The City of Upland’s recent renewal of a sales tax springback arrangement with Holliday Rock has brought a wider-scale refocusing to the manipulation of taxing authority by which cities are able to divert – some have used the term steal – other cities’ sales tax revenues.
Holliday Rock is one of Upland’s largest and most successful businesses. For fourteen years, the City of Upland has returned, or sprung back, to Holliday Rock 40 percent of the city’s share of the sales tax paid by that company’s customers for the products it sells.
One of the facts of municipal life is that some cities employ as their managers and administrators individuals who are more sophisticated than do many other cities. As in the natural world, where the strong prey upon the weak, in the world of government, where money is the lifeblood that enables official action, programs and the provision of services, the smart take advantage of the less well-informed and less-worldly.
One concept by which money makes its way out of the pockets of one city and into the coffers of another is that of point of sale.
Point of sale is a relatively obscure element of financial function that stands at the intersection of business and government in California, and it applies to in particular the use of taxing authority to enhance the financial circumstance of municipalities.
The State of California imposes a 7.25 percent sales tax on most goods sold in California, with exceptions made for services, unprepared and non-snack food, meals delivered to elderly and disabled people or patents, student meals, medicine, prisoner of war bracelets, blood storage units, carbon dioxide, cogeneration devices, organic fuels, animal feed, original works of art, newspapers and periodicals, items sold at yard sales, oxygen delivery systems, racehorse breeding stock, real property, school yearbooks, teleproduction equipment, timber harvesting equipment, used mobilehomes subject to property tax, vending machine sales, wheelchairs, crutches, canes and walkers, such that seven-and-one-quarter cents is tacked on to each dollar paid in purchasing transactions throughout the state. Of those seven-and-one-quarter pennies that go to the state for every dollar spent, one of those pennies is reserved for and given to the city where those sales occur. If the sale does not occur in a city but rather in an unincorporated county area, that penny is routed to the county government.
In most circumstances, sales occur over the counter, from a store, one that is located unequivocally in a given jurisdiction, such that there is no confusion with regard to which municipality or county is due that one cent per dollar in sales tax that is collected. In virtually all circumstances, the merchant making the sale is responsible for collecting the sales tax at the time of the purchase, and is responsible for passing the sales tax collected to the state, which then makes the disbursement of that portion of the sales tax to the relevant city or county.
In some relatively limited cases, cities use what are referred to as sales tax springbacks to induce a company, usually one with a relatively large operation and a substantial quantity of sales, to set up shop within its particular jurisdiction. For example, city officials in a given city are likely to recognize that an entrepreneur who is contemplating establishing a car dealership has options of placing that business not only in their city but in a neighboring one or perhaps another location. Those officials recognize as well that it would behoove them and their city to host that car dealership so that they will see the benefit of the substantial amount of sales tax to be realized from the sale of large numbers of big-ticket items such as cars, SUVs, trucks and vans. To ensure the dealership locates in their city rather than elsewhere, those city officials will sometimes offer the dealership’s owner an incentive to locate his/her operation in their city, particularly if they know that the entrepreneur is considering locating the dealership in another jurisdiction. In such circumstances, those city officials might be willing to offer to refund to the car dealership ten percent or 25 percent or even as much as fifty percent of the tax money to be generated by that dealership for a set number of years to persuade its owner to locate in their city. These city officials justify these sales tax springbacks by the knowledge that 90 percent or 75 percent or even 50 percent of the tax revenue those car sales in their city will generate is preferable to zero percent of the tax revenue those car sales will generate if they are sold in another location outside that city’s boundaries.
The controlling factor, generally speaking, as to which governmental entity is to be the recipient of the sales tax from a sale consists of the location at which or from which the sale is made. This location is referred to as point of sale.
Mid-size, large and giant companies and corporations often function from a multiplicity of locations, however, and under California law, such entities are permitted to designate a single one of those locations as its “point of sale” for all of its California locations. Thus, a corporation or company can, for example, sell its goods in a few, dozens, scores or even hundreds of places, communities or cities around California, yet have those sales registered as emanating from one specific location or city. A company or corporation designating a city as its point of sale for the products that business is marketing thereby routes all of the sales tax generated from those sales, no matter where they occur in California, to that city.
