What’s the Deal with Apple’s Tax Arrangement in Cupertino?

California state regulators recently chose to put an ongoing tax agreement between Apple Inc and the city of Cupertino where its headquarters are located under the microscope as it concluded an audit of the arrangement – and this could have a serious impact on how much money the tech giant contributed to its hometown.

California’s Department of Tax and Fee Administration launched the audit back in 2021. Following its conclusion, the Department summoned the city’s financial director to explain the audit’s findings to the city council last Thursday, April 20th. While the tech company was not named directly in the report, Apple is the city’s single largest contributor to sales tax revenues. 

Based on the auditors’ findings, however, it is expected that such revenues will drop to $11.4 million this year from last year’s $42.1 million. The Cupertino city government may also be asked to return any money it has received from Apple over the past several years to the state government. As a result, the local government could end up laying off staff and reduce spending in other areas to make up for the shortfall.

What’s Going On Here?

In a statement issued by the city government, it appears that the reduction in sales tax revenues was caused by changes to sales tax distributions based on the anticipated outcome of a state audit on one of the city’s leading taxpayers. This essentially implied that the audit was being conducted on Apple.

That said, the Cupertino city government is taking action as early as now to advise council members and the community in order to develop budget-balancing strategies for its 2024 budget.

The primary beef that the Tax and Fee Administration has with Apple lies in the latter’s treatment of online sales. Under state law, a local portion of the sales tax goes to the location where a purchase was made as opposed to the customer’s location. That said, Apple has long treated all its online purchases – regardless of where customers actually are – as if these were done in Cupertino. In this case, Apple sets aside the one percentage point local portion of the 7.25% state sales tax for Cupertino.

Later, the company remits all the sales tax it receives to the state tax department, and the specific portion is allocated to Cupertino. In turn, the city government passes on 35% of its total to Apple – and now, those payments have hit a total of $107.7 million since the agreement was made back in 1998.