Around 25 men showed up near the end of a Marine Corps Toys for Tots event on Saturday. It was also attended by the local police department.
The group posed for photos with a dress-up Santa while making the 'OK' hand gesture, which has been associated with white supremacy.
Photos and videos from the event have been uploaded to social media and used by Proud Boys as political propaganda.
A police patrol car can be seen in the foreground of one of the images.
Placerville mayor Michael Saragoa said those associated with the group, which describes itself as a "free speech" organisation, are not welcome in the community.
“Why would you display a hand signal that has been affiliated with such a stance which is white power?” he told CBS13.
“White supremacists, racists, we don’t want you in Placerville. Proud Boys: we don’t want you in Placerville," Mr Saragoa added.
A man named Patrick, who did not give his second name and said he is the Placerville Proud Boys president, claimed the group was welcome at the event and has the support of the local community.
He said Proud Boys donated $5,000-worth of gifts and that the police cruiser in the photograph just "happened to be in the background".
Placerville Police Department was quick to distance itself from Proud Boys, which the Southern Poverty Law Center has designated as a hate group.
A spokesperson for the force said: "To be clear, neither the City of Placerville nor the Placerville Police Department invited, is associated with or supports this organisation.
"We were there to support the Toys for Tots Programme. When our police vehicles are parked in public view, we have not authority to disallow anyone from taking a photograph of it or near it."
The force added: "No officer from the Placerville Police Department was involved with this group or the photograph that was taken.
"It is unfortunate some chose to use the Toys for Tots event to push a personal or political agenda. This event was about supporting the kids in our community."
On Tuesday, local residents took to the streets outside the city's town hall to denounce Proud Boys.
“We’re here to make sure the city council makes a resolution saying we will not tolerate this,” Ruth Michaelson, who owns an art gallery in Placerville, said.
Other protesters at the town hall held up signs that read “This is not us” and “Placerville is too great for hate.”
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