California Loves Dealerships

SACRAMENTO, CA - Californians love their cars, but California cities love their car dealerships.The reason: dealerships are major sources of municipal revenues in a state where local governments can levy their own sales tax with voter approval.

Steve Finlay, Senior Editor

August 1, 2007

6 Min Read
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SACRAMENTO, CA — Californians love their cars, but California cities love their car dealerships.

The reason: dealerships are major sources of municipal revenues in a state where local governments can levy their own sales tax with voter approval.

“We need to let dealers know on a continuous basis that they are loved and cared for,” says Nanci Klein, corporate outreach manager for the city of San Jose's economic development office. “We make it clear that we appreciate their business.”

California cities once relied heavily on property taxes. That changed in 1976, when a referendum capped those levies. The burden shifted to sales taxes.

California has a statewide sales tax rate of 7.25%. Local supplementary taxes can increase it to 8.75%. That's why in California items costing the same can carry different sales taxes, depending on where you buy them.

Communities in the state look more and more to sales taxes to fill local coffers. Consequently, franchised dealerships selling high-ticket items — more than 2.1 million new vehicles annually — are coveted.

Dealers elsewhere may tell horror stories of fighting city hall in municipalities where dealerships are about as welcome as a plutonium enrichment plant.

It's different in California, where local governments go to great lengths to get and keep dealerships — such as paying them to stay.

The county of Sacramento agreed to pay $100,000 a year over 10 years to Mike Daugherty Chevrolet to stay put, says Iris Yang, who was involved in the deal as an attorney specializing in land redevelopment.

“It gives you an indication of how important the sales tax is to communities,” she says.

The dealership employs 135 people, collects $800,000 to $1 million a year in sales tax and is an anchor store in an area that has declined and which Sacramento wants to revitalize.

The dealership considered moving to a new auto mall outside the county, but that fell through. Sacramento offered the $1 million to stay and significantly improve the facility.

The state legislature over the years has enacted laws that prohibit local governments from blatantly battling for dealerships in what Yang calls “sales-tax wars.”

Now, a community is prohibited from enticing an existing dealership away from another community. But a city can waive fees and provide incentives to keep a dealership, which is what Sacramento did.

“It could start a slew of requests,” Yang says.

Along I-80 in Fairfield, CA, halfway between Sacramento and San Francisco, is an auto mall that stems from a concerted city effort to sweeten its tax take.

“The city had a strong interest in putting together an auto mall,” says Sean Quinn, Fairfield's community development director.

Fairfield assembled the parcel, starting with 23 acres. Original plans called for a shopping center. Some residents voiced objections when plans switched to an auto mall.

“But it is how you raise sales taxes,” says Quinn. “Car sales are the largest sales tax generated for the city of Fairfield.”

Since the auto mall was created, new-car sales have become the largest sales tax generator for the city, surpassing tax revenues from department stores.

The city's new-vehicle sales tax revenue went from $1.3 million in 1997 to $2.9 million in 2006. It is projected to reach $4 million in 2008 — 22% of Fairfield's total sales-tax income — as the auto mall expands.

Statewide, California's 1,658 franchised dealers collect about $6 billion in sales taxes per year on more than $77 billion in taxable sales, according to a California Motor Car Dealers Assn. economic impact report.

Fairfield's assistance for the auto mall project took various forms, right down to changing the name of a freeway overpass road from Magellan Road. That forced the state transportation department to begrudgingly erect freeway signs saying “Auto Mall Parkway,” Quinn says.

Eleven dealerships were part of the first phase. The opening of Fairfield Ford on a 12-acre site in March marked the beginning of a second phase.

More dealerships are in the works, including a Mercedes-Benz store to be run by retired Mercedes-Benz USA CEO Paul Halata and his son Mark.

“We are excited to bring Mercedes-Benz to Fairfield and anticipate a great future,” says Paul Halata.

Saturn of Fairfield also has submitted plans for a facility on a 3-acre spot in the auto mall, relocating from four miles away.

Simon Buniak, owner of Golden State Mitsubishi and Suzuki, is acquiring land for another dealership as Fairfield razes buildings — including a blighted motel and an old fire station — to extend the auto mall to the northeast.

“Fairfield is a good community for our new dealership because of its geographic location between two major cities, San Francisco and Sacramento,” Buniak says.

The city's pro-dealer stance impresses him.

“Not only does Fairfield have growth potential, it has a good planning and development department that helps businesses to grow,” Buniak says. “The staff has been very helpful.”

Half of the auto mall's dealerships moved from elsewhere in Fairfield and half are new points. Fairfield Toyota doubled sales after relocating to the mall, Quinn says.

The mall's high-visibility location along the freeway helps dealers, says Fairfield Mayor Harry Price. “And the tax revenue dealerships generate certainly helps create a strong economic base for Fairfield.”

In San Jose, “we're blessed with two auto rows” where 28 dealerships collect $11 million to $12 million a year in sales taxes for the city, says Klein.

Ten percent of San Jose's sales taxes come from new-car dealers.

That's a big help, because “even though our revenues are going up, our costs are going higher,” Klein says during a panel discussion at a California New Motor Vehicle Board roundtable here.

Panelists also included Yang, Quinn and Michael Palombo, economic manager for Vacaville, another dealer-friendly city.

To maintain good relations with dealers, San Jose city officials meet with them semi-annually “to see what problems we may be causing them,” Klein says. “Any one of them leaving would be a big blow.”

She says San Jose controls 1,440 acres and “very seriously” is considering the development of a third auto row.

Palombo says although he has been doing auto malls for 20 years, “I don't know a thing about the auto business.

“On the other hand, I've found that people in the auto business don't know a thing about government,” he says. “So we find out about each other and each other's needs. Frankly, it's always about money.”

Vacaville collects $2 million in taxes from dealership sales, about 12% of the city's revenues.

“Sales taxes account for our greatest revenue stream,” Palombo says. “You'd think property taxes would be big, but they're not. Sales taxes, overall, account for 22% of our revenues. They keep us going.”

Much of that revenue comes from nine dealership points on a 30-acre site that Vacaville “bought for nothing in the 1990s and sold for nothing” to enhance the tax base, Palombo says.

He says the city's attitude towards dealerships essentially is: “Whatever you need, if you make a good enough offer, we'll make a good enough deal.”

He adds, “We're both in business, and we deal with each other in a business way.”

It's a good working relationship, in part, he quips, because “auto dealers don't get a lot of respect and government officials get even less; so we have a lot in common.”

Palombo also is kidding when he vows: “If you sell cars within my geography, I'll do whatever you want, including coming to your house and babysitting your kids.”

But he's serious when he says: “Dealers make us a lot of money, make us happy and, frankly, do a lot for the quality of life in the community.”

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