Such is the case with Holliday Rock and the City of Upland. Holliday Rock, a mining operation/manufacturing operation which produces aggregate, ready mix concrete, asphalt and construction materials, has been in business since 1937. Holliday Rock has 32 operations in San Bernardino, Riverside, Los Angeles, Kern and Orange counties, including three in Upland, Ontario, Chino, Colton, two in San Bernardino and Adelanto in San Bernardino County, as well as in the City of Industry, three in Irwindale, Montebello, Santa Ana, Irvine, Westminster, Vernon, Long Beach, Palmdale, Antelope Valley, Perris, Romoland, two in Sun Valley, Lancaster, Santa Clarita, Canoga Park, Mojave, Tehachapi, Ventura and Bakersfield.
In 2007, the City of Upland entered into a 15-year operating covenant with Holliday Rock, which is set to expire on June 30, 2022. In exchange for Holliday Rock’s commitment to continue its Upland operation and use Upland as its corporate point of sale, the City of Upland in that covenant agreed to spring 40 percent of the sales tax Holliday Rock collects annually back to the company.
According to a staff report by Upland Development Services Director Robert Dalquest dated July 26, 2021 but written prior to that date, “Holliday Rock has continued to expand its operations since the time that 2007 agreement was approved, and the city has negotiated a new agreement to reflect resulting increased sales tax attributable to Holliday Rock facilities within the city.”
Dalquest’s report, which was forwarded to the city council by Acting City Manager Stephen Parker, was intended to orient the city council with regard to the circumstance involving the city’s previous sales tax springback arrangement with Holliday Rock and the point of sale issue in preparation of the city council’s vote, scheduled for the Monday, July 26 meeting, on extending the arrangement with Holliday Rock another 15 years.
The report deals far more explicitly with regard to the sales tax springback while dealing with the point of sale issue obliquely. The indirect discussion of the full implication of Upland being Holliday Rock’s point of sale was to avoid alerting Ontario, Chino, Colton, San Bernardino, Adelanto, the City of Industry, Irwindale, Montebello, Santa Ana, Irvine, Westminster, Vernon, Long Beach, Palmdale, Antelope Valley, Perris, Romoland, Sun Valley, Lancaster, Santa Clarita, Canoga Park, Mojave, Tehachapi, Ventura and Bakersfield that Upland is diverting the sales tax they would otherwise be receiving to its municipal coffers exclusively.
The money at stake is not insubstantial.
“Holliday Rock estimates that over the 15-year term contemplated by this new agreement, Holliday Rock’s activities will result in $3,252,769,492 in taxable sales revenues sourced to the city, with $13,011,078 in covenant payments from the city to Holliday Rock, and $19,516,617 in sales tax revenues retained by the city,” according to Dalquest’s report.
Understandably, Upland officials, including Parker, Dalquest and the five members of the city council, are in no hurry to alert officials with many of the other cities where Holliday Rock has operations of something at least some of them do not realize, which is that Upland has effectively picked their pockets of the sales tax revenue that would otherwise have come their way over the last 14 years and that for the rest of the current fiscal year and for the decade and a-half to come after that, it will be siphoning off the sales tax revenue due them from Holliday Rock’s business activity in their jurisdictions.
Upland’s preempting of the 21 other cities’ and four communities’ shares of the sales tax from Holliday Rock’s operations and its hogging of all of that sales tax revenue is considered, by some, to be poor form on multiple accounts.
Holliday Rock’s operations involve at least nine mining operations similar to its one in Upland, which entail the generation of dust and exhaust from the machinery used to unearth, crush, convey and load gravel, rock and other ore. All of Holliday Rock’s operations involve the use of heavy duty trucks, most of them diesel-powered, carrying substantial loads on local streets. The pollution and contamination the mining operations entail, the belching of diesel and machinery exhaust into the air and the wear and tear on the streets to and from the Holliday Rock operations represent health, safety and economic costs to those communities which see no monetary benefits or cost offsets from Holliday Rock in terms of sales tax revenue flowing into those cities or communities.
The operating covenant between Holliday Rock and the City of Upland for the fifteen years running between July 1, 2022 and June 30 2037 ratified by the council in a 4-to-1 vote with Councilman Rudy Zuniga absent stated, “Holliday Rock shall designate the City of Upland as the sole point of sale for a significant portion of products sold, including but limited to, through an internet website or phone sales which are designated for any location within California. The California Department of Tax and Fee Administration shall maintain the appropriate master sales permits applicable to and required for the operation of the facility. Holliday Rock shall consummate all taxable sales transactions for company sales activities at the facility, consistent with all applicable statutory and California Department of Tax and Fee Administration regulatory requirements applicable to Holliday Rock’s company sales activities and the designation of the City of Upland as the ‘point of sale’ for a significant portion of owner’s Holliday Rock’s company sales activities at [the] facility.”
