Cities Move to Halt UAL Deal With Oakland

SACRAMENTO —  Los Angeles and San Francisco are trying to plug a loophole that is costing the cities millions of dollars a year in lost tax revenue while providing troubled United Airlines with a financial windfall.

The loophole allows United to pay all the state sales taxes on the fuel its pumps in California exclusively to the city of Oakland -- no matter where its jets tank up.

In turn, Oakland gives 65% of the city’s share of that money back to United.

The arrangement is perfectly legal. A 1998 law requires that state sales taxes be paid at a single location when a retailer has only one location in California, and United in late 2003 established a subsidiary at the Oakland airport whose sole function is to sell jet fuel to itself.

Assemblyman Leland Yee (D-San Francisco), the author of a bill that would close the loophole, accused Oakland and United of “having their hands in the cookie jar.”

If the arrangement, which began earlier this year, were to continue, Oakland would receive about $1.2 million in extra tax revenue every year, city officials calculated. United -- which is working to emerge from Chapter 11 bankruptcy proceedings -- would see its annual fuel sales tax bill shaved by $2.25 million in California. At the same time, cities and counties that operate commercial airports where United jets tank up would lose about $3.45 million in yearly tax revenue. (Cities and counties receive 1 percentage point of the state’s 7.75% sales tax.)

The Oakland-United agreement “does not help other locations and, certainly, is not fair to the other airlines,” said Lenny Goldberg, a lobbyist with the California Tax Reform Assn.

The biggest losers are the city of Los Angeles and Los Angeles County, home to Los Angeles International Airport, and the city of San Francisco and San Mateo County, which operate San Francisco International Airport.

LAX and SFO are among United’s five U.S. hubs. United flights make up 60% of all takeoffs and landings at San Francisco, a major gateway for transpacific travel.

Tax officials in San Francisco discovered the Oakland-United pact last month when they noticed that jet fuel sales tax revenue from United had suddenly plunged to zero.

San Francisco immediately contacted Los Angeles, which checked and saw that its United fuel sales tax income of about $100,000 a month had disappeared.

“That rings a bell, even for a slow-moving bureaucrat like me,” said Rex Olliff, a finance specialist in the Los Angeles city administrator’s office. Sales taxes should be paid at the “wingtip,” where the jet fuel goes into an aircraft’s tanks, Olliff said.

The two cities found an ally in Yee, who grabbed an unrelated bill idling without hope of passage on the floor of the state Senate. The old bill was stripped of its contents -- “gutted” in legislative parlance -- and amended Tuesday to wipe out the Oakland-United windfall.

“They’re robbing our local community,” said Yee, who expects to get the bill on the governor’s desk by the end of the week.

United and Oakland see no reason to change their setup. “United reached an agreement with the city of Oakland that provided incentives for both parties,” said Stephan Roth, a spokesman for United, which is owned by UAL Corp. He stressed that the airline was paying significant taxes of all types “as the largest airline employer in the state.”

Ignacio De La Fuente, president of the Oakland City Council, said he felt blindsided by San Francisco.

“Unfortunately, our neighbor did not even bother to call us,” he said. Oakland, he said, shouldn’t be punished for taking the initiative to create a business incentive program with United after the airline proposed the arrangement in early 2003.

Olliff countered that Oakland had no business benefiting from taxes on sales taking place elsewhere in California. The taxes “don’t belong in Oakland,” he said, “because the wingtips are here.”