October 22, 2018 San Franciscans to vote on imposing another Gross Receipts Tax to fund services for homeless On November 6, 2018, San Francisco voters will vote on another tax increase that would, if approved, affect businesses (a person or combined group) with over $50 million of annual San Francisco gross receipts. The proposed ordinance will appear on the ballot as Proposition C — Gross Receipts Tax for Homelessness Services (Proposed Ordinance), and would take effect January 1, 2019, if approved by the voters. In June 2018, San Francisco voters approved another "Proposition C," which enacted a commercial rent tax to pay for childcare and early education (Childcare Tax). The June 2018 Proposition C should not be confused with this new Proposition C. For discussion of that tax, see Tax Alert 2018-1423. Tax proposal on November ballot The Proposed Ordinance is intended to provide funding to address San Francisco's significant homelessness problem. If approved, it would impose an additional gross receipts tax (GRT) on businesses with over $50 million of annual San Francisco gross receipts. Generally, the applicable tax rate would vary based on the taxpayer's business activities (see chart below), and an aggregate rate would apply for taxpayers that engage in more than one activity type. A breakout of the increased tax rates can be found in the table below:
Under the Proposed Ordinance, however, certain taxpayers that engage in business in San Francisco as administrative offices would be subject to a 1.5% homelessness administrative office tax, measured by the total payroll expense of the person or combined group attributable to the city. Administrative offices are defined as taxpayers: (i) that provide administrative and management services exclusively to their combined group and have over 50% of the total combined group's payroll expense within San Francisco, (ii) whose total combined number of employees exceeds 1,000, and (iii) whose total combined group's gross receipts exceeds $1 billion as set forth on the combined group's federal income tax return. Certain administrative office taxpayers would be subject to the proposed 1.5% homelessness administrative office tax in addition to the administrative office tax rate of 1.4% under the proposed ordinance, for a total GRT rate of 2.900%. Implications If the Proposed Ordinance passes with a simple majority (i.e., 50% of the voters plus one vote), it could be subject to legal challenge by taxpayer advocacy groups arguing that passage required a two-thirds supermajority. In California Cannabis Coalition v. City of Upland, 3 Cal.5th 924 (2017), the California Supreme Court held that the state's constitutional provision limiting the ability of local governments to impose, extend or increase any general tax by requiring a two-third majority of voters did not apply to voter initiatives.1 After this decision was issued, the Childcare Tax was enacted with a simple majority vote rather than a two-thirds supermajority.2 Various tax advocacy groups, however, have filed suit over the tax increase on the grounds that it violates Proposition 218's two-thirds supermajority requirement. The Proposed Ordinance is not wholly dissimilar to defeated Proposition D — Commercial Rent Tax for Housing and Homelessness Services, which was voted down on June 5, 2018. Both propositions would increase the GRT to provide homelessness services. That proposition required a supermajority to pass, which it did not achieve. Click here for the San Francisco Controller's analysis of Proposition C. Click here for a text of Proposition C - Gross Receipts Tax for Homelessness Services. ———————————————
——————————————— 1 3 Cal.5th 924 at 948. 2 It is notable that the Childcare Tax passed by a narrow 51% vote. | |||||||||||||||||||||||||||||||||||||||
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