San Francisco updates—Superior Court rejects challenges to Commercial Rents, Homelessness Gross Receipts Taxes (GRT), and other developments

Overview

The City and County of San Francisco’s (City) enactment of the Homelessness Gross Receipts Tax¹ (Homelessness GRT) and the Commercial Rents Gross Receipts Tax² (Commercial Rents GRT) are two in a series of taxes that the City has recently enacted. These new taxes, which were placed on the ballot by citizen signature gathering, were passed by a simple majority (more than 50 percent voter approval) but fell short of the super-majority (greater than two-thirds voter approval) required under California Propositions 13 and 218.

Recently, a San Francisco Superior Court judge upheld the validity of these taxes, which, if upheld on appeal, would represent an exception to the super-majority requirement for new taxes generally required. The Superior Court’s upholding of the Homelessness and Commercial Rents GRTs is a continuing trend in local tax ballot initiatives that have passed by a simple majority of the vote.³

Back to top

Background on the Homelessness and Commercial Rents GRTs

The Homelessness GRT is imposed on gross receipts from business attributable to the City above $50,000,000.⁴ The Homelessness GRT requires quarterly estimated tax payments and taxpayers are subject to an estimated tax penalty of 5 percent of the amount of any underpayment.⁵ However, the estimated tax penalty does not apply to the 2019 tax year.⁶

The Commercial Rents GRT is imposed on the gross receipts earned from a lease or sublease in the City, at a rate of 3.5 percent for commercial space and 1 percent for warehouse or industrial space.⁷ The Commercial Rents GRT also requires estimated tax payments.⁸ Failure to timely remit payments is subject to an estimated tax penalty of 5 percent of the amount of the underpayment.⁹ However, like the Homelessness GRT, this penalty does not apply to tax years beginning on or before December 31, 2019.¹⁰ The Commercial Rents and Homelessness GRTs were both parts of a local ballot initiative, Proposition C, which passed with 61.34 percent of the vote.¹¹

Back to top

San Francisco Superior Court upholds City’s Homelessness and Commercial Rents GRTs

On July 5, 2019, San Francisco superior court judge Ethan Schulman, in two separate cases, upheld the constitutionality of the Homelessness GRT and the Commercial Rents GRT.¹² The taxes were both enacted by a simple majority as part of a local ballot initiative, Proposition C.¹³ In the matter of the Homelessness GRT, the City filed a petition for certification with the San Francisco superior court seeking validation of the tax. In the matter involving the Commercial Rents GRT, three business interest groups and an anti-tax group filed a petition seeking to invalidate the tax. The parties’ arguments in both matters were generally the same.

The City argued that both taxes were constitutional under the Supreme Court’s rationale in California Cannabis Coalition v. City of Upland,¹⁴ in which in dicta the Court explained that local ballot initiatives with the required number of signatures only require a simple majority of the vote as opposed to a super-majority of the vote.¹⁵ The California Business Roundtable, the Howard Jarvis Taxpayers Association, the California Business Properties Association, and the Building Owners and Managers Association of California¹⁶ argued that the taxes were unconstitutional because they did not comply with Propositions 218 and 13 of the California Constitution. Propositions 218 and 13 of the California Constitution provide that to impose a special tax at the local level a super-majority of the vote is required.¹⁷

In upholding the constitutionality of both taxes, the superior court judge agreed with the City’s interpretation of Upland.¹⁸ In both orders the judge explained the California Constitution requires approval by a two-thirds vote before a local government can impose, extend, or increase any special tax.¹⁹ However judge Schulman pointed out that the Upland Court explained this constitutional requirement does not extend to voter initiatives.²⁰ The Howard Jarvis Taxpayers Association has filed a notice of appeal in the matter involving the Commercial Rents GRT.²¹ According to multiple legal commentators an appeal will also be filed in the Homelessness GRT matter.²²

Back to top

Homelessness GRT considerations

The City has announced that it will not spend the current collected revenue from the Homelessness GRT during the pending litigation.²³ To fund homeless services, the City enacted City Ordinance 73-19 on April 26, 2019, which, effective May 26, 2019, provides a tax credit to taxpayers who pay the tax and waive their right to file a future refund claim.²⁴ City Ordinance 73-19 specifies that a taxpayer will be entitled to a tax credit if it either:

1. Pays the tax and waives the right to a refund of the Homelessness GRT due to the pending litigation or
2. Makes an irrevocable gift in the amount of the tax owed.²⁵

If a taxpayer chooses to waive its right to a refund, the City will grant the taxpayer a credit equal to 10 percent of the Homelessness GRT refund waived.²⁶ If a taxpayer is willing to make an irrevocable gift to be used for the same purposes, the City will grant the taxpayer a credit against their Homelessness GRT liability equal to 110 percent of the gift amount.²⁷

Taxpayers should consider the impact of the Homelessness GRT credits and whether it is more beneficial for them to waive their right to a refund in the event the tax is ultimately invalidated by a court, in exchange for the certainty of a 10 percent credit. Per City Ordinance 73-19, taxpayers have until the sooner of either the resolution of the pending litigation or January 1, 2024, to make the choice.²⁸

Back to top

Commercial Rents GRT considerations

Taxpayers are also facing some level of uncertainty related to the Commercial Rents GRT due to the recent court decision. However, unlike the Homelessness GRT, the City is not offering taxpayers a tax credit for the Commercial Rents GRT to waive the potential refund or gift the amounts. Accordingly, taxpayers, including landlords that may face business decisions due to the tax, should evaluate the potential impact of the Commercial Rents GRT and this decision.²⁹

Back to top

Other tax ballot measures

On July 17, 2019, Supervisor³⁰ Gordan Mar withdrew his proposal for a stock-based compensation tax from the November 2019 ballot.³¹ Supervisor Mar’s stock-based compensation tax would have been imposed on stock-based compensation attributable to the City and would have been paid by the business.³² Supervisor Mar has deferred this tax proposal to the November 2020 ballot in order to gain time to work with community and labor leaders to present comprehensive solutions to economic inequality in the City.³³

Supervisor Mar stated that his decision to defer consideration of the stock-based compensation tax was due in part to the pending Transportation Network Company Tax (TNCT).³⁴ The TNCT imposes a 1.5 percent tax on ride sharing services and a 3.25 percent tax on all other rides.³⁵ According to Supervisor Mar,”[b]y focusing this November on the $600 million Affordable Housing Bond and [Transportation Network Company] Tax, we will continue to build momentum for longer-term solutions to the biggest problem facing our City [economic inequality].”³⁶

Supervisors Hillary Ronen and Matt Haney have also withdrawn their proposal to impose the so-called “CEO Tax,” which would increase the gross receipts tax on businesses if the median compensation paid to employees in the City is 1 percent or less than the highest paid employee or officer.³⁷ Supervisors Mar, Ronen and Haney are looking to reintroduce their tax proposals on the November 2020, and March 2020, ballots, respectively.³⁸

Back to top

Multistate Tax alert archive

The Multistate Tax alert archive includes external tax alerts issued by Deloitte Tax LLP's Multistate Tax practice during the last three years. These external alerts highlight selected developments involving state tax legislative, judicial, and administrative matters. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons.

View the list of archived Multistate Tax alerts.

Back to top