OBIN R. BARA • HansonBridgett
ENIOR COUNSI
-MAIL [email protected]
June 24, 2022
VIA EMAIL [email protected]
City of Richmond
450 Civic Center Plaza
Richmond, CA 94804
Attn: Shasa Curl, Interim City Manager
Re: Notice of Payment Under Protest - Measure U Business Tax DKD of Hilltop, Inc. dba Hanlees Hilltop Buick GMC
Hanlees Hilltop, Inc. dba Hanlees Hilltop Toyota
Leehan, Inc. dba Hanlees Hilltop Nissan
Hanlees Seven, Inc dba Hanlees Hilltop Hyundai
Michael C. Stead Inc., dba Hilltop Ford/Kia
Michael Stead's Auto Depot Inc., dba Hilltop Chrysler Jeep Dodge Dear Ms. Curl:
We write this letter on behalf of our above-referenced clients who collectively comprise the specifically the unconscionable rate imposed on the auto dealership retail class. Measure U, as applied to automobile dealers, violates several constitutional safeguards, as detailed below. The Richmond Auto Dealers will therefore pay the Measure U business tax strictly under protest and the Richmond Auto Dealers request reimbursement of all Measure U taxes that the City has unconstitutionally imposed or collected from the Richmond Auto Dealers within the past six months. (Cal. Const., art. XIII, § 32; Richmond Measure U, § 7.04.270, 7.04.510.) The Richmond Auto Dealers request a meeting within the next three weeks to discuss corrections to the tax rate for automobile retailers. Measure U authorizes the City Manager or, alternatively the City Council, to revise the Class C tax rate to ensure that it is fair, equitable and, most importantly, legally defensible.
Measure U's gross receipts business tax imposes an astronomical and unsustainable tax burden to the Richmond Auto Dealers, by raising annual business taxes for all of their dealer locations from approximately $14,000, historically, to over $1,125,000, when factoring 2021 gross receipts. Measure U therefore imposes more than a 8,000% increase in automobile retail business taxes, in addition to the approximately $3 million in annual sales and use taxes that the Richmond Auto Dealers collectively generate for the City. Measure U will increase the Hanson Bridgett LLP
500 Capitol Mall, Suite 1500, Sacramento, CA 95814 hansonbridgett.com 18657629.6
Shasa Curl, Interim City Manager
June 24, 2022
price of vehicles in the City of Richmond. Potential customers will choose to purchase vehicles outside of the City, where taxes are cheaper, reducing City sales tax revenue.
In addition to Measure U's anti-competitive impact, the new rates will tax the Richmond Auto Dealers out of business, as it will consume the entire profit percentage of most of their dealers.
For example, gross receipts for the Richmond Auto Dealers exceeded $835 million, averaging at least $275 million in annual revenue for the three years between 2017 and 2019, before Measure U was adopted. While these gross receipts are significant, the net profit percentage during that time was only in the range of 1-2% before owner allocations and taxes. As such, the automobile retailer business tax rate consumes approximately 20-40%, collectively, of the net profit percentage of all Richmond Auto Dealers. The impact of Measure U is much more pronounced for specific dealers. For the majority of the Richmond Auto Dealers, the Measure U business tax will consume more than 85% of the net profit percentage of those dealers. When factoring all final payouts, the Richmond Auto Dealers will be subject to significant annual losses, particularly for the dealers with smaller profit percentages. The Measure U taxing scheme for automobile retailers is therefore excessive, burdensome, arbitrary and capricious, and has no correlation to the automobile retail sector, or to Measure U's stated purpose of being imposed for the privilege of engaging in a business or occupation in the City.
Given the uncertainties in the global economy, rising interest rates and the impacts of inflation, the impact of Measure U will undoubtedly increase. Measure U therefore presents an existential threat to the Richmond Auto Dealers, such that the only viable path for remaining in the City of Richmond is for the City to significantly reduce the business tax for automobile retailers. To date, however, the City has not been responsive to the concerns of the Richmond Auto Dealers.
While the Richmond Auto Dealers are prepared to challenge the constitutionality of the Measure U tax rate on automobile retailers, the obvious solution here is to avoid litigation (or the closure of all Richmond dealer locations) through the City Council's adoption of a lower rate, as authorized by Measure U and codified in Richmond Municipal Code section 7.04.675.' This would allow the Richmond Auto Dealers to continue to operate within City limits, and prevent any arbitrary distinction between business or retail classes. Accordingly, the Richmond Auto Dealers are paying the Measure U business tax under protest, and we request that the City Council take action to reduce the Measure U business tax rate for automobile retailers.
