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PUBLIC HEARING TO APPROVE AN OFFICE AND INDUSTRIAL SALES TAX INCENTIVE AGREEMENT BETWEEN THE CITY OF STOCKTON AND HOME DEPOT USA, INC., AND AMEND THE OFFICE AND INDUSTRIAL SALES TAX INCENTIVE PROGRAM GUIDELINES
recommended action
RECOMMENDATION
It is recommended that the City Council adopt a resolution:
1. Approving the execution of an Office and Industrial Sales Tax Incentive Agreement between the City of Stockton and Home Depot USA, Inc.;
2. Amending the Office and Industrial Sales Tax Incentive program guidelines to better support the City in attracting and retaining businesses and to facilitate easier engagement with enterprises;
3. Establishing a Redevelopment Unrestricted Sub-fund within the General Fund as a mechanism for use in the City’s redevelopment efforts including acquisition, blight abatement, demolition, and other actions that support the City’s development;
4. Authorizing the City Manager to take necessary and appropriate actions to carry out the purpose and intent of the resolution.
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Summary
At its June 24, 2014 meeting, the City Council approved the Office and Industrial Sales Tax Incentive Program to support the City’s business attraction/expansion efforts and generate additional revenue for the City. The program provides financial incentives to eligible businesses that are looking to locate or expand in existing or newly constructed office or industrial facilities within Stockton city limits. The Economic Development Department has been working with Ernst & Young LLP, a retail consulting firm, in attracting Home Depot USA, Inc., a multinational home improvement business, toexpand their e-commerce point of sale distribution center in Stockton. Home Depot USA, Inc., has agreed to establish its distribution center in Stockton for the completion and release of point of sales orders for flatbeds and bulk orders to local customers, upon the execution of an Office and Industrial Sales Tax Incentive Agreement.
DISCUSSION
Background
The Stockton City Council has identified several key goals for the City, including economic development and fiscal sustainability. On June 24, 2014, the Stockton City Council adopted Resolution No. 2014-06-24-1505, approving the Office and Industrial Sales Tax Incentive Program (Attachment A) in an effort to generate additional tax revenues, encourage new investment, and aid in the attraction of new business and expansion of existing business. The guidelines were later revised on August 12, 2014, to disqualify businesses already located within San Joaquin County from being eligible with the exception of businesses located within the Stockton city limits (Attachment B - Resolution No 2014-08-12-1601).
Examples of the types of office and industrial uses that would be eligible under the program include: eCommerce businesses, fuel distributors, high-tech equipment manufacturers or software developers, medical device manufacturers, and business-to-business sales. In these cases, there must be a physical sales desk located at the office or industrial facility where the transaction occurs. Under the current program guidelines, a business must meet the following criteria in order to be eligible:
• Generate net new annual gross taxable sales of $25 million or more
• Generate sales tax to the City of Stockton corresponding with the gross sales tax amount
• Create a minimum of ten full-time equivalent jobs
• Make or retain a capital investment within the City of $50,000 or more (may be an aggregate of lease or purchase of facility, tenant improvements, off-site improvements, or other similar investment)
• Must have a physical presence within Stockton city limits with disqualification of businesses currently located within San Joaquin County
• No tax sharing agreement shall include local measure taxes
Present Situation
As indicated in the Office and Industrial Sales Tax Incentive program guidelines, each incentive agreement requires Council approval. Further, in accordance with AB 562, which took effect on January 1, 2014, local agencies must provide specified information to the public before approving economic development subsidies of $100,000 or more. AB 562 also requires that a public notice and hearing be held regarding the subsidy to include, among other things, the name of the company receiving the subsidy and the amount of the subsidy.
The Economic Development Department has been engaged with Ernst & Young LLP, a consulting firm, in attracting Home Depot USA., Inc., a national company which operates a chain of retail stores and distribution facilities specializing in home improvement and construction products, to locate its Central California eCommerce and point of sale distribution center in Stockton, upon the execution of an Office and Industrial Sales Tax Incentive Agreement. This includes the completion and release of ecommerce and point of sale orders to its California customers.
