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Business & Tech

City Welcomes Tech Companies Despite Untaxable Products

Companies providing online services don't pay taxes on their virtual products, but Redwood City is still willing to host them.

Just months after from its budget, Redwood City is looking to find as many spending efficiencies as possible in order 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.

Recently hired Community Development Director Bill Ekern said he envisioned taking that idea a step further by which could simplify tasks such as digitalizing the permit process for home improvement projects.

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But as the city begins to look for companies within its boundaries to provide such services, the only financial benefit it stands to gain is from savings. Not from sales tax revenue.

 

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Show Me the Money

Cloud computing services often do not generate local sales tax revenue for the cities hosting the companies where the company offering the service is located. That is because virtual services transmitted over the internet, or non-tangible items, are not taxable.

And as more companies providing cloud services flood the Peninsula, such as Contactual in Redwood City or Vello Systems in Menlo Park, the cities continue to lose out on potentially significant source of revenue.

Columnist Chris O'Brien, of the San Jose Mercury News, further illustrates how this issue is plaguing local jurisdictions in Silicon Valley.
Redwood City relied on sales tax to revenue to account for $14.8 million of its general fund last year, 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.

Yet still, the local cities welcomes 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.

And, should the pass in November, these companies will still contribute some revenue to Redwood City.

 

A Similar Story from Our Neighbor

Menlo Park Business Development Director David Johnson has expressed a similar sentiment in the past, as can be exemplified by the city recently welcoming Facebook to move its headquarters into the city.

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, from which the city of Menlo Park stands to gain at least a slice of the sales tax pie.

Meanwhile, independent brick and mortar businesses in Redwood City and Menlo Park are .

The hope of companies such as Kepler's Books, is that large internet companies such as Amazon that host distribution bases in California, will soon be forced to comply with the same sales tax that they do.

Kepler's Books owner Clark Kepler 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, as it is 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 is likely 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," said the report.

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