City Welcomes Tech Companies Despite Untaxable Products

Cities continue to lose out on potentially significant source of revenue, as companies that utilize virtual, online services flood the Peninsula.

While Menlo Park seeks additional sources of revenue, they shouldn't look to or other Internet service providers that operate in the city. It won't get any sales tax revenue from them.

Companies that utilize cloud computing services, which enable them to store data online and access it anywhere, often do not generate local sales tax revenue for the cities where the company is headquartered.

That is because virtual services transmitted over the Internet, or non-tangible items, are not taxable in California.

San Jose Mercury News Columnist Chris O'Brien illustrated how this issue is plaguing local jurisdictions in Silicon Valley in a recent op-ed. Neighboring towns such as Redwood City relied on sales tax revenue to supplement its general fund last year with $14.8 million, according to a city report.

And across the state, the California Board of Equalization estimates that nearly $1 billion in Internet sales revenue goes untaxed each year.

The cities still welcome the businesses, regardless of whether or not they stand to gain from sales tax revenue.

"Redwood City is thrilled when companies seek to locate here or expand here, from any industry, including emerging technologies, cloud computing, and Internet," said city spokesman Malcolm Smith.

"Whether or not a company’s products are subject to sales tax is not an issue when a company wants to locate here. We welcome them," he said.

Menlo Park Business Development Director David Johnson has expressed a similar sentiment in the past, when the city encouraged into town.

And though the city is excited to bring the internet titan to Menlo Park from its former home in Palo Alto, Johnson said that it stands to gain little to no revenue from sales tax generated by the company's sale of advertising space.

Instead, Menlo Park is attempting to use more creative strategies to capitalize on the influx of traffic into the city. Johnson said a voucher program, which offers gift certificates to Facebook employees that would be redeemable to strictly Menlo Park businesses, may be on its way.

Such a program would encourage the thousands of Facebookers to patronize local businesses that sell tangible things, from which the city will gain a slice of the sales tax pie.

Meanwhile, independent in Menlo Park are advocating for a tax law revolution. The hope of companies such as is that large internet companies such as Amazon, that host distribution bases in California, will be forced to comply with the same sales tax that they do.

Kepler's Books owner has said he believes subjecting tech companies to such regulations would level the playing field between competitors.

The League of California Cities is fighting alongside independent businesses, advocating for the passage of tax bills that would allow cities to stake claim to a significant portion of the Internet sales tax revenue. But the battle likely is far from over, according to a report by the League of California Cities.

"The Internet has dramatically changed the manner in which business is conducted, so it is expected that our laws—and perhaps future Court interpretations—will evolve with our changing economy," the report reads. 

For a comparison point, just months after city officials avoided cutting $2.6 million from the budget, Redwood City is trying to be as efficient as possible to elude facing the same type of decisions again.

In order to do so, employees are encouraged to utilize available technological services that will cut down on staff time and expenses. This includes tasks as simple as printing less in order to save on paper and ink costs.

And recently hired Community Development Director Bill Ekern said he envisioned taking that idea a step further by implementing "cloud government," which could simplify tasks such as digitalizing the permit process for home improvement projects.

Ekern said that the city would be well served to take advantage of some of the innovations crafted by local technology companies in an attempt to make the city run more efficiently, and save money in the process.