated outcome of a state audit of one of the city’s taxpayers,” a spokesperson for the city told The Epoch Times in an emailed statement on April 13.
The taxpayer in question was not named by state or city officials, but a connection to Apple was first made by Bloomberg, with speculation that as the largest business and taxpayer in the city, its revenues are potentially involved in the discussions.
The council’s concerns follow reviews of taxpayer revenues by the state Department of Tax and Fee Administration. The agency, responsible in part for administering sales and use taxes, said its strict confidentiality laws prevent it from disclosing and discussing specific taxpayer information.
Apple’s 1997 agreement with Cupertino funnels all online sales tax revenue collected across California to the city, which then reportedly refunded the company 50 percent of that income—and later 35 percent, starting in 2013—through a revenue-sharing agreement, which is now being challenged by the state, according to the city. State law requires that local online sales tax revenue should go to municipalities within which the purchase was made.
Cupertino was notified of the audit in December 2021, with a follow-up letter received in May 2022 detailing the years covered by the review, and a letter from March this year informing the city that a final determination would come in the next four to six months.
“Budget reduction is very new for the city of Cupertino,” Kristina Alfaro, the city’s administrative services director, told city councilors at the April 13 meeting. “I’ve been here for ten years, and we’ve never had to have this conversation.”
Alfaro warned the council that the city could be required to pay back revenues received in past years, but the forecast section of her report predicted that the state would not request repayment, and no estimates were included in the report.
Budget plans recommended the council respond to the loss of revenue mainly by cutting employment costs, through a hiring freeze, elimination of vacant positions, furloughs, and layoffs. Other strategies include cutting spending on compensation and benefits, contract services, and other expenditures.
Though the path forward remains uncertain, residents might see reduced maintenance for parks and grounds, a smaller budget to fix potholes and repair roads, fewer festivals and events, and a drop in technology initiative investments, according to city staff, which are “best guess estimates for worst-case scenarios.”
Officials presenting the assessment to the council noted that the staffing cut could be challenging, but city staff has been working hard to find solutions.
Proposals to replace a portion of the lost revenues include a quarter of a cent transaction and use tax, a parcel tax, and a 2 percent increase to the transient occupancy tax—which would affect hotel guests in the city—according to city staff.
While adjusting budget proposals, city officials say they are still waiting for clarification and specific dollar amounts from the state agency.
“We are still learning more information and determining how these changes may impact the community, and the city will continue communicating with our residents and City Council as we move forward,” the mayor’s office told The Epoch Times.
