San Francisco Passes Proposition C to Increase Gross Receipts Tax on Commercial Landlords

Commercial Rent Tax for Childcare

Proposition C—the Commercial Rent Tax for Childcare and Early Education—is set to take effect January 1, 2019, and increase the Gross Receipts Tax (“GRT”) on Commercial Rents.

The imposition of the Commercial Rent Tax is expected to be a significant increase to the local tax burden on commercial property owners in San Francisco. To that end, taxpayers’ advocacy groups have filed suit against the City and County of San Francisco seeking to invalidate the tax and claiming that Proposition C was passed in violation of the California Constitution.1 At issue is whether San Francisco voters can circumvent the requirement that Propositions that constitute a “special tax” must attain a two-thirds majority to pass as compared to the voter initiative process, which only requires a simple majority for approval. Last year, the California Supreme Court held in California Cannabis Coalition v. City of Upland that certain procedural standards applicable to measures proposed by legislators do not apply to measures proposed by voter initiative. The business organizations challenging Proposition C argue that the Upland decision did not go so far, as it did not address required voter threshold.

The City’s existing Gross Receipts Tax (“GRT”) regime already imposes a tax on the gross receipts of many businesses operating within San Francisco, with a current GRT rate of approximately 0.3%  imposed on commercial rents. In addition to the existing GRT, the City’s new Commercial Rent Tax imposes a tax of 1% on amounts received for rentals of “warehouse space,” and a tax of 3.5% on amounts received from rentals of other “commercial space” in the City.

Commercial landlords in San Francisco who already pay tax on the lease of their space will find the process familiar, as returns for the new tax will be filed in the same manner and on the same schedule as the current gross receipts tax. The rules for filing combined returns applicable to the current rent tax will apply: the taxpayer must file returns on a combined basis with all of that taxpayer’s related entities, i.e., those entities with which the taxpayer is permitted or required by the California Franchise Tax Board to reflect income on the same combined report.

Generally, the Commercial Rent Tax would not apply to businesses exempt from the existing GRT, including businesses with less than $1 million total in gross receipts, leases of retail spaces, leases for “industrial use,” leases for “arts activities,” most residential real estate leases, nonprofit organizations that are leasing spaces as commercial landlords, and leases to nonprofit organizations or local, state, or federal governments.

The imposition of the Commercial Rent Tax, on top of the existing tax on gross receipts, will likely be a significant increase to the local tax burden on commercial property owners in San Francisco. Landlords may be able to pass some of the resulting expense on to their tenants with triple net leases, depending upon the expense pass through language in the leases. Going forward, landlords will need to consider this tax when drafting such provisions, and tenants will want to pay close attention as well when negotiating their leases.

To better understand the additional tax burden posed by the Commercial Rent Tax, a discussion of San Francisco’s existing GRT regime follows.

San Francisco’s Existing Gross Receipts Tax Regime

Gross receipts tax refers to the tax on the total amount of money received or accrued by a person from doing business in San Francisco, less specific statutorily excluded items. The tax is payable by “persons” engaged in business in San Francisco, which includes any individual, firm, company, partnership, LLC, joint venture, association, proprietorship, domestic or foreign corporation, or any other group acting as a unit.2

“Gross receipts” are defined broadly to include all amounts that constitute gross income for federal income tax purposes, such as all receipts; cash; credits; and property of any kind or nature, and including any amount for which a credit is allowed by the seller to the purchaser, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, interest paid or payable, losses or any other expense whatsoever.3

Phase-In of Gross Receipts Tax

On January 1, 2014, San Francisco began making the transition to the GRT for all business activities attributable to San Francisco. The GRT was to be phased in over five years, with incremental decreases in payroll expense tax corresponding to incremental increases in GRT. By 2018, the phase-in was to adopt the GRT base rate at 100% and the payroll expense should have been phased out to zero. However, this did not happen, and the current rates are shown below.4

Year % of Adopted Gross Receipts Base Rate Payroll Expense Tax Rate
2014 10% 1.350%
2015 25% 1.162%
2016 50% 0.829%
2017 75% 0.711%
2018 100% 0.380%


Therefore, for 2018, both payroll expense tax and GRT are payable by San Francisco businesses.

