Proposition C—the Commercial Rent Tax for Childcare and Early Education—is set to take effect on January 1, 2019, and increase the Gross Receipts Tax (“GRT”) on commercial rents in San Francisco. As discussed in our previous post, Proposition C competed with Proposition D—the Housing For All Commercial Rent Tax—and prevailed with San Francisco voters in June.
The City’s existing GRT regime already imposes a tax on the gross receipts of many businesses operating within San Francisco, with a current GRT rate of approximately 0.3% imposed on commercial rents. Gross receipts tax refers to the tax on the total amount of money received or accrued by a person from doing business in San Francisco, less specific statutorily excluded items. In addition to the existing GRT, the City’s new Commercial Rent Tax imposes a tax of 1% on amounts received for rentals of “warehouse space,” and a tax of 3.5% on amounts received from rentals of other “commercial space” in the City.
The Commercial Rent Tax will significantly increase the local tax burden on commercial property owners in San Francisco, and taxpayers’ advocacy groups have filed suit against the City and County of San Francisco seeking to invalidate it, claiming that Proposition C was passed in violation of the California Constitution. At issue is whether the “special tax” imposed by San Francisco voters by initiative requires a two-thirds majority to pass.
Unless the challenge is successful, the Commercial Rent Tax will take effect on January 1, 2019. Landlords may be able to pass some of the resulting expense on to their tenants with triple net leases, depending upon the expense pass through language in the leases. Going forward, landlords will need to consider this tax when drafting such provisions, and tenants will want to pay close attention as well when negotiating their leases.
Commercial landlords in San Francisco who already pay tax on the lease of their space will find the process familiar, as returns for the new tax will be filed in the same manner and on the same schedule as the current gross receipts tax. The rules for filing combined returns applicable to the current rent tax will apply: the taxpayer must file returns on a combined basis with all of that taxpayer’s related entities, i.e., those entities with which the taxpayer is permitted or required by the California Franchise Tax Board to reflect income on the same combined report.
For a more in-depth discussion of the GRT regime in San Francisco, including its history, the current applicability, and information about determining the tax, please refer to the recent Coblentz publication examining this topic.