Upland’s point of sale arrangement with Holliday Rock to seize for itself all of the sales tax revenue from the corporation is a direct and proximate cause of the other 21 cities and four communities not getting the sales tax to which they would normally be entitled.
Even more pointedly, the manner in which Upland and Holliday Rock mutually induced one another into maintaining the 2007 arrangement for another 15 years has been questioned. Upland offered Holliday Rock the incentive of a 40 percent sales tax springback. Holliday rock, at least implicitly, threatened to make a location other than Upland its point of sale. Were there no point of sale agreement between Holliday Rock and Upland, each of the 26 cities or communities where the company has operations would come in for a share of the sales tax levied upon the Holliday Rock products. Through its springback pact with Holliday Rock, however, Upland has made it so that the company, over the next 15 years, will keep more than $13 million in sales tax its customers will have paid to buy its products. Many see this springback as a kickback, by which Upland is able, under a loophole in California law, to essentially legally bribe Holliday Rock into designating it as the point of sale for all of its products, and by so doing deprive the cities where Holliday Rock is operating of sales tax they should receive while capturing for itself sales tax from places outside of Upland’s jurisdiction. If the City of Gracious Living were not offering the monetary inducement to Holliday Rock, it would not be receiving that enhanced sales tax revenue, which many people feel Upland is neither ethically nor morally entitled to.
This week, the Sentinel sent letters to Adelanto City Manager Jessie Flores, Chino City Manager Matt Ballantyne, Colton City Manager William Smith, Ontario City Manager Scott Ochoa and San Bernardino City Manager Robert Field, asking them if they believed the city each of them worked for is powerless to resist the arrangement Upland has with Holliday Rock, or whether they felt, on the contrary, that there was perhaps a way to prevent the sales tax from business activity involving Holliday Rock in their cities from being diverted to Upland. The Sentinel inquired as to whether they felt that the diversion of sales tax money to another municipality through the point of sale ploy was something entirely in the hands of another governmental entity such as the Tax Franchise Board or the California Department of Tax and Fee Administration, and whether they had explored their options in preventing the loss of the sales tax revenue they should have been receiving from Holliday Rock. The Sentinel asked if those cities had in the past fought a battle over this issue and not prevailed or whether there was a case where some other city waged such a battle in court or elsewhere, establishing a precedent that made taking this issue up moot or futile. If that was not the case, the Sentinel inquired of each of the city managers whether they would they consider exploring their cities’ options in that regard.
By press time, neither Flores, nor Ballantyne, nor Smith nor Field had responded.
Ontario is no stranger to point of sale arrangements with companies doing business within the 50-square mile confines of Ontario’s city limits, deals which have enhanced Ontario’s revenues. In his response, Ochoa acknowledged that there was a cut-throat competition amongst cities to increase their revenue. He insisted, however, that this dog-eat-dog ethos, while somewhat unseemly, was not a result of unprincipled city officials who are taking advantage of cities other than their own which employ city managers and administrators less sophisticated and aggressive than they are. Rather, he said, what is happening is more a product of a state government which has over the past several decades deprived cities of revenues that were formerly available to them, while creating circumstances wherein cities, which have been outcasts from the feast of government funding, must fight among themselves for the leftovers and table scraps. Accordingly, he indicated, he did not begrudge Upland the money it is realizing through its arrangement with Holliday Rock.
“Particularly in the wake of the Educational Revenue Augmentation Fund takings of the 1990s, the ‘triple flip’ involving the reduction in vehicle license fees in the 2000s, loss of redevelopment in 2012, and the host of other state mandates along the way, cities in California have had to utilize whatever tools were still available to generate the general revenues needed for municipal services ranging from public safety to quality of life,” Ochoa said. “Sales tax sharing agreements are such tools. Until and/or unless the State of California rationally, comprehensively and strategically revisits the broad policy issue of intergovernmental revenue sharing, then my wager would be that cities will continue to unapologetically leverage the tools and rules as they currently exist.”
