Kevin Valine

Modesto News: Council OKs plan for businesses to stop paying tax

For more than a dozen years, Mistlin Honda has paid a few hundred thousand dollars in city business license taxes despite not being within Modesto’s city limit.

The auto dealership has been paying the tax as part of a 1998 agreement it signed with the city before it relocated from Modesto to just outside the city on north McHenry Avenue, which is home to about a dozen auto dealers. Mistlin signed the deal to get water from the city and with the expectation the city soon would annex the area.

The annexation never happened. But Mistlin and about a dozen other businesses have kept paying the tax. These businesses also signed agreements in 1998 or later to pay the tax to get city water. They and Mistlin also pay city utility bills for the water.

Mistlin Honda has found this arrangement unfair because there are other north McHenry businesses that get city water but don’t pay the business license tax. The City Council rectified that Tuesday by saying the businesses paying the tax can stop paying after a dozen years.

The city says Mistlin, Enterprise Rent-A-Car and party supply retailer Grand Events have met that threshold. The other businesses – including CarMax and Valley Lexus – have several more years of payments ahead before reaching the dozen years.

The city says these roughly dozen businesses paid $195,000 in business license taxes last year, with $60,000 of that from Mistlin, Enterprise and Grand Events. The tax is based on a percentage of a business’ sales.

Here’s where the issue gets tricky:

Modesto and Stanislaus County feuded in the 1990s over the sales tax money the city lost after the county allowed auto dealers to locate along north McHenry just outside the city. The city and county settled their dispute in 1998 with an agreement to share the sales, property and other taxes – including the business license tax – that the north McHenry businesses paid. The city also agreed to provide water and sewer service to the businesses. It’s not clear how many get sewer service from the city.

County CEO Stan Risen said the north McHenry area businesses are expected to generate about $4 million in taxes in the current budget year. The city gets 54 percent of the taxes, and the county gets 46 percent.

Risen said the county does not support Modesto’s decision to let the businesses stop paying the business license tax. He said the county’s position is that the city will need to make the county whole for the lost taxes. But he stressed that he hopes the two governments can reach an amicable resolution.

Here’s another twist:

A 2006 city report identified 21 businesses that were getting city water and potentially needed to pay the business license tax. The report recommended Modesto continue to pursue annexation and getting the businesses to pay. The report said as a matter of fairness, the city should have all businesses pay the tax.

City Manager Jim Holgersson – who has been with Modesto since May – confirmed that there are businesses that should have paid the tax. He added that his research shows the city worked on annexing the area in 2007 but the work stopped in 2008.

He said Modesto decided the equitable solution was to stop collecting the business license tax. He said the city faced practical and legal issues if it tried to get everyone to pay.

Bee staff writer Kevin Valine can be reached at kvaline@modbee.com or (209) 578-2316.

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