Home Depot USA, Inc., is a Delaware corporation with a distribution center in Stockton at 2055 Industrial Dr. #2, Stockton. Home Depot USA, Inc., would expand its eCommerce and point of sale distribution center at an existing location or lease a new facility of between 600,000 and 700,000 square feet near the proposed site at 320 McCloy Ave. The new facility would employ approximately 80-100 permanent employees and additional seasonal staff. In addition to these employees, it is anticipated that there will be some job growth throughout the duration of the tax sharing agreement; however, the exact number is unknown at this time.
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Net New Sales Tax Revenue The Incentive Agreement will be for a term of 15 years from the date of execution, with options to extend up to an additional 10 years, and the rebate amount will be based on the following tiers |
% of Sales Tax Revenue Rebated to Home Depot USA, Inc. |
% of Sales Tax Revenue Retained by the City |
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Less than $250,000 |
50% |
50% |
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$250,000-$500,000 |
50% |
50% |
|
Above $500,000 |
50% |
50% |
It is estimated that Home Depot USA, Inc., a multinational home improvement business, will generate annual sales of approximately $50 million - $100 million, which will result in an annual sales tax rebate of $500,000 - $1,000,000 which will be split, with each entity receiving 50 percent. The sales tax rebate is based on net new sales tax revenue received by the City and applies only to the one-percent Bradley-Burns tax and not the entire nine-percent tax rate. No rebates will be provided on tax revenues received from Measures W and A.
As outlined in the Incentive Agreement, Home Depot USA, Inc., has agreed to a 50/50 split with the City of Stockton. The Incentive Agreement will be for a term of 15 years from the date of execution, with options to extend it up to an additional 10 years. The public will receive a direct benefit from the execution of the Incentive Agreement in that it will generate net new sales tax revenue for the City of Stockton to further economic growth and create additional job opportunities with the expansion of Home Depot USA, Inc. operations.
The previous program included a tiered tax sharing vehicle, however the only substantial change to the updated program guidelines attached is that going forward, the City will split the taxes 50/50 regardless of the amount. This change is reflected as a supporting table in Exhibit 1 to the Resolution.
The funds will be reviewed on an annual basis for eligibility to be deposited into a revolving redevelopment fund that will allow the Economic Development Department to further the goals of the Economic Development Strategic Action Plan including acquisition, blight abatement, demolition and necessary actions that support downtown development. The initial primary focus of the fund will be focused on acquisition as land assembly is a key factor in the City’s economic development strategy.
Staff is recommending that the City Council approve the execution of an Office and Industrial Sales Tax Incentive Agreement between the City and Home Depot USA, Inc., which is attached as Exhibit 2 to the Resolution.
PUBLIC NOTICE
A notice of this public hearing was published in The Record on March 2, 2024.
FINANCIAL SUMMARY
The proposed resolution would establish a new unrestricted sub-fund within the General Fund. The purpose of this sub-fund would be to establish a tracking mechanism to enable fund balance to accumulate for the purposes of facilitating property acquisition and economic development activities, with a focus on the downtown area.
As part of the annual budget process, the proceeds from the proposed agreement from the previous calendar year between Home Depot and the City and other qualifying revenue sources would be reviewed for eligibility to be transferred annually to this fund to accumulate for use on redevelopment.
Home Depot U.S.A., Inc., estimates annual sales of approximately $50 million - $100 million (or $500,000 - $1.0 million, in sales tax revenue), which will result in an estimated annual return of $250,000 - 500,000 to be remitted to Home Depot, USA, Inc., leaving the amount net the rebate for the City. Revenue from the Office and Industrial Sales Tax Incentive Agreement between the City of Stockton and Home Depot USA, Inc. will be deposited into the new Redevelopment sub-fund.
Attachment A - Approved Resolution No. 2014-06-24-1505
Attachment B - Approved Resolution No. 2014-08-12-1604