The sweetheart deal between United Airlines and the city of Oakland that diverted $10 million in jet fuel sales tax away from San Mateo County was based on the location of a “sham” office that did not actually conduct such business, according to the state Board of Equalization’s Appeals Division.
The conclusion could mean the funds will be reallocated to San Mateo County along with smaller amounts to the cities of Ontario, Palm Springs, San Diego and Santa Barbara and Sacramento County that also challenged claims fuel transactions happened in the Oakland office.
“There’s a lot at stake,” said County Manager John Maltbie.
But a Board of Equalization hearing set for next week is now pushed back likely to March because the city of Oakland asked for more Appeals Division review of the ruling that it did not comply with the requirements of the law allowing the airline to locate an office and split the sales tax rather than paying San Mateo County where San Francisco International Airport is located.
The Board of Equalization will take the challenge up about six to nine months later and Deputy County Counsel David Silberman said he feels the counties will be victorious. If not, the next step is court, he said.
In 2003, Oakland and United Airlines struck a deal which cut out other counties otherwise entitled to local sales tax revenue from San Francisco International Airport by forming a subsidiary to sell fuel from a single point. In return for only doing business in Oakland, the city gave the airline a 65 percent return of statewide revenue.
In 2005, then-assemblyman Leland Yee, D-San Francisco/San Mateo, passed a bill closing the loophole in 2008, handing the approximately $3 million back to San Mateo and San Francisco counties equally. But between 2003 and 2007, more than $10 million was redirected from San Mateo County to Oakland.
During the county’s appeal to the Board of Equalization, the appeals division concluded the Oakland office was a “sham” and was uncertain which, if any, United employees actually worked negotiating fuel agreements, Silberman said.
One example, he said, is that one employee reportedly negotiated a deal before even being assigned to the Oakland office.
Silberman said United claims backdating agreements is standard industry practice.
“If that’s accurate, it’s accurate. But it did seem odd to us,” Silberman said.
United Airlines declined comment, said Corporate Communications Director Christen David.
The appeals decision and recommendation concluded the airline’s actions were done “solely in the attempt to shift the local tax to Oakland” but that the tax was incorrectly reported because that office didn’t participate in sales.
The Board of Equalization hearing is just the latest hurdle in the county’s lengthy fight to keep its millions in jet fuel sales tax funds. While Yee’s law ended the deal, the lag time in closing the loophole was hotly contested by a handful of county supervisors who felt it showed cities how to make money in the time left.
In January 2006, the San Jose City Council considered an agreement with American Airlines allowing the company to buy its entire statewide jet fuel supply in the city in return for a sales tax break. The deal, which offered about $3 million in additional sales tax revenue for San Jose, failed. The next month, South San Francisco agreed to negotiate with Northwest Airlines over a fuel tank location. The proposal would have brought $132,000 in jet fuel sales tax to the city while taking nearly $500,000 from the county until 2008. The deal ultimately was not made but the tank was located in the city with the tax going to the county. But in September 2007, the Board of Equalization alerted the county that $996,734 in tax revenue dating back to the first quarter of 2003 actually belonged to South San Francisco. The county disputed the claim, arguing the facility was actually a collection of tanks not being used at the time and that San Francisco International Airport is located in the unincorporated area. On Sept. 17, 2008 the Board of Equalization alerted the county it was reinstating the $996,734 in tax back to San Mateo County and closing the appeals process.
During this time, the county sued over the deal but, in 2010, a judge ruled that the county had no standing because it had yet to exhaust all avenues for remediation and sent it back to the Board of Equalization for appeal.
(650) 344-5200 ext. 102