To illustrate the extreme nature of Richmond's business tax increase, every other city in the Bay Area with active auto malls (Antioch, Concord, Fairfield, Fremont, Pleasanton, Walnut Creek) have business taxes for automobile retailers ranging between $0.04/$1,000 (Walnut Creek) and $0.33/$1,000 in gross receipts. To remain competitive with these cities, the Richmond Auto Dealers request that the City's automobile retailer business tax rate be revised to $0.25/$1,000 in gross receipts.
1 Chapter 7.04 of the Richmond Municipal Code available online does not contain any reference to Measure U and is misleading to prospective businesses that might be seeking to locate within the City.
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Shasa Curl, Interim City Manager
June 24, 2022
The Automobile Retailer Tax Rate is Oppressive and Discriminatory and Therefore Violates the Equal Protection Clause
We recognize that business tax classifications carry a presumption of constitutionality. (City of Berkeley v. Cukierman (1993) 14 Cal.App.4th 1331, 1342.) This presumption, however, can be overcome, as business taxes that impose an oppressive or discriminatory burden on certain classes violate the equal protection clauses of both the federal and California constitutions. At their extreme ends, business taxes may be invalidated if a court finds that the tax would completely prohibit the taxable activity conducted by the taxpayer. (Auston v. Wilson (1938) 27 Cal.App.2d 124, 128.) In addition, equal protection requires "that the classification be not arbitrary, but based on a real and substantial difference having a reasonable relation to the subject of the particular legislation." (Barker Bros. v. City of Los Angeles (1938) 10 Cal.2d 603, 607.) As such, business taxes may be deemed invalid if the amount of tax "has no relation to the taxable event occurring in [the city] or the quantum of business there carried on." (E.g., Security Truck Line v. City of Monterey (1953) 117 Cal.App.2d 441, 454.) Although California courts have generally endorsed gross receipts business taxes, Measure U poses a significant departure from any other business tax adopted in California, as it imposes an excessive and unreasonable burden on automobile retailers that operate on extremely low profit percentages. The Class C tax rate applicable to automobile retailers, for example, is more than 150% greater than the Class A tax rate for all other retail sales and, as noted above, it poses a more than 8000% increase over the historical business tax rate for the Richmond Auto Dealers. There is no valid justification for the City to increase the automobile retailer business tax rate in such a dramatic amount, and in excess of all other retailers, especially when factoring the total revenue in sales and use taxes that automobile retail sales generate for the City. The Measure U tax rate for automobile retailers therefore has no relation to the quantum of business carried on within the Richmond city limits.
Measure U is also invalid due to its discriminatory effect. Measuring taxes based on gross revenue, as compared to net or gross profit, results in businesses with lower profit percentages paying a more significant percentage of their profit towards business taxes than businesses with higher profit percentages, and therefore has no reasonable connection with those different businesses. By basing the new tax scheme on gross revenue as opposed to profit, Measure U unreasonably imposes an excessive financial burden on businesses with low profit percentages, thereby arbitrarily discriminating between businesses with lower and higher profit percentages.
Between 2017 and 2019, profit percentage for all Richmond Auto Dealers averaged 1.5%. In arriving at this average, some dealers operated with a less than 1% protit percentage, whereas other dealers fared better, however in no year did the profit percentage exceed 2%. If the Measure U tax rate was in effect during this period, the tax rate would have been approximately
0.4%, and would have consumed up to 40% in annual profits in most years. For 4 out of 6 dealers, profit percentages are much slimmer, and Measure U as applied to 2017-2019 revenue would have consumed approximately 85% of the profit percentage of those dealers. For businesses in Richmond with higher profit percentages, such as accounting or legal services, a
0.4% effective business tax rate is much less significant to business operations. For the Richmond Auto Dealers, however, the City's new business tax will consume nearly the entire profit percentage of the majority of dealers. Accordingly, Measure U is invalid as applied to automobile dealers under both federal and state equal protection provisions. 18657629.6
Shasa Curl, Interim City Manager
June 24, 2022
The court's reasoning in Austin, supra, is instructive here. In Austin, supra, the court found that a business tax was valid because it "did not subject this particular line of business to oppressive or unjustly discriminatory burdens and was not prohibitive." The court further noted that "all within that class are treated alike" and "no evidence [was provided] as to the amount of capital invested by [the taxpayer]." (Austin, supra, 27 Cal.App. 2d at 128) Unfortunately, in the case of Measure U, the automobile retailer tax rate meets all of the above criteria for deeming the tax illegal: the tax is burdensome, oppressive, and will effectively prohibit the Richmond Auto Dealers from operating in the City. Moreover, Measure U discriminates between other retailers with no apparent justification, and as a result the significant investments by the Richmond Auto Dealers in the Richmond community may be jeopardized if the dealers are forced to relocate to another City as a result of Measure U.
