Commercial Landlords Beware: Competing Tax Measures on June Ballot

Competing special purpose tax measures are on the San Francisco June ballot, both of which would raise the tax on gross receipts from the lease of commercial space in San Francisco. The tax rates in the measures – generally, 1.7% and 3.5% – would be a steep increase over the current gross receipts tax rate applicable to commercial rents of around 0.3%. Either proposed tax would be in addition to the gross receipts tax already in effect and would become operative on January 1, 2019.

Prop D: Housing For All Measure

Proposition D would impose a tax of 1.7% on gross receipts from the lease of commercial space in San Francisco to fund low- and middle-income housing and homelessness services.

Exemptions would apply to:

A small business with gross receipts within San Francisco of $1,000,000 or less.
Private foundations and non-profit organizations that are exempt from income taxation under California or federal law. Further, rents paid by such organizations are not considered gross receipts subject to the tax.
Any structure or portion thereof being used for “production, distribution and repair”, “retail sales and services”, or “entertainment, arts and recreation” (as these categories of uses are defined in San Francisco’s Planning Code).

This measure is sponsored by San Francisco Supervisors Ahsha Safai, Jeff Sheehy, Katy Tang, Malia Cohen and Mark Farrell. A two-thirds supermajority vote is required for the approval of this measure.

Prop C: Universal Childcare for San Francisco Families Measure

Proposition C would impose a tax of 1% on gross receipts from the lease of warehouses in San Francisco and 3.5% on gross receipts from the lease of all other commercial space to fund early care and education for children up to five years old.

Exemptions would apply to:

A small business with gross receipts within San Francisco of $1,000,000 or less.
Private foundations and non-profit organizations that are exempt from income taxation under California or federal law. Further, rents paid by such organizations are not considered gross receipts subject to the tax.
Rents paid by federal, state or local governments.
Any structure or portion thereof being used for “industrial uses”, “arts activities”, or “retail sales or service activities or establishments” other than “formula retail” uses (i.e., chain stores) (as these categories of uses are defined in the San Francisco Planning Code).

“Industrial uses” and “arts activities” are significantly narrower subsets of the uses that comprise “production, distribution and repair” and “entertainment, arts and recreation”, respectively, under the Planning Code. For example, unlike under Proposition D, “business services” uses would not be exempt. Another difference from the Proposition D exemptions, as noted above, is that “formula retail” uses would not be excluded under this measure (i.e., leases for chain stores such as Starbucks would be subject to the tax).

San Francisco Supervisors Jane Kim and Norman Yee led the citizen initiative campaign for this measure.

Proposition C requires a simple majority to pass, whereas Proposition D requires a two-thirds vote to pass. However, only one of the two proposals can be adopted because each measure provides that if both are approved by San Francisco voters in June, then the measure with more affirmative votes will become operative. The San Francisco Controller estimates that Proposition D would generate approximately $70 million in net annual revenue for San Francisco compared with approximately $146 million expected from Proposition C.