Fremont celebrated as sales tax revenue ballooned by $37 million. Now the state wants it back.

The City of Fremont will have to pay back tens of millions of dollars in sales tax to the state of California after an accounting blunder left them with a financial windfall that some observers believe they should have immediately identified as an error. 

The City of Fremont will have to repay tens of millions of sales tax dollars to the state of California after an accounting blunder gave it a financial windfall that some say they should have immediately identified as an error.

The mistake highlights the challenges of local budget planning amid a delicate relationship between cities and the California Department of Tax and Fee Administration, a state agency charged with collecting sales tax from businesses.

“It’s not a particularly unique circumstance. This happens all the time,” said David Persselin, Fremont’s finance director. “But it’s usually smaller numbers.”

In Fremont, the trouble began in 2022, when the city began receiving unusually high quarterly sales tax allocations from the state. The unexpected money, which amounted to $37 million, about 10% of Fremont’s general fund, was a financial boon for the city of approximately 225,000.

At the time, city officials said the tax funds were the result of “higher than anticipated” revenue generated from auto sales. But in reality, nearly every household in Fremont would have needed to purchase a car last year to account for tax revenue boon—at the same time that auto sales tax revenues in other cities across the county and state had remained flat.

Some residents believe that should have been a huge red flag for city officials, who revised their sales tax projections upwards, established a reserve fund, and planned millions of dollars in public works projects.

Now those plans will have to be tabled, perhaps permanently.

According to a city report released this week, the state tax department told Fremont that it had overpaid the city, to the tune of tens of millions of dollars.

Persselin said the overpayments were likely the result of businesses misreporting certain types of transactions. Depending on the nature of the transaction, the sales tax might be allocated to Fremont, to a state or county pool, or another jurisdiction entirely.

He said the state has given Fremont scant information on how much it will owe. City officials know they’ll have to re back some amount–but not how much, or even which quarters they were overpaid. As of now, Presselin said city staff is estimating that Fremont will owe about $28 million of the $37 million total.

To repay the state, Fremont will have its quarterly sales tax remittances cut over the next two years, and will likely have to pull from or even empty its reserve fund. The city is also pulling millions of dollars in planned funding for street, building, and parks maintenance, effective immediately.

In Persselin’s view, the mistake does not fall at the city’s feet. Fremont does not calculate sales tax for the businesses within its borders–that falls on the state. All the city can do is move forward in good faith that the money disbursed by the state has been tabulated accurately.

“We really do rely on the state to make sure things are reported properly,” Persselin said.

Still, some residents say the fact that the city staff didn’t recognize the error is proof of either incompetence or willful misdirection. Perhaps most damningly, the city noticed a similar, albeit smaller, error just five years ago, and said it would be taking a harder look at the allocations moving forward, even employing a sales tax consultant.

“They’re either misleading us, or they’re not as competent as they told us five years ago when they said they were monitoring this stuff closely,” said Kelly Abreu, a Fremont resident who has followed the sales tax saga.

Persselin, for his part, said the city did question the legitimacy of the funds at the outset.

“We did have concerns about spending the money,” Persselin said. “As it turns out, that was a well-founded concern.”

The city presented its report at a city council meeting on Tuesday. For now, officials will wait until they learn exactly how much they will need to repay, or even when it will be notified.

“Presumably, the state can’t take back more than they’ve paid us,” Persselin said. “But we really haven’t gotten any specifics.”

In a statement, the state tax department said it was unable to disclose information about specific taxpayers due to confidentiality laws.