Richmond businesses face double whammy with COVID, new tax

Univision set to film commercial at Richmond's El Agave Azul
El Agave Azul is located at 12955 San Pablo Ave. (near McBryde Ave.) in Richmond.

A nationwide surge of COVID-19 cases is once again tightening restrictions on businesses that have been struggling to stay afloat since the pandemic began in March. But in Richmond, where many businesses are additionally facing exponential increases in their annual business tax following the passage of Measure U in the November election, the pandemic is only one ominous front in the battle to stay alive.

Agave Azul, which opened on San Pablo Avenue near McBryde Street to rave reviews in March 2019, was like many businesses forced to temporarily close its doors a year later due to the pandemic. When the Mexican restaurant first opened, it had 24 employees, but now it is down to six. Despite applying for all three financial assistance programs, owners say they may have to permanently shut down if the current prohibition on indoor dining doesn’t end soon.

Agave Azul is among dozens of businesses that responded to a recent survey seeking the status of pandemic-impacted city businesses and information on how Measure U will impact them. The resounding theme is the double-punch of reduced revenue and increased expenses could force businesses to reduce their workforce, leave the city or close permanently.

Measure U, which at latest count received over 72 percent voter approval in the November 3 election, has changed the business license tax from one based upon number of employees to one based upon gross receipts. The tax rate is higher than San Francisco’s and was inspired by a similar proposal in Oakland that hasn’t yet reached the ballot because that city, unlike Richmond, chose to establish a blue ribbon committee to examine its economic impacts.

Richmond’s new tax rate progressively increases for businesses with gross receipts over $250,000 and is expected to add $3.2 million in new revenue to city coffers.  But at what cost?

Survey says…

The survey of Richmond businesses, only some of which agreed to be identified in our report, provides insight. A lumber company employing 67 people expects its business license tax to increase from the current $2,571 to $120,000, which could result in layoffs of three union employees or a relocation to a “more business-friendly city.”

Owners of an auto dealership say it may also have to move because its tax is expected to increase from the current $6,400 to $250,000. The tax hike “wipes out” the dealership’s profits, owners said.

Scientific Art Studio, the Iron Triangle-based company noted for creating the giant glove at AT&T Park, the play areas at San Francisco Zoo, and also helping the nonprofit Pogo Park create local play spaces, expects its business license tax to increase by 1,500 percent, from $565.70 annually to $8,500 annually. The tax hike will mean reduced community service projects and possibly shrinking its staff, according to the business.

Meanwhile, a well-known local food manufacturer noted in the survey that its new tax, which will increase by 1,000 percent to $70,000 annually, is “basically the equivalent of doubling our rent.”

A construction company employing between 100-300 employees, about 80 percent local, echoed that sentiment in the survey: “We were already thinking of moving out of Richmond. This would just put the nail in the coffin.”

Some businesses have already checked out, including Omega Lighting Supply, which is closing its Richmond office.

Richmond Mayor Tom Butt said he isn’t certain the tax rate change on its own would cause a lot of businesses to shut down and relocate. But he said the timing amid the pandemic deals a significant blow.

“The problem is that we’ve got a double-whammy,” said the mayor, noting the business tax change is taking effect at the same time as Point Richmond businesses like Hotel Mac, Brezo and Starbucks are closed due to the pandemic.

The mayor’s own Point Richmond architectural firm, Interactive Resources, expects its tax burden increase from about $900 per year to about $15,000 per year.

“It’s not going to put us out of business, but it’s a big hit,” the mayor said.

Interactive Resources aims to pay competitive salaries and shares whatever profits it has at the end of the year with its staff.

“Assuming we’re going to have a profitable year, we’re going to have $15,000 less to share with our employees,” the mayor said.

Tax reform alternative

The mayor said he’s been advocating to reform the city’s comparatively low business license tax for years, and was successful in having City Council direct city staff to look into increasing rates.

Rather than consulting with local businesses on proposed reforms, city staff allowed city labor unions to do all the research on the tax proposal, according to the mayor, which led to a poorly written measure that passed at the worst possible time for COVID-impacted businesses.

“It was prepared without input from anyone with any knowledge about how to run a business,” Butt said.

The mayor recently met with local business groups and says they will try to propose that City Council change the tax structure in a way that increases city revenue without walloping businesses. The council has the authority to reduce the tax rate, but not to raise it.

The business community has reiterated its willingness to pay double than the current rate, rather than 10 to 15 or 100 times more, Butt said. The newly elected City Council, however, is “antibusiness” and likely won’t be receptive, the mayor said.

“They have no sympathy for businesses whatsoever,” Butt said.

Among the problems with the progressive tax structure is that gross receipts aren’t the same as net profits. Sandra Escalante, owner of Laner Electric Supply, said her business that employs 14 people had gross receipts amounting to $10 million pre-pandemic, but the cost of the goods the business sells amount to over $9 million. Last year, her net profit after paying bills and labor costs was $65,000, she said.

Under the new business license tax, Laner Electric could see its tax increase from the current $986.90 per year to anywhere from $18,600-$35,500, depending on how her business will be classified in the new structure.

Meanwhile, M.A. Hays Insurance is seeing its tax increase spike by 600 percent, while Storage Pro is going up from $331 to $2,610, a cost it says will be passed on to customers and result in fewer charitable activities in the community.

Owners of residential and commercial properties are also heavily impacted by the new tax rate structure. Some indicate possible staff layoffs and needing to pass down the additional cost to renters and lessees. Some are also retirees who rely on rental income and say the tax spike impacts their retirement. 

The owner of a manufacturing company – which is staring down a 5,000 percent increase to its business tax, from $2,000 to $105,000 – compared the new business license tax to seeing your home water or trash bill go from $25 per month to $12,500.

“What would you do?” the owner states in the survey. “What do you expect us to do?”

Consider moving, he concluded.