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State law keeps taxpayers in dark regarding Costco payment

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POSTED January 13, 2010 2:52 a.m.
Manteca municipal officials found out through commercial leasing agents with Kitchell that Costco was going to locate another store in the region and were considering the east side of Modesto.

They were told the Manteca market numbers “weren’t high enough” yet to locate a Costco in Manteca. They’d consider Manteca, though, if there was some type of “help” in covering the site development.

Manteca residents spent $6 million in taxable sales at Costco stores in Modesto and Tracy in 2006.

The $6 million Costco was pulling out of Manteca consumer pockets represented $600,000 in local sales tax that Manteca residents were paying to support municipal services in Modesto and Tracy.

Costco is a huge generator of taxable sales in the communities they are located in. Had Costco opted for a second Modesto location on the east side of that community it would have been years before Manteca had a chance at landing a Costco. And down the road that may not have happened as Lathrop would have been bigger and the appeal of locating on the Interstate 5 corridor as being a central location for the Manteca-Lathrop-Weston Ranch region would have been a tough one to pass up.

So the city considered sharing future sales tax with Costco. It is a move that other cities have used to snare Costco stores including a neighboring community to Manteca that has been crying foul lately about Manteca “paying” business to locate here.

The City Council wasn’t sold especially without any firm data in hand. They retained a Los Angeles firm that specialized in such analysis that also – through Costco’s permission – got access to confidential and proprietary information that is collected by the State Board of Equalization on each business that has taxable sales in California.

They used that hard, state-audited data to determine whether a sales tax split deal would really benefit Manteca.

The end result was a 10-year sales tax split deal that was capped at $3.7 million to Costco to build a wholesale store in Manteca. The $3.7 million would come out of sales tax the city would receive from Costco shoppers buying items at the store.

The deal gives Costco 45 percent of the city’s share of sales tax - excluding Measure M public safety sales tax that the city would retain – that is collected annually at the Manteca store up to $3.7 million.

If Costco reaches $3.7 million before 10 years, the deal ends. No bonus sales tax as it were. If Costco reaches 10 years and doesn’t receive $3.7 million, that’s it. They have to live with making less.

The initial analysis projected Costco will receive $370,000 a year in sales tax generated from its own sales while Manteca would receive $780,000 annually once the Measure M half-cent sales tax is tossed into the mix. After the $3.7 million obligation is met, Manteca would have over $1.1 million a year in sales tax coming in from Costco sales.

That analysis also estimated that based on “normal years” Costco could get their $3.7 million in four to five years.

Unfortunately, the general public has no way of monitoring this specific deal thanks to the government code that the city attorney’s office indicates prohibits the city from releasing confidential and proprietary sales tax figures tied to a specific store.

Unlike the city’s only other sales tax sharing deal with Poag & McEwen which covers the entire lifestyle center and not just one store, the Costco deal is extremely retailer specific.

Costco obviously is only going to get what they are entitled to receive. And given how zealously the city is counting every cent of revenue these days and watching every penny it spends, there is no reason for alarm.

That – however – doesn’t mean that the Costco deal should be standard practice. The public needs to be able to monitor all transactions involving public money.

It is kind of a Catch 22 situation. If the city attorney’s office is right, the only way such a deal could have been made with a specific collector of sales tax under California law is for the check that the city writes each year to be kept confidential which means it won’t show up on the warrants.

Such information naturally could give competitors an insight to Costco’s Manteca operations. Ultimately, though, that information will come out. If Manteca stops paying in six years due to the contract being fulfilled, then one can deduce a rather close ball park figure of Costco’s annual taxable sales for the previous six years in Manteca.

The bottom line may indeed be Manteca keeps sales tax in the city was being lost to Modesto and Tracy and that the city is simply giving up sales tax revenue that it never would have gotten otherwise. That, however, is not the point when it comes to open government.

Manteca likes to pride itself on transparence whether you agree with that notion or not. In this case, there is every indication that the city will make sure Manteca’s interests are protected. The public, though, should have a right to know exactly how such deals are working on a year-to-year basis so they can have a voice in whether to object to future deals of that nature should the city elect to do them again.
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