1. What caused this situation to begin with?

Businesses that collect sales tax are responsible for telling the state where those taxes should be distributed. The state reviewed the taxes of one of our local businesses and challenged the long-standing practice of allocating sales tax to Cupertino and determined that a large portion of this business’ sales tax should be distributed to other locations, resulting in an ongoing reduction to the City’s budget. The City has also set aside funds to account for sales tax revenues the City has already received that would potentially be subject to reallocation.

2. What is the latest CDTFA update?

The City and State have agreed to resolve the dispute around the distribution of sales tax revenues to Cupertino. Although nuanced, the settlement reached with the State essentially allows the City to keep the funds previously allocated and anticipated for receipt through August 2024 and avoid lengthy litigation that would have cost the City significant time and money. The reserves that the City had previously set aside to cover an adverse determination by CDTFA can now be saved or used for other purposes. 

3. Why did the City settle?

The City believes that the risk of an adverse legal ruling is significant enough to warrant this settlement. The uncertainty surrounding litigation and the need to set aside large amounts of revenue over a protracted period of years as a precaution against an adverse result would cripple the city for an extended timeframe.

4. Why is this settlement important?

If the City had pursued litigation, it would have been necessary for the City to set aside ever increasing sales tax in an account to be able to pay in the case of an adverse decision. These funds would have sat unused for years as the litigation ensued, benefiting no one. The settlement makes available revenues for residents of Cupertino that would otherwise been reserved to account for this possibility of an adverse outcome in litigation with the State. 

5. How will the additional funds be allocated?

It is up to the Council to allocate funds through recommendations from the City Manager

6. Does the settlement affect ongoing sales tax allocation to the City?

Beginning in 2025, the City will no longer receive the sales tax distributions that CDTFA determined should be reallocated to other jurisdictions. The City will need to identify other revenue sources or expenditure reductions to balance its budget over the long term. 

7. Is the City still projecting a structural deficit?

Yes. The reduction in sales tax revenue is ongoing and will continue to impact the City's budget. The City is actively seeking ways to mitigate this impact and has plans to use its fund balance and reserves. The City will continue to monitor the situation and provide updates as necessary.

8. Will the City still be reducing services at this time?

Through proactive approaches to reduce costs and maintain important services to residents, as well as fostering partnerships with the community and the private sector, the City was able to present a balanced budget that was unanimously adopted by Council in June. 

9. How does this affect the tax-sharing agreement the City has with Apple?

The City’s settlement agreement with the CDTFA has no effect on the City’s tax-sharing agreement with any taxpayer.