A suburban San Francisco county sued United Airlines, the city of Oakland and a state tax board on Tuesday over a fuel-purchase deal with the company that directed tax revenue out of the county.
As part of the deal United struck with Oakland in 2002, United fuels its jets at airports around the state. But on paper, a "dummy corporation" United created consolidates and conducts all the transactions, according to the lawsuit filed by San Mateo County.
San Francisco International Airport is located primarily within an unincorporated area of San Mateo County.
The arrangement relies upon a state regulation governing taxation on corporate subsidiaries that resell taxable goods to parent companies.
Oakland agreed to give United 65 cents of each sales tax dollar and keep the rest.
The deal saved money for the Illinois-based airline and generated revenue for Oakland, but it meant that other California counties with airports, such as San Mateo, wouldn't get tax funds.
The civil suit, filed in Superior Court, called the arrangement "creative accounting and economic blackmail."
United spokeswoman Robin Urbanski said the company, a unit of UAL Corp., hadn't yet seen the lawsuit, but that "controlling our fuel costs ... is a priority for United."
San Mateo County claims to lose more than $1 million in annual sales tax revenue because of the arrangement.
The suit also alleges that other carriers, including Northwest Airlines Corp., AMR Corp.'s American and Southwest Airlines Co., have offered similar deals to other cities.
San Mateo County is seeking reimbursement for the sales tax, as well as unspecified damages.
Last year, California lawmakers and Gov. Arnold Schwarzenegger enacted a law aimed at eliminating the arrangement. Beginning on Jan. 1, 2008, "the point of sale of jet fuel is the point of delivery of that jet fuel to the aircraft," according to the law.
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San Mateo County, Calif. and United Airlines will enter into mediation, just four months after the county filed a lawsuit against the airline.
San Mateo County officials allege that United Airlines lobbied the California Board of Equalization to allow it to "set their own tax rates through creative accounting and economic blackmail."
With the city on record opposing a nearly identical deal between Oakland and United Airlines, the council was more concerned about appearing hypocritical.
San Jose cried foul when United Airlines and Oakland struck a deal letting the company buy its entire statewide jet fuel supply in that city in exchange for a break on sales taxes.