Battle over Jet Fuel in Oakland Heads to Court

REDWOOD CITY -- San Mateo County and United Airlines failed to reach a settlement during a mediation session Friday in the county's lawsuit against the airline, the city of Oakland and the state Board of Equalization over the distribution of tax revenue from jet fuel sales.

The county charges that a pact between United and the city of Oakland is siphoning millions of dollars away from the county and the state.

"This is our first attempt to try and discuss the issue with United," San Mateo County Deputy County Counsel David Silberman said. "We may have different views of United's level of liability."

And, according to Silberman, the two sides did have different views Friday. He said both parties will return to federal court on Jan. 26, at which point he said he hopes a trial date will be set for the case.

San Mateo County officials allege that in 2001, United Airlines, along with several large accounting firms, lobbied the state Board of Equalization to allow multi-national corporations to "set their own tax rates through creative accounting and economic blackmail."

According to the complaint, which was filed in May, United Airlines and Oakland formed a partnership in 2002, which allowed United to create an Oakland-based subsidiary designed to resell jet fuel back to United. The airline then received a 65 percent jet fuel sales tax revenue kickback from Oakland.

"At its simplest, they intentionally redirected taxes to evade them," Silberman said. "It doesn't matter what your theories are, evading taxes is always wrong."

According to the county, in late 2003 jet fuel sales tax revenues were first redirected to Oakland and then on to United. According to Silberman, the state of California has lost more than $15 million because of the deal.

In 2004, the county asked the state Board of Equalization to reverse its decision allowing the tax loophole. That appeal was denied by the board, Silberman said.

In response to the accusations, United Airlines spokeswoman Megan McCarthy said the airline's deal with the city of Oakland is legal, as there is currently no law that prohibits such partnerships.

"It was done to help reduce the impact of increasing fuel costs," McCarthy said. "We feel that the deal was legal and as a company, we continue to focus on controlling our fuel costs."

A bill to ban such arrangements was passed in 2004, but later vetoed by Gov. Arnold Schwarzenegger. Then Assembly Speaker Pro Tem, now state Sen. Leland Yee, D-San Francisco, later introduced AB 451 in 2005. The bill will become law in 2008 and will ensure that areas affected by jet fuel pollution, traffic and noise receive jet fuel sales tax revenues. San Mateo County, site of San Francisco International Airport, would have to share the revenue with San Francisco.

Attorneys representing the city of Oakland and the state Board of Equalization did not return calls for comment.

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