State sued by Walmart, San Bruno

A 25-year tax revenue sharing agreement between San Bruno and Walmart.com was seen as a boon for the city, councilmembers said, when it was approved in 2020. A 2020 staff report predicted initial annual sales tax revenue of $6.2 million from Walmart’s eCommerce headquarter activities, which are located in San Bruno.

But the CDTFA doesn’t believe the sales tax revenue belongs to San Bruno.

It found that under the application of local tax law, the money should be reallocated to jurisdictions with physical Walmart fulfillment and pickup locations, issuing formal reallocation notices for the money in April 2023, per a writ of mandate petition filed by San Bruno and Walmart.

Now, the city is risking $15.3 million in repayment if a lawsuit contesting the decision is unsuccessful, per a February 2024 staff report, although it’s holding a portion of recent sales taxes in reserve until the case is resolved.

The CDTFA cannot comment on pending litigation or specific taxpayer information, it said, although the agency said in a statement that no tax dollars are moved between jurisdictions until a decision becomes final and all appeals are resolved. An informal appeal against the reallocation by Walmart was rejected and San Bruno’s current appeal is still pending.

“Once a reallocation decision becomes final, the department works with jurisdictions to facilitate repayment, recognizing that it may take time for a jurisdiction to pay back tax that was mis-allocated,” a spokesperson for the CDTFA said of its reallocation process in an email.

The litigation team will determine next steps for the lawsuit, which is currently pending the results of the appeal, Peter Pierce, a litigator with the San Bruno City Attorney’s Office, said.

“We think the reallocation notices effectively incorrectly redistribute local tax revenue [in] San Bruno to other cities. We think the state is incorrect under the law in doing that, and there’s a lot of money at stake,” Pierce said. “We disagree with the state’s approach.”

The tax-sharing agreement allowed San Bruno to collect 65% of the first $3.5 million in sales tax generated from Walmart’s San Bruno eCommerce headquarters and 50% moving forward on both Walmart owned inventory and third-party inventory shipped to California customers.

But the city’s new revenue source, which was designed to play a part in addressing an $8 million budget deficit in 2020, faced troubles since an audit conducted by the CDTFA in 2021, according to a writ of mandate filed by the city’s legal team.

Next steps in the lawsuit include a status conference so the court can set a briefing schedule and likely oral arguments that will be heard based on documentation and legal briefings that will be filed in upcoming months, Pierce said.