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'Virtual Presence' Can Trigger Oakland Business Tax

by Steve Cramer

Businesses based in Oakland have long grown accustomed to the tax the city assesses against gross receipts.  Here is a sample of the tax rates:

  • Real estate rentals: 1.395% (of gross receipts).
  • Grocers: .06%
  • Wholesale, Retail, Auto Sales and Manufacturing:  .12%
  • Cannabis:  5% [1]

On the other hand, businesses without a physical location in Oakland have paid little attention to the tax, even while supplying Oakland companies.  This strategy is no longer viable however.  Oakland’s Office of Finance is aggressively pursuing collection of the tax against these out-of-town businesses, and it is relying on an internal ruling focused on auto dealers, wholesalers and manufacturers.  In this ruling, the Director of Finance found that the city’s tax can apply to any business engaged in activities within the city which are designed to “promote, activate, stimulate or otherwise encourage” the sale of goods.  Critically, these activities may be conducted from outside Oakland by means of telephone, internet, or other forms of virtual or electronic transmission.

What this means is that the normal relationship between an Oakland based buyer (say a manufacturer or gasoline retailer) and a supplier based out of town will subject the supplier to Oakland’s gross receipts tax.  I assume that the supplier’s salespeople will, of course, periodically contact the Oakland business (whether in person, by phone or email) to solicit or accept orders. The tax will apply to the sales made to the Oakland business, regardless of solicit or accept order shipment terms (i.e., specifying “f.o.b. Sacramento supply depot” or “f.o.b. Benicia refinery” will have no impact).  For many suppliers, their first Oakland tax invoice will include interest charges and penalties.

Best practice for an Oakland business is to notify its suppliers of Oakland’s gross receipts tax and the city’s enforcement practices.  Depending on the industry, the tax is not that significant if timely paid.  However, if reporting is ignored and the tax is allowed to accumulate over time with interest and penalties, it can reach a level that may damage relationships.  

Many California cities do not have a gross receipts tax at all and rely instead on a tax based on the number of employees.  This often adds to the dismay of the out of town suppliers faced with an Oakland tax bill.

If you (or one of your suppliers) do receive a notice of deficiency or an invoice for past due taxes, it is critical that you act within the appeal period set forth in the notice.  The guidelines for calculating Oakland receipts by out of town suppliers are complex and leave room for negotiations, if the taxpayer acts timely.

Conversely, if you own an Oakland business that supplies businesses located in other California cities, you should review those cities’ tax requirements as well.  Many will not have a gross receipts tax, but some will, and you need to be sure as it may affect pricing.  

To make matters more interesting, Oakland, like most California cities, now participates in a data exchange program with the California Franchise Tax Board, so the chance of a (potential) taxpayer slipping through the cracks has diminished.

[1]The city receives nearly 3 percent of all business taxes collected from this class.