United States

San Francisco business tax developments to review for 2019

INSIGHT ARTICLE  | 

Beginning Jan. 1, 2019, there were several important changes to San Francisco’s business tax regime that have taken effect following their approval through the California statewide elections in 2018. These new changes to the city’s tax laws include a new Commercial Rent Tax (CRT) that will increase taxes on certain commercial rents, a new Homelessness Gross Receipts Tax (HGRT) on certain city taxpayers, and a new economic nexus standard for San Francisco business taxes. Additionally, the city’s Payroll Expense Tax, which was scheduled to phase out at the end of 2018, will now remain in place at a flat rate of .38 percent. A summary of the changes is below:

  • CRT imposed on the landlord and based on the gross receipts of certain leases (or subleases)
  • HGRT imposed on San Francisco taxpayers with over $50 million in annual San Francisco receipts
  • New economic nexus standard for San Francisco business taxes beginning Jan. 1, 2019

Commercial Rents Tax

The first of these initiatives, the CRT, was passed on the June 2018 ballot and is imposed on the gross receipts earned from a lease (including subleases) in the city at a rate of 3.5 percent for commercial space and 1 percent for warehousing. Revenues are intended to be used for early childhood education and childcare services. This new tax is in addition to the existing tax on gross receipts, which is a city tax on total gross revenues (as opposed to gross profits) with a variable rate depending on business type and industry. Notably, certain key definitions in the CRT are not yet defined. Further, this new CRT will not apply to businesses with less than $1 million of total gross receipts, nor will it apply to rents from certain retail activities, manufacturing and certain industrial uses, arts activities, and various non-profit and government entities and activities.

Homelessness Gross Receipts Tax

The HGRT ordinance was passed as Proposition C on the November 2018 ballot. It is a new tax that directs revenues toward the provision of shelters, housing assistance, and mental health services for homeless populations within the city. The HGRT is an additional tax imposed on businesses that are currently paying a San Francisco gross receipts tax. The tax will be imposed at a rate between 0.175 percent and 0.69 percent of San Francisco gross receipts over $50 million, depending on the type of business, and an additional 1.5 percent of the payroll expense in San Francisco for businesses that pay the administrative office tax. Rents subject to the San Francisco CRT are exempt from the HGRT. The tax is expected to impact 300 to 400 businesses out of the more than 13,000 current taxpayers.

Economic nexus standard

Finally, the city’s new economic presence nexus for the existing gross receipts tax, payroll tax, CRT, Cannabis Business Tax and business registration fee supplements the term “engaging in business within the city,” a term which had generally required some physical presence within the city for more than seven days during a tax year to incur tax and fee liability. The new economic nexus standard requires remote sellers or service providers with $500,000 or more of gross receipts from San Francisco consumers to register with the city, as well as determine if any of the city taxes apply.

Takeaways

The CRT and the HGRT, both effective for 2019 and which received about 60 percent of the vote, are currently being challenged in court under a state constitutional provision requiring certain taxes to pass with a two-thirds threshold. Taxpayers subject to those taxes should consider that this litigation may impact their eventual filing obligations.

The new economic nexus provisions may capture businesses remote to the city that have never had a filing or tax compliance obligation before. Accordingly, businesses with gross receipts or payroll derived within San Francisco should contact their tax advisor to determine how the new nexus standard, additional gross receipts tax and commercial rent taxes could impact their total San Francisco tax liability and to consider available planning options.

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