There’s an auto dealership war raging between Los Angeles and Beverly Hills, but it’s not about Chevys or Hondas. Think dealerships where cars sell for six figures and a 400-horsepower engine comes standard.
The first shot was fired when Beverly Hills BMW moved out of its namesake city and down Wilshire Boulevard to a sleek showroom and service center just east of L.A.’s Miracle Mile in July. Then, this month, Beverly Hills Porsche announced it would move to the Westwood area of Los Angeles.
Both dealerships were lured by a three-year exemption from a levy many businesses loathe: the gross receipts tax.
“L.A. was welcoming us with open arms and the free business tax for three years,” said Seth Waskow, the BMW dealership’s general manager, who said the offer was too good to turn down.
And when Porsche moved, Los Angeles Mayor Antonio Villaraigosa rolled out his most aggressive move yet: a proposal to eliminate the city’s gross receipts taxes for dealerships that sell new cars.
But now, Beverly Hills is firing back.
It’s planning on developing its own incentives early next year and has worked diligently to secure a brand-new Audi dealership and retain its Lexus dealership, which could have moved out also.
Auto dealership wars are nothing new. They have been waged across Los Angeles County for decades as cities offer tax holidays and other incentives to lure dealerships and their sales tax receipts. Glendale’s and Calabasas’ lack of a gross receipts tax has helped attract such dealerships as Acura and Toyota.
Beverly Hills and Los Angeles are taking the fight to the next level. They are competing for dealerships selling luxury cars with price tags topping $100,000 and that generate upwards of $1 million in sales tax annually.
They and other cities have more incentive than ever to engage in the competition, as the recession and state takeaways leave even wealthy municipalities struggling to balance their budgets.
“This is just the beginning of what I call local tax wars,” said Larry Kosmont, chief executive of downtown L.A. economic development advisory firm Kosmont Cos. “All these cities are so tax starved that we are going to see much more competitive strategies to induce businesses (to move) to one’s community.”
So what does it take to lure a dealership? Consider Beverly Hills BMW.
The dealership, owned by BMW of North America LLC, had been in Beverly Hills for several years, and during that term had grown to five scattered properties for sales, servicing and storage. Waskow said that the dealership would have liked to stay, but it was having difficulty getting approved for an expansion and renovation required by the manufacturer.
“We had to look outside the city of Beverly Hills when it looked like it wasn’t going to happen there for us,” he said. “(Los Angeles) helped facilitate our needs through the various city departments.”
So, BMW built a 350,000-square-foot dealership in two buildings across the street from each other near Highland Avenue. The white-panel and glass-clad buildings allow the dealership to consolidate and significantly expand its showroom and service bays. It will keep its old name, even though it’s no longer in Beverly Hills.
The loss of BMW, and its $1.45 million in sales taxes and nearly $200,000 in gross receipts taxes, was a blow to Beverly Hills. But when Porsche earlier this month announced it would be moving, City Hall was blindsided, said Mayor Barry Brucker.
“Had I heard about it, we would have met with the proprietors to solve their problem,” Brucker said. “We would have offered a luxury service center in our entertainment business district right where Mercedes’ service center is, and opened a healthy dialogue.”
Beverly Hills Porsche alone generated $100 million in sales last year, and paid $1 million in sales taxes and about $125,000 in gross receipts taxes to Beverly Hills.
The dealership did not return calls for comment, but at this month’s press conference a representative said a desire to be closer to the Porsche service center on Santa Monica Boulevard near Westwood Boulevard was a key factor.
The losses have prompted Beverly Hills to begin a more aggressive campaign to keep its remaining eight dealerships, including Bentley Beverly Hills, Maserati Beverly Hills and Mercedes-Benz of Beverly Hills.
“Car dealerships are very important assets that not only are compatible with Beverly Hills and its cachet but from a fiscal tax revenue basis, they are important,” said Brucker. “We have some really wonderful properties still available for high-end luxury auto dealers and that’s one of the areas of focus for us.”
This year the city was able to secure Fletcher Jones Audi, owned by Fletcher Jones Management Group Inc. of Las Vegas. The dealership will open next year in space vacated by Beverly Hills BMW.
Meanwhile, Jim Falk Lexus, also on Wilshire in Beverly Hills, has been in talks with the city for more than two years to complete a $20 million expansion. This month, it took a step closer to getting the green light when the Beverly Hills Planning Commission approved the plan.
The dealership wants a 170,000-square-foot building with a nearly 30,000-square-foot showroom and 70 service bays. The plan, which must be approved by the City Council, will allow the dealership to consolidate its three Beverly Hills properties.
Los Angeles may have gained two of Beverly Hills’ dealerships – and it recently secured the headquarters of two new electric-car manufacturers, Coda Automotive Inc. and BYD Co. Ltd. – but it has seen significant departures as well. In the last 25 years, the city has lost 98 dealerships, leaving it with only 52 today. Among the losses was Bob Smith BMW, which moved to Calabasas from Canoga Park in 2004.
The city has estimated it has lost $57 million in taxes in the process, a figure that caught the attention of L.A. jobs czar Matthew Karatz, who was appointed in July to replace Austin Beutner as director of the city’s Office of Economic and Business Policy. He said one of his first meetings was with Beverly Hills Porsche and that since then city officials have continued to talk to other dealers about how to attract more dealerships.
“What we have heard loud and clear is that the gross receipts tax that we impose on them, which we do on all other industries, is a major impediment,” Karatz said, noting few other cities charge the tax.
Attracting just four or five luxury dealerships would generate enough sales taxes by themselves to make up for the loss of the $3.6 million in gross receipts tax generated by all city dealerships last year, he said.
The city gross receipts tax is $1.27 per every $1,000 of revenue, which amounts to a little more than one-tenth of 1 percent tax on sales. In comparison, the city’s share of state sales tax is much larger, amounting to 1 percent of sales. So last year, the city’s 52 dealerships generated less than $4 million in gross receipts taxes but $29 million in sales tax revenue.
Certainly, the decision to cut gross receipts taxes would leave the city with at least a temporary budgetary hole, but Kosmont said that it shouldn’t be difficult to fill if the plan is successful in attracting high-end dealerships.
“That’s not a far-fetched strategy,” he said. “For a city the size of L.A., it could happen in a short amount of time and the loss of the business taxes is not significant enough to believe that you couldn’t make it up on the sales tax side.”
Beverly Hills now is considering eliminating its own gross receipts tax on dealerships, which is virtually the same as L.A.’s at $1.25 per $1,000 of revenue. The dealerships generated almost $2.7 million in gross receipts taxes last year and more than $27 million in sales taxes.
Brucker said a plan to eliminate the gross receipts tax should be on the City Council agenda in January.
Charles Gill, executive director of the Greater L.A. New Car Dealers Association, said that cities with gross receipts taxes for dealerships should take L.A.’s cue and eliminate them.
“It’s hamstrung dealers for over 40 years and made it difficult to compete with surrounding areas,” Gill said
However, not everyone agrees that cities should be cutting taxes in order to retain or attract dealerships.
Robert Stern, president of the Center for Governmental Studies in Los Angeles, said dealership wars often move dealerships a few miles down the road and fail to benefit the overall local economy by promoting more sales.
“If you look at the region, it doesn’t make any sense, but the cities need as much tax revenue as they can generate,” Stern said. “All it does is basically reduce taxes. So the overall winner clearly is businesses.”
And not everyone likes the idea of giving one industry a break from taxes while continuing to impose them on other industries.
“The problem with any targeted tax cuts is the city is trying to pick winners and losers,” said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association. “The best thing to do with the local economy is to reduce the business tax burden on all.”
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