The law cited is clearly poorly worded and over-vague, but almost certainly targeted against illegal businesses and illegal dumping rather than weekend-warrior mechanics who build and work on a few of their own cars. Like many laws, it leaves a lot to the discretion of the enforcing official.
Now, I do engine swaps and restore cars at my house, wiht a 2-car-garage, in a quiet upper-middle-class suburb. By the letter of the law in Sacramento I'd be in violation of it. However, I am considerate of my neighbors, do almost all my work during the day when they're at work (I'll take a day off work to do noisy stuff like excessive grinding), and everything is "put away" when not in use - i.e. my parts car is hidden in a shed, my project car(s) in my garage, and my "normal" daily drivers in my driveway. I doubt the Sacramento enforcement officials would go after me, event though they technically could. Also, I give my neighbors no reason to call in on me, even the grumpy ones.
Our county doesn't have any crazy laws like that, just typical zoning and noise ordinances. That said, looking at your place, it would be in violation of dozens of laws here, regardless of what "tools" you own. I like building cars, I like projects, and I like building house stuff, but I woudln't want to live next door to you either, with a 40-foot container, a bunch of ramshackle sheds, junk cars, etc all over the place. It's absolutely no wonder your neighbor is grumpy.
As noted above, the Sacramento law is pretty lousy in many respects, but you should feel lucky to ONLY have gotten $350 fine or whatever, considering you freely admitted to far more violations than just the one they hit you with.
Perhaps move someplace where there is some actual distance from your neighbors - not right across the fence from where you put all your junk.