A – Revenue Enhancement Opportunities Report (02.2026) — Cupertino City Council, March 17, 2026

CITY OF CUPERTINO REVENUE ENHANCEMENT OPPORTUNITIES REPORT – ADDENDUM FOR ADDITIONALLY REQUESTED INFORMATION

BACKGROUND
The City of Cupertino (“City”) is exploring potential revenue enhancement opportunities to raise additional tax revenue. The city retained the services of HdL to prepare a report evaluating various revenue enhancement opportunities. This addendum provides information in response to follow-up questions from the Cupertino City Council.

This addendum provides information requested by the City Council on:
• Utility Users Tax
• Transactions and Use Tax
• Business License Tax

UTILITY USERS TAX
Description
A Utility Users Tax (UUT) may be imposed by a city on the consumption of utility services, including (but not limited to) electricity, gas, water, sewer, telecommunications, sanitation, and cable television and other video services . Covered telecommunications and video services can respectively include VoIP and messaging and streaming when the ordinance language is sufficiently broad and technology neutral. The rate of the tax and the use of its revenues are determined by the city. The rate of tax may also vary by the utilities being taxed. For example, a city may choose to tax some categories of utilities at 6% and others at 4% or not at all. The city may also choose to tax only residential or only commercial customers for each category of utility. The tax is collected by the utility as part of its regular billing cycle and then remitted to the city. Most city UUT levies are general taxes.

Currently, 156 cities in California levy utility users taxes. Across the state, UUT rates vary from one to 11 percent. The typical rate is four to five percent. The City of Cupertino imposes a UUT on telephone, electricity, and gas utilities that will sunset in 2030. Cities with a UUT in Santa Clara County include Cupertino, Gilroy, Los Altos, Mountain View, Palo Alto, San Jose, and Sunnyvale.

There would likely be an additional administrative expense associated with any change in the tax from increased monitoring of the collection and audit of the UUT.

Implementation Process
Implementation or modification of a UUT requires a ballot measure approved by the residents of the city. Placing a measure on the ballot requires City Council approval with a two-third vote for general purpose funding (4 out of 5 for the City of Cupertino) or a simple majority for special purpose funding. Voter approval of a majority (50% plus 1) is required for general purpose funding and two-thirds for special purpose funding. The tax measure can include a ‘sunset’ of the tax.

From June 2002 through November 2024, there were 99 measures to increase or adopt a new UUT, of which 34 passed (34%). Of these taxes, 11 were special taxes designated for a specific purpose. Among the 88 general taxes, 12 were accompanied by advisory measures. There were also 93 measures to modernize UUTs, of which 83 passed (89%).

Cupertino could update its UUT by extending or removing the sunset, increasing the rate of the tax or modifying its ordinance language to include water and cable television utility services and technology-neutral definitions of video and telecommunications services.

As described previously, there are many variations as to which users can be taxed, such as residents and/or commercial customers, which categories of utilities it applies to, and what rate applies to each. If the City were to consider an increase or change to its existing UUT, a separate analysis should be conducted. Issues to be analyzed include who should be taxed, which categories of utilities it should apply to, and at what rates.

Collection of the revenue is the responsibility of the various utilities and are remitted to the city on a regular schedule based upon negotiations with the utilities. Any time there is a reliance on an outside agency responsible for collection and remittance there are greater chances of errors. This can be further complicated if there are many variations to the UUT rates.

Pros and Cons
Pros
Depending on the percentage of the tax, UUTs can generate a significant amount of revenue that can be used for general purposes.

Traditionally, UUTs are a dependable and consistent revenue stream. Revenues can increase gradually over time as the cost of the utility rates increase.

Cons
The tax is considered regressive in that the most common utilities taxed include electricity, gas and water which are basic household utilities. The utility rates users pay are based upon consumption. Therefore, the more you use the higher your bill. Property owners or tenants with lower incomes pay a disproportionate percentage of their income on utilities and the UUT.

The tax is on the utility consumption of residents and businesses in the city. Businesses may also choose to pass on the cost of the UUT to their customers in the form of higher prices.

While historically the revenue stream has been consistent, with current and future changes in the availability of some utilities such as water and energy, UUT revenue may become more of a volatile revenue source with greater fluctuations.

Potential Revenue Estimate
Estimating potential revenue can be complex. It depends on the percentage of the tax and the utilities that the city chooses to impose the tax on. This varies from jurisdiction to jurisdiction. In addition, revenues collected by many utilities are propriet ary information, so it is difficult to know exactly the amount of revenue collected by certain utilities. The following revenue estimates reflect Cupertino’s options to increase or broaden its UUT.

Increase Existing UUT Rate – Extrapolation Approach
The City’s current UUT rate is 2.4%. This report estimates additional revenue based upon doubling the rate to 4.8%. The estimates are based upon the actual revenue the City received in the last year for which actual data is available (FY2024). In summary each 1% increase in the UUT could generate approximately $1,639,966 in additional revenue.

Analysis of UUT Revenue Based on Extrapolation of Actual Revenue Tax Rate Estimated Revenue

2.4% (Current Rate) $3,935,918

4.8% (Doubled) $7,871,836

Modernize UUT Ordinance– Extrapolation Approach
One way to estimate potential revenue is to look at one or more peer cities in the region that currently impose the tax, estimate the tax base of their actual revenue on a per capita basis, and extrapolate it for the City of Cupertino’s population based on the City’s current UUT rate of 2.4%. As is demonstrated in the chart below, the tax rates vary from city to city. HdL identified six cities in Santa Clara County with a UUT in addition to Cupertino:

Gilroy, Los Altos, Mountain View, Palo Alto, San Jose, and Sunnyvale.

Utility Users Tax Rate - As of February 2026
County: Santa Clara County
Jurisdiction: Cupertino Gilroy
Los
Altos
Mountain
View Palo Alto San Jose Sunnyvale
Population 58,566 59,004 30,698 83,732 67,237 990,138 154,236 Amount Collected
FY 2024 $3,935,918 $6,563,469 $3,517,437 $7,647,779 $19,012,528 $152,062,539 $10,816,575 Telephone:

Intrastate
Residential