In addition, there is no rational basis for progressively increasing the tax rate for automobile retailers. Automobiles sales occurring within the City are relatively the same irrespective of the sales cost of the vehicle. However, under the City's scheme, selling an expensive vehicle, or a large amount of vehicles, causes the owner to pay more business tax, however the business being transacted in the City is no different, nor are the costs different for the City to provide services to different dealers. There is no evidence to support the notion that the taxable event occurring within the City is different based on the amount of revenue received. There is also no evidence to support the notion that the amount of the tax reflects the cost of the privilege of doing business in the City. The cost of the "privilege" of doing business in the City does not increase merely because a business gross revenue exceeds some arbitrary number. An intentional and systematic valuation of property on a higher basis than that of other property of the same class is held to be a denial of equal protection to the taxpayer whose property has the higher assessment, where no valid justification exists for the distinction.
Measure U's Excessive Burden Also Violates the Dormant Commerce Clause The interstate commerce clause "by its own force prohibits certain state actions that interfere with interstate commerce." (Woosley v. State of California (1992) 3 Cal.4th 758, 777) Business taxes are invalid where they impose burdens on interstate commerce that are clearly excessive in relation to the local benefits or where they are not fairly related to the services provided by the state. (Art. I, Sec. 8, U.S. Const.; Pike v. Bruce Church, Inc. (1970) 397 U.S. 137, 142; Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274, 279; Northwest Energetic Services, LLC v. California Franchise Tax Bd. (2008) 159 Cal.App.4th 841, 862, as modified on denial of reh'g (Mar. 3, 2008).)
Measure U both imposes an excessive burden on the flow of retail automobile sales, and is not fairly related to any services provided by the City. As discussed above, Measure U places a disproportionate burden on businesses with low profit percentages, by taxing gross revenue rather than overall profit. This burden is particularly pronounced in the context of the automobile ndustry, where the business tax will consume the profit percentage of the Richmond Aut Dealers. Automobile dealers operate on national franchise and sales models, therefore Measur U's drastic increase in business taxes cannot be absorbed in a manner that will allow the Richmond Auto Dealers to remain competitive to other dealers or franchises. Moreover, if Measure U was adopted in cities throughout California, it would have a significant, stifling effect on the interstate flow of retail automobile sales.
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Shasa Curl, Interim City Manager
June 24, 2022
The profound effect that Measure U will have on the automobile industry is not proportional to the local benefits. According to the official ballot question, Measure U was proposed to "provide essential City services, including 911 emergency response, pothole/street repair, homeless and youth services, and other general services." While essential services undoubtedly benefit the City's citizens, automobile retailers already generate their fair share in sales and use taxes that more than compensate for the essential services provided by the City to benefit the Richmond Auto Dealers. For example, between 2017 and 2019, the Richmond Auto Dealers collectively generated over $9 million to the City in sales and use taxes, averaging approximately $3 million in sales and use tax revenue per year. Measure U would require the Richmond Auto Dealers to pay more than $1 million in additional business taxes, collectively for all dealers, in addition to its existing sales and use tax contributions.
Measure U is not fairly related to the services provided by the state. By taxing businesses based on gross revenue as opposed to profit, the tax is not "in proper proportion" to the activities of the Richmond Auto Dealers within the City, and thus does not represent a "consequent enjoyment of the opportunities and protections which the [City] has afforded in connection with those activities." (Commonwealth Edison Co. v. Montana (1981) 453 U.S. 609, 626.) Taxing gross revenue forces the automobile industry to unfairly shoulder an unfair portion of the City's essential services as compared to local businesses, likely with higher profit percentages, and where a gross receipts tax is less consequential to their operations. Accordingly, the City's new tax scheme is also invalid under the dormant commerce clause of the federal constitution.
