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Prior to Measure T, Richmond's Business License Tax was based on the number of employees a company had in Richmond. Measure T amended the City's Business License Tax so that manufacturers were taxed either according to the number of employees in Richmond or according to the value of raw materials inputs used in manufacturing in Richmond, whichever was higher.

Chevron sued the City, arguing on several grounds that Measure T was unlawful. Among those arguments was one based on the so-called "internal consistency test" under the Commerce Clause of the United States Constitution. To be overly simplistic, the Commerce Clause of the United States Constitution prohibits states from imposing tariffs or otherwise interfering with interstate commerce, leaving all regulation of interstate commerce to the Federal government. States and municipalities often attempt to find ways to reward local businesses and give them a competitive advantage over out-of-town businesses, such as by imposing higher taxes on out-of-town businesses than on local businesses. The Courts, in response, have developed ways of testing taxes to determine whether they impose an unlawful burden on interstate commerce.

To use the "internal consistency test," one assumes that all cities in America have a tax identical to the one being tested, then one compares the tax burden on businesses doing business entirely inside the taxing city to the tax burden on businesses who also do business outside the city. If the tax burden on businesses doing business outside the city is greater than the tax burden on the business located entirely inside the city, then the tax fails the internal consistency test.

Measure T fails the internal consistency test. That can be demonstrated easily by example. Assume that there are two businesses, each of which employ 100 people and each of which operate a manufacturing plant using $10 million in raw materials each year. The difference is that company A is located entirely in Richmond, whereas company B has its manufacturing plant in Richmond, but its headquarters office and most of its employees in Berkeley. If both Richmond and Berkeley have a Measure-T-like tax, then company A will pay the higher of Richmond's business license tax on its employees or on its raw materials, but company B will pay both taxes, on its employees in Berkeley and on its raw materials in Richmond.

The City of Richmond must have realized pretty quickly that Measure T failed the internal consistency test, because it enacted an "Enforcement Policy" that, according to the attorneys for the City in the Chevron litigation, “ authorized businesses that operated partly in Richmond and partly elsewhere to pay a license tax proportionate to their activity in the City." That Enforcement Policy is an amazing document that redefines terms that you probably thought did not need any definition in ways that defy common sense. For example, "Employee employed or to be employed in Richmond" no longer means an employee working in Richmond, but now means an employee working outside of Richmond "whose employment contributes to business engaged or conducted in the City, whether or not that employee works within or without the City." Similarly, "'New business in the City of Richmond' means a person newly engaged in business in the City...whether or not from a location within or without the City."

In the context of Chevron's lawsuit, the City's attorneys argued that Measure T, as interpreted by the Enforcement Policy, applied to any vertically-integrated business that included manufacturing, even if there were no manufacturing activity actually located in Richmond. So, for example, the tax would apply to Shell Oil, which has no refinery or any other industrial facility in Richmond, but does have a company-owned gas station.

Theoretically, however, the Enforcement Policy has even broader implications. The City might, for example, claim that it has a right to impose a Business License Tax on Amazon, which has no physical presence in Richmond, at all, because it does sell to Richmond residents and, thus, has "business activity" in Richmond.

Chevron argued to the Court, convincingly, that the Enforcement Policy is also unlawful, independently of whether Measure T is lawful. Regardless, however, of its lawfulness, the Enforcement Policy is bad policy, and yet another example of the City's blindness to its own long-term interests in attracting and maintaining businesses. Even if Measure T somehow survives Chevron's legal challenges, the Enforcement Policy must be eliminated.

Written by
Joshua G. Genser
Genser & Watkins LLP
Past Chair, Richmond Chamber of Commerce
Chair, RichPAC