This story was updated at 8:15 PST to include a statement issued by the Cupertino Mayor.
Everyone loves a good David and Goliath story.
Meet Barry Chang: Mayor of Cupertino and the media’s new David. Mayor Chang is getting enormous coverage for this complaints that Apple won’t chip in another $100 million to help the city repair its crumbling infrastructure.
The U.K. Guardian reports that Chang went to Apple’s current HQ to demand a meeting with CEO Tim Cook and was not allowed in!
The horror! The horror!
Apple, of course, makes a convenient Goliath. It’s the world’s most valuable company. It practically prints unlimited amounts of money. And lo, it’s the subject of tax-dodging accusations in Europe.
Now, to be clear, there are legitimate questions that should be asked about Apple’s international tax schemes to lower its payments. And I understand that it’s hard to generate a lot of sympathy for a gigantic corporation. But in the case of Chang, his complaints are misguided.
Not only do they ignore the city’s history with Apple, but they miss the mark when it comes to identifying the real issues confronting California’s towns and cities.
Chang is essentially beginning to regret the decision by the city council in November 2013 to approve the new headquarters and allow Cupertino to become an Apple company town without extracting more concessions. It’s hard to feel too much pity there. After all, the growing impact and influence of Apple was perfectly clear at that time, particularly to those on the city council, like Chang.
Around 2001, Apple had about 3,000 employees in Cupertino. By 2012, it had 16,000 employees, about 40 percent of the city’s total employment base. With the new campus, Apple projects 24,000 employees in Cupertino.
The $9.2 million Apple paid in all taxes to Cupertino was 18 percent of the city’s budget. The company projects that its annual taxes will increase to $13 million annually when the campus is open. And while Apple accounted for 9.6 percent of Cupertino’s property tax valuation, compared to 1.21 percent in 2001, the new campus is expected to triple its valuation.
In addition, Chang seems to have forgotten (along with many journalists, apparently) that during the approval process for the project, Apple made significant changes in the construction plans to reduce traffic impact.
Also, the company, as part of the development agreement, said it will fund $66 million worth of public improvements around the campus and across the city (including $10 million for bicycle and pedestrian services) and $3.7 million for parks. And Apple agreed to spend $35 million annually on its own transportation management programs.
Fast forward to 2016, with the construction scheduled to finish later this year. Chang wants to revisit the development agreement. Mayor Chang has suddenly come to the realization that allowing a company like Apple to build a new headquarters the size of the Pentagon in a city of 60,000 people is going to have a significant impact on its infrastructure.
It’s also worth nothing that Apple, in a manner of speaking, did volunteer to pay more taxes. In November 2013, Apple agreed to restructure a tax agreement to increase the amount of taxes going to the city.
Under the terms of a deal struck in 1997, when Apple was near death, the city agreed to refund half of all the sales taxes the company generated back to the company. So in 2012, when Apple generated $12.7 million in sales tax for Cupertino, the city gave $6.2 million of that back to Apple.
Under the new terms, Apple agreed to cut that rebate to 35 percent. In 2012, that would have given Cupertino another $1.8 million, which is not insignificant for a city that had general fund revenues of $51.4 million that year.
Still, the tax deal is a lousy one for the city. And this is a good place to start talking about the real problems. Because Cupertino has more leverage to change it than you’d think.
You might think, well, what’s Apple going to do, move 26,000 employees out of Cupertino to another town?
It doesn’t matter. In California, companies have wide latitude to decide which cities to assign their official income to. I’m not saying the company would, but Apple could decide that maybe if it has an office in Palo Alto then that is where its sales occur. And bam: Good-bye sales tax revenue (or a chunk thereof).
These rebate deals are not uncommon. A couple of California towns were offering them to Amazon a few years ago to lure its offices to their district.
And in 2011, the city of San Jose offered a similar deal to Netflix to move its DVD division from Los Gatos. This was the ill-fated “Qwikster” spin-off of its DVD business.
San Jose offered to refund Netflix 30 to 50 percent of new sales taxes it collected over three years. Though tempted, Netflix nixed the move after customers strongly objected.
In general, though, if Chang wants to point a finger at someone, he should point it at the California state government. They should tighten the rules around assigning sales and close the loopholes.
And while they’re at it, they should rewrite the rules that charge state sales taxes on sales of physical goods but not on virtual ones. The move to cloud services away from software sales is another issue eating away at budgets of Silicon Valley communities.
This is not a big issue for Apple now. But consider that its hardware sales are flat or declining, while its services are still growing. Hardware generates sales taxes; cloud-based services don’t. So over time, if that trend continues, Cupertino might see less sales tax revenue from Apple. By the way, this is what has happened to the town of Los Gatos as Netflix’s business has shifted from DVDs to streaming.
According to the Guardian, Chang is also working on a proposal to create a business employer tax. A company with more than 100 employees would pay more than $1,000 per employee. San Jose and Los Gatos have similar tax systems.
But beware: Pushing Apple on this front could cause them to rethink their sales tax situation. And then you’re back to square one.
“You’re helping create the problems, so you have to help solve the problem,” Chang told the Guardian. “Look at the system we have here: the rich people get more richer and the poor cannot survive. Where’s the fairness? Nowhere.”
Sorry, but Apple was pretty upfront about what its impact would be. Cupertino made its decision, and now the city has to live with it.
Chang’s time would be better spent rallying other California municipalities to push for state tax reform that would really make a difference, rather than trying to bang his head against Apple’s front door.
UPDATE: Chang issued a statement on the town’s website claiming there were “several factual errors reported in a recent story by The Guardian.” However, his statement does not explain exactly what parts of the article are inaccurate.
Chang’s statement in full:
“I was shocked and dismayed to see a recent article quoting me with words I never used and describing situations that never happened,” said Cupertino Mayor Barry Chang.
“I feel very strongly about combating traffic,” said Mayor Chang. The mayor has previously promoted the idea that large companies that contribute to traffic problems should also contribute to traffic solutions. The Mayor was emphatic that, “other situations reported in the article absolutely have no bearing on anything that I may have said or anything that has happened in this community.”
“The reporter clearly misunderstood. My concerns and the concerns of this city council are well documented.”