Measure U May Result in Economic Takings
Taxation that is so "arbitrary as to constrain to the conclusion that it was not the exertion of taxation, but a confiscation of property" is illegal under the taking clause of the state and federal constitutions. (Quarty v. U.S. (9th Cir. 1999) 170 F.3d 961, 969.) Money is itself a legally protected property interest. (Dickman v. C.I.R. (1984) 465 U.S. 330, 336.) "Every person conducting any business activity in the city shall pay the annual business tax and obtain an annual business tax certificate from the city." (Measure U, § 7.04.020.) The City may withhold a business license approval until the tax is paid (Id., § 7.04.300), and place a lien on the property (Id., § 7.04.410). By conditioning the business license permit on the owner's payment of unconscionable taxes, and placing a lien on the property, the City could pressure a taxpayer into voluntarily giving up property for which the Fifth Amendment would otherwise require just compensation. (Koontz v. St. Johns River Water Management Dist. (2013) 570 U.S. 595, 605.) Because the tax is confiscatory, it operates to prohibit the rights of the company to do business in California and Richmond. (Frost v. Railroad Commission of State of Cal. (1926) 271 U.S. 583, 597-598.)
Further, a state is without power to impose an unconstitutional requirement as a condition for granting a privilege. (Id. at 598.) Under the doctrine of unconstitutional conditions, "the government may not impose a choice between the government benefit and the exercise of a constitutionally guaranteed right." (Parks v. Watson (9th Cir. 1983) 716 F.2d 646, 650) Here, the City is conditioning the grant of a business license permit on payment of an unconscionable tax that amounts to the taking of a lawful business. As noted above, losses sustained by the Richmond Auto Dealers will be significant if they are forced to abandon their current locations and relocate outside of the City to avoid paying the excessive and discriminatory Measure U business tax.
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Shasa Curl, Interim City Manager
June 24, 2022
Measure U May Give Rise to Claims under the Federal Civil Rights Act, and the Prevailing Party May be Awarded Attorney's Fees
Under the Civil Rights Act (42 U.S.C.A. § 1983) cities and other local agencies can be sued directly for monetary, declaratory, or injunctive relief where the allegedly unconstitutional action implements or executes a policy statement, ordinance, regulation, or decision officially adopted and promulgated by that body's officers. (Monell v. Department of Social Services of City of New York (1978) 436 U.S. 658, 690.) Here, the taxing ordinance violates several constitutional rights.
The City has a remedy available to it to correct the unconstitutional nature of the tax. The taxing ordinance provides that "It)he City Council may reduce any of the tax rates set forth herein, and may terminate any such reductions, without voter approval." In essence the City is acting under the color of law to collect illegal revenue. Plaintiffs who prevail in actions or proceedings to entorce § 1983 claims are entitled to receive attorney's fees under 42 USC § 1988. The City may theretore be taced with signiticant financial liability if any claim challenging the automobile retailer tax rate is successful.
The Richmond Auto Dealers Have Requested All Public Records Maintained by the City in Connection with Establishing the Class C Business Tax Rate for Automobile Retailers On June 22, 2022, our office filed a request for public records with the City Clerk seeking all emails, correspondence, reports, documents, evidence, research, and any other records in the City's possession relied on by the City in developing the automobile retailer tax rate (Class C) for Measure U. We also requested that the City Clerk be mindful of the City's statutory obligation to reply on a timely basis, and to provide the legal bases for withholding any documents that the City believes to be exempt from disclosure.
As applied to automobile retailers, Measure U is invalid under both the California and federal constitutions. Accordingly, the Richmond Auto Dealers will pay Measure U business taxes strictly under protest, and the Richmond Auto Dealers request reimbursement of all Measure U taxes that the City has unconstitutionally imposed or collected from the Richmond Auto Dealers within the past six months. The Richmond Auto Dealers remain open to paying a reasonable business tax that respects the high-volume, low profit-percentage nature of automobile retail sales. The City should redesign its business tax rate to be competitive with other regional auto malls. The Richmond Auto Dealers therefore propose a business tax rate of $0.25/$1,000 of gross receipts for automobile retailers, so that the City can establish a legally defensible tax rate that remains competitive with other jurisdictions that are competing for automobile retail sales and use taxes and business tax revenue.
Thank you for considering our request, and we look forward to working with the City to establish a fair, equitable and legally defensible rate for automobile retailers. * * *
:
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Shasa Curl, Interim City Manager
June 24, 2022
In accordance with Measure U, section 7.04.270, 1 hereby declare under penalty of perjury under the laws of the State of California, that to the best of my knowledge the information in this letter is true, and the Richmond Auto Dealers intend to provide additional testimony in connection herewith to the City.
Sincerely,
Robin R. Baral
Senior Counsel
RRB
CC: Mayor Tom Butt
Councilmember Nathaniel Bates
Councilmember Claudia Jimenez
Councilmember Demnlus Johnson, III
Councilmember Eduardo Martinez
Councilmember Gayle McLaughlin
Councilmember Melvin Willis
Interim City Attorney David Aleshire
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