San Mateo County Objects To Oakland Fuel Deal
You're United
Airlines... a proud old company that's had to endure bankruptcy,
furloughs and layoffs, and even the slings and arrows of the
occasional Klyde Morris cartoon. About the only thing missing from
this witches' brew is a nasty lawsuit -- so let's have a big hand
for San Mateo County vs. United Airlines, in Superior Court in
California. Come on down!
Joining United in the defendant's dock are a couple of unlikely
co-conspirators: the state's Board of Equalization (California's
Orwellian-titled tax board) and the City of Oakland (which has an
airport which is most definitely NOT in San Mateo County... the
importance of that detail will be clear in a moment).
The suit alleges that the airline and city used "creative
accounting and economic blackmail," to deprive San Mateo County --
in whose unincorporated territory most of SFO actually sits -- of
millions of dollars in fuel tax revenue. Yep, it's all about the
Benjamins, and we're talking quite a few Benjamins. According to
the Air Transport Association, in October 2005 testimony, California has the
second-highest jet fuel tax rate in the nation.
"At current fuel prices of approximately $1.70 per gallon,
carriers are paying about 14� in taxes on every gallon
purchased in California," ATA's Robert Dibblee told the California
Legislature in support of a bill to cap the tax last year. "By
comparison, the tax rates in some of the other western states range
from a low of 1� in Oregon to 7� in Hawaii." The tax
cap did not pass. (The California jet fuel tax appears to be a
sales percentage tax which goes up with fuel prices, as opposed to
a per-gallon excise levy; it's hard to get current information on
state fuel taxes).
The airlines are really feeling this fuel pain. Everyone knows
the cost of crude oil is increasing, but the crack spread for Jet A
(the premium that refined or "cracked" Jet A draws over a barrel of
crude) is increasing even more rapidly. While that $1.70 was an
October 2005 price, ATA forecast this week that 2006 prices will be
just under $2 (remember that airlines buy fuel in vast, wholesale
bulk; this price reflects that discount).
The entire airline industry would be in a dramatic upswing,
financially, if not for fuel prices. Fuel has probably surpassed
labor as a percentage of cost of delivering airline service this
year. And fuel excise taxes are one of the few points where
anything but market forces work on the system.
To put things in perspective, the oil company's profit on Jet A
is estimated at eight cents per gallon, and the oil company, unlike
the taxing jurisdiction, is exposed to risk.
The revenue from the tax, while collected by the state, goes to
the locality in which the sale was made. Which brought United and
Oakland to the negotiating table in 2002. They made a deal that
works like this:
- A United subsidiary,
based in Oakland, buys all United's fuel for California.
- It's delivered wherever the planes are -- say, SFO in San Mateo
County -- but the point of sale is Oakland.
- Oakland gets all the tax revenue.
- Oakland kicks 65 cents of each tax dollar back to United
This is possible because of California rules about taxing
subsidiaries that sell goods to a parent company. Oakland still
comes out ahead; it's only getting 35% of the tax total, but it's
getting that percentage of the tax from fuel uploaded in Los
Angeles, San Diego, San Francisco -- you get the idea. United,
based in Chicago, comes out way ahead -- paying just under five
cents a gallon, net, in tax, instead of 14.
Of course, the rhetoric coming with the suit is not about
Benjamins. The San Mateo Daily Journal quoted County Board of
Supervisors President Jerry Hill as saying, "We feel this practice
is wrong and we feel it's important it be exposed." The suit calls
the United/Oakland agreement a "scheme" and the Oakland subsidiary
a "sham sales office."
The California legislature considers the deal legal, apparently
-- otherwise they probably would not have passed a law aimed at
stopping it. The new law, drafted by a San Francisco assemblyman
and signed by Gov. Schwarzenegger last September, defines the point
of sale of jet fuel for tax purposes, as the point of delivery of
the fuel to an aircraft. But the new definition does not take
effect until January 1, 2008.
The City of San Jose reportedly considered a similar deal with
American Airlines this year, but didn't go through with it;
according to the Daily Journal, the deal would have brought San
Jose $3 million annually, until 2008. South San Francisco was
trying to work a slightly different proposal, which would have
installed a fuel tank on South San Francisco property rather than
on the airport; the tax revenue would have flowed to the city, not
to San Mateo County.
United spokesmen had not seen the lawsuit and couldn't comment
on it.
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