Six Hilltop neighborhood car dealerships are suing the City of Richmond over a collective 8,000 percent hike in their business tax.
Richmond Mayor Tom Butt said it’s the latest lawsuit against the city borne from policies pushed by the Richmond Progressive Alliance (RPA), whose members hold a majority on City Council.
The auto dealers allege the city “misled” voters into passing what they call unreasonable, punitive tax rates prior to the November 2020 election.
Measure U changed Richmond’s business license tax from one based upon number of employees to one based upon gross receipts. The new tax rate progressively increases for businesses with gross receipts over $250,000. But, as Council of Industries Executive Director Katrinka Ruk stated prior to Measure U’s passage, the new tax system doesn’t take into account that “gross receipts and net profits are two different things.”
An auto dealer might have relatively high gross receipts, because cars have high sales value, but that doesn’t necessarily mean the dealership is raking in large profits on each car sold.
Hilltop auto dealers say their business operates on thin net profit percentages. From 2017-2019, net profits for Hilltop auto mall dealerships averaged 1.5 percent, according to the lawsuit. If the current tax rate was in effect from 2017-2019, it would reportedly gobble up about 85 percent of net profits for four of the dealerships. The other two Hilltop dealerships wouldn’t fare much better, it said.
The Measure U tax rate is particularly punitive to auto dealers, whose maximum tax rates exceed big box retailers like Target, Walmart, Costco and Home Depot, even though auto dealers have lower net profit percentages, according to the lawsuit.
The suit additionally claims the city failed on its promise to model the Measure U tax rate on the City of Berkeley’s tax rate, which is $1.20 per $1,000 in gross receipts for auto dealership retail sales. Under Measure U, Richmond’s auto dealers face a progressive rate that maxes out at more than 400 percent higher than the City of Berkeley’s flat tax rate on dealers, according to the lawsuit.
The city is also accused of misling voters by “grossly underestimating” the amount of revenue that Measure U would generate for the city. While the city promoted estimates of $3.4 million in total annual business tax revenue from all businesses operating in the city, the six dealerships alone combined to pay $1.125 million in 2022 under the new tax system, based upon receipts from 2021, according to the lawsuit.
Richmond’s auto dealers believe the city violated the U.S. Constitution in acting “arbitrarily and capriciously by not conducting any meaningful analysis to develop a reasonable, fairly apportioned tax rate for automobile retailers.”
The RPA-controlled City Council pushed for the tax measure despite numerous warnings from the city’s business community that its impacts weren’t adequately studied. Auto dealers say additional pleas last summer fell on deaf ears.
To read the full complaint, go here.