At their July 26 meeting, the four Upland City Council members present heard a presentation on the covenant from Dalquest and an exposition from Holliday Rock principal John Holliday with regard to his company. They then voted to extend the operating covenant between Upland and Holliday Rock for a decade-and-a-half, effective July 1, 2022. During the presentation and the council discussion, there was reference to the point of sale arrangement, but there was no explicit reference to its implication, that being the diversion of sales tax revenue from Ontario, Chino, Colton, San Bernardino, Adelanto, the City of Industry, Irwindale, Montebello, Santa Ana, Irvine, Westminster, Vernon, Long Beach, Palmdale, Antelope Valley, Perris, Romoland, Sun Valley, Lancaster, Santa Clarita, Canoga Park, Mojave, Tehachapi, Ventura and Bakersfield to Upland. The city council members came across as determined to deal with that aspect of the deal in the most indistinct way possible, one that was calculated to avoid alerting any of the officials or residents of the cities or communities deprived of that sales tax revenue from taking stock of the situation. Moreover, the council came across as being unwilling to acknowledge, even to themselves, what the full implication of their action was, let alone create a situation where they might have to explain why or justify Upland foreclosing on revenue that others would certainly contend should more properly go to other governmental jurisdictions where the taxable product was actually sold.
Nevertheless, while Upland’s officials were unwilling to enter into a polemic to justify their city’s monopolization of the sales tax revenue generated by Holliday Rock’s operations, a former governmental official was willing to defend Upland’s use of both point of sale and tax springbacks to fill its coffers.
Greg Devereaux stands rightly accused and convicted of being the most sophisticated and resourceful governmental functionary in San Bernardino County history, someone whose skillful and creative manipulation of the arcane and complex regulations attending governmental and intergovernmental operations were envied by his peers in municipal management and both highly valued and sought-after by elected officials.
In the early 1990s, as Fontana was teetering on the brink of bankruptcy and possible disincorporation as a result of malfeasance, misfeasance and mismanagement on the part of its civic leadership, he initiated that city’s economic turnaround, first in the capacity of housing and redevelopment director and then, beginning in 1994, as its city manager. In the three years while he was at the helm in Fontana City Hall, Devereaux structured an economic recovery program and set in place both reforms and revenue-generating mechanisms that moved the city out of the red and into the black. So comprehensive was Devereaux’s recovery blueprint that only a portion of it had been put into action by the time of his departure, and his successor as city manager, Ken Hunt, not only survived but thrived the next 22 years as Fontana’s acting and thereafter full-fledged city manager by, essentially, executing the plan that Devereaux had put in place before he left.
In 1997, the City of Ontario, impressed by what Devereaux had achieved in Fontana, lured him away to become its city manager. In Ontario, Devereaux started with the advantage of serving a community that was already in decent shape financially. From that position, he intensified its economic primacy, utilizing the full panoply of what was available, including incentives such as sales tax springbacks in combination with point of sale arrangements to induce large corporations such as Cemex and Hewlett-Packard to make Ontario their California headquarters, facilitating residential, commercial and industrial development, while leveraging the city’s existing draws, including the Mills shopping mall and Ontario International Airport, as well as progress in Ontario’s neighboring communities of Chino, Upland and Rancho Cucamonga, to encourage further economic expansion in the city. By the time he left Ontario, it was economically head, shoulders and torso over the rest of the county’s cities, with approaching two-thirds of a billion dollars running through all of the city’s funds, making its municipal budget more than twice that of the next most prosperous city in the county.
In 2010, San Bernardino County poached Devereaux from Ontario, creating the previously nonexistent position of county chief executive officer into which Devereaux was hired as the replacement of what had previously been the county’s highest staff position, that of county administrative officer.
Devereaux left the county after seven years and is now the principal of Worthington Partners, a consulting company. Worthington Partners’ primary clientele consists of governmental agencies, such that at present nearly a dozen governmental entities are making use of Devereaux’s managerial expertise simultaneously. In his capacity as a municipal troubleshooter, Devereaux now earns more money than he did when he was San Bernardino County’s highest paid public official.
Whereas Upland officials were not willing to speak up for themselves and defend how their city is monopolizing all of the sales tax revenue reserved for municipalities generated by Holliday Rock’s operations, Devereaux rallied to their defense.
The ground upon which governmental entities compete for funding is an uneven one, Devereaux said, and the rules governing that competition defy the concept of fairness. Accordingly, he said, cities have to be aggressive and in some cases ruthless in pursuing revenues.
The fact is, Devereaux said, the agreement worked out between Upland and Holliday Rock was perfectly legal.
“I can understand how people can come to the conclusion that the covenant they have is unfair, but what I would point out is the state legislature made that deal possible,” Devereaux said. “If people perceive that to be unfair, then they should go to the state legislature to change the law. People are criticizing the city for doing something that is permitted under the law. The city did not put the state’s sales tax policy together. The state did that in a way that allows what you are discussing. The city is doing what the law allows. It is an awful lot to ask the city to follow the law and then criticize it for doing just that.”
