CA: San Francisco proposition C increases gross receipts tax on lessors of commercial real estate

Proposition C, the Commercial Rent Tax for Early Care and Education, was recently approved by San Francisco voters. Effective January 1, 2019, this measure imposes an additional “Early Care and Education Commercial Rents Tax” on each person that receives gross receipts from leasing or subleasing commercial real estate in the City of San Francisco. This tax is in addition to the existing San Francisco gross receipts tax that likewise applies to such receipts and is imposed at progressive rates that range from 0.285 percent to 0.3 percent. Gross receipts from the lease of warehouse space will be taxed at an additional 1.0 percent, and gross receipts from leases of other commercial space will be taxed at an additional 3.5 percent. “Commercial space” is generally defined as any building or structure that is not residential real estate, with certain exclusions. “Warehouse space” is space used for commercial storage, volatile materials storage, wholesale storage, or as a storage yard, as these terms are defined in section 102 of the City Planning Code.

There are a number of exemptions and exclusions from the new tax. Gross receipts received from leases to nonprofits and government entities are not subject to the tax, and there is a small business exemption from the tax for lessors of commercial space with $1 million or less in in gross receipts. There are also certain exemptions for leases of space that are specifically excluded from the definition of “commercial space.” These include any building or structure or portion of a building or structure that is used for (a) industrial use under section 102 of the City Planning Code (e.g. manufacturing plants, power plants, storage yards, or shipyards), (b) arts activities under section 102 of the City Planning Code (e.g., theaters, studios, workshops), and (c) retail sales or service activities that are not so-called “formula retail” uses as defined under section 303.1 of the City Planning Code. Formula retailers are establishments with multiple locations and standardized features or a recognizable appearance; thus, it appears that receipts from leases to chain retailers will be subject to the tax.  Persons subject to the Early Care and Education Commercial Rents tax will file returns at the same time and in the same manner as returns are filed for the existing City gross receipts tax. The combined filing rules that apply for existing gross receipts tax purposes likewise apply to the new tax. The revenues derived from the Early Care and Education Commercial Rents tax will be used for early childhood care programs and education. Proposition C passed with a simple majority vote. There is some question as to whether a 2/3 majority was required. Please contact Jennifer Petersen at 415-963-7101, Chris Hoge at 415-963-8241, Joy Gray at 415-963-8613, or Jon Guiliano at 415-963-7286 with questions.