Just like many things in life are unfair, Devereaux said, there are disparities in the way governments operate.
“I can take exception with all sorts of things,” Devereaux said. “Is it fair that one city gets 50 percent of the one percent property tax collected on the property in its city limits and other cities get virtually nothing from the collection of property tax? Is that fair? Maybe it isn’t fair, but that is what the legislature has set up. Is it fair that those cities next to the mountains where water runs down can charge its residents lower rates for water? Is that fair? Each city has its own circumstance and has to make the best of that circumstance. It isn’t fair that one city has a mall and another one doesn’t. Just because of one city’s location, it sometimes gets all that sales tax. If a mall developer came to a city and the members of the city council said to him ‘Don’t locate your mall here. Locate it in city next to us because they need the revenue more than we do,’ how long do you think those people would last in office?”
Devereaux continued, “When you look at the system of revenue distribution to local government, Proposition 13 skewed the system considerably.”
Proposition 13 was passed in 1978 by means of the initiative process. That initiative replaced the practice of annually reassessing property at market value with a system in which assessments are based on cost at acquisition. It also restricted annual increases of assessed value to an inflation factor, not to exceed 2 percent per year. Proposition 13 locked in existing property tax rates, including existing disparities.
“At the time Proposition 13 passed, there were cities that were being very responsible in some people’s minds and not taxing their residents heavily while there were cities that were increasing property tax all along,” Devereaux said. “The latter cities got a much higher percentage of property tax than the cities that were most responsible and kept their taxes low. This was unfair. I can go on. At its heart, you are talking about what is allowed as part of the system. You are talking about what is moral and what societal judgment is. Isn’t that what the legislature is for? If the legislature wants to change that system, it can do so.”
Upland was merely making use of an opportunity available to it, Devereaux said.
“The inequalities in how cities are being funded are rife, and to pick out one thing and say that shows something is wrong misses the bigger picture,” Devereaux said. “The bigger story is the inequities that are built into the system that need to be redressed. Until you do that, you are going to have cities in the system scrambling within the system to provide services at the highest level they can.”
In the same way, Devereaux said, it is perfectly legal for Holliday Rock to have negotiated with Upland to work a trade-off which obtained for it the 40 percent sales tax springback in return for making Upland its point of sale.
“It is not surprising that corporations will try to see who will give them the best deal,” Devereaux said. “If they don’t do that, they aren’t being responsible to their shareholders. It is not uncommon for a company to look at six or seven competing cities when they are deciding where they are going to locate.”
To survive, all cities need revenue, and the competition for that revenue among cities is fierce, Deveraux said. Some cities are more aggressive while engaging in that competition than others, he said.
“There are cities that have staff and leadership that are more entrepreneurial,” Devereaux said. “They understand they are in business, the business of running a city. I am not suggesting that cities are businesses, but there are city leaders who understand that if they want amenities for their community, they have to generate revenue. Some cities are more accomplished in doing that than other cities. In Ontario, when I was there, we held our own. We had the Mills. We had point of sale agreements with HP [Hewlett Packard], Cemex. There were many of those kinds of deals. But we weren’t the only city to do that. Ontario was entrepreneurial. Ontario really worked hard to have diversified revenues. In any jurisdiction where there are difficult financial and budgetary times, its leadership will try to cut their way into balance. Ontario always tried to earn its way into balance. There are different philosophical approaches. Our approach led us to trying to diversify the city’s revenue base. We wanted to have higher levels of service, high levels of public safety. We wanted well-equipped departments with high levels of training. We were an entrepreneurial city, determined to earn whatever we could and to use that to provide those services.”
“People think all cities have the same revenue bases,” Devereaux said. “They don’t. Each city has to find its own way because of those differences. Most people do not understand that every single city’s circumstance is different, and it is the structure that leads them to have to seek different sources of revenue. The system creates inequities because choices in many instances have not been given to the local jurisdictions. They don’t get to impose income tax. City councils can no longer raise property taxes. They can’t raise the sales tax rate. That has to be done by a vote of the people. Cities work within the system. If they are working within the system, what’s the problem? There may be a problem with the system, but you cannot rightfully criticize cities for working within it.”
Sales Tax Springback/Point Of Sale Ploy Lets Cities Pick Each Others’ Pockets
The City of Upland’s recent renewal of a sales tax springback arrangement with Holliday Rock has brought a wider-scale refocusing to the manipulation of taxing authority by which cities are able to divert – some have used the term steal – other cities’ sales tax revenues.