Determining the Gross Receipts Tax

The rate of the GRT is dependent upon the type of business activities and the amount of gross receipts.5  Businesses conducting business both within and outside San Francisco must apportion their gross receipts to determine gross receipts subject to the GRT.6  Businesses located entirely outside San Francisco are still subject to the GRT to the extent their gross receipts are allocable to San Francisco.7

There are multiple methods of apportionment, and the method varies depending on type of business activity. The primary methods of allocation and apportionment are set forth in Code section 956.1, summarized as follows:

(1) Real or Personal Property. Gross receipts related to real property located in San Francisco and personal property delivered to San Francisco are allocable to San Francisco;
(2) Services. Gross receipts from services are allocable to San Francisco to the extent the purchaser of the services received the benefit in San Francisco;
(3) Intangible Property. Gross receipts from intangible property are allocable to San Francisco to the extent the property is used in San Francisco;
(4) Payroll. Gross receipts apportioned based on payroll is calculated by determining the amount of all non-exempt gross receipts multiplied by the fraction of payroll in San Francisco over combined payroll.

In addition to the GRT, there is a San Francisco Business Registration Fee, which is based on gross receipts for the immediately preceding year and the type of business activity.8  Under the current structure, there are thirteen levels of Registration Fees that may apply, ranging from $90 for businesses with $100,000 or less in gross receipts to $36,225 for businesses with $200,000,001 or more.9

Exemptions & Exclusions from Gross Receipts Tax

1. Small Business Exemption
Exempted from the GRT are small businesses with less than $1,000,000 in San Francisco gross receipts.10 This number is adjusted annually for inflation, putting the 2018 threshold at $1,090,000.  Note that businesses with $500,000 or more in San Francisco gross receipts must still file a GRT return or be subject to a penalty, and businesses operating in San Francisco must still pay the Business Registration Fee regardless of the amount of gross receipts.11  A residential landlord is considered a “small business enterprise” within the meaning of the exclusion if and only if the landlord leases fewer than four units in any individual building.

2. Tax Reimbursement Exclusion
Excluded from the computation of gross receipts are federal, state and local taxes for which a taxpayer is reimbursed by means of a separately stated charge.12

3. Investment Exclusion
Gross receipts do not include any “investment receipts,” which are defined as interest, dividends, capital gains, other amounts received on account of financial instruments, and distributions from business entities, provided such amounts are derived exclusively from the investment of capital and not from the sale of property other than financial instruments or from the provision of services.13 

Gross receipts do not include allocations of income or gain, or distributions from an entity treated as a pass-through entity for federal income tax purposes, provided such allocations or distributions are derived solely from an investment in such entity and not from the provision of services.14

4. Exclusion for Amounts Received from Related Persons
Amounts received from a related person or entity, including gross receipts of a pass-through entity which is itself subject to the GRT, are excluded from gross receipts.15

5. Rent Controlled Buildings Exclusion
Lessors of residential real estate may exclude from gross receipts 50% of the total amount received from the rental of real property to tenants in occupancy at any location in San Francisco that is subject to limits on rent increases.16

6. Other Exemptions
The following are also specifically exempt from the GRT:

Formally recognized tax-exempt organizations under either the California Revenue and Taxation Code or the Internal Revenue Code;

  • Banks, financial corporations, and insurance companies;
  • Businesses engaged as for-hire motor carriers;
  • Businesses engaged in intercity transportation as a household goods carrier;
  • Charter-party carriers operating limousines that are not domiciled or maintained in the City; and
  • Any other person the City is prohibited from taxing under State law.17

Quarterly Estimated Tax Payments

In February 2017, the San Francisco Board of Supervisors passed Ordinance 026-17, which requires quarterly estimated payments for payroll expense taxes and GRT, and permits taxpayers to apply refunds of overpayments of the business registration fee, the payroll expense tax, and the GRT to subsequent tax periods.  Every business with San Francisco gross receipts of more than $1,090,000 or payroll expense of more than $300,000 is required to make three quarterly estimated tax payments and file an annual tax return. Residential landlords that rent four or more units, with annual gross receipts less than $1,090,000 and payroll expense less than $300,000 are only required to file an annual tax return.18 For businesses not fitting these criteria, no annual return is required for GRT and payroll expense tax.

The required quarterly estimated payments are the lesser of (1) 25% of the prior year or (2) 25% of the current year tax liabilities. If a taxpayer fails to make the estimated payment, there is a penalty equal to 5% of the underpayment.19 The quarterly estimated payments due are billed and posted in March. The first, second, and third estimated tax payments for a tax year are due on or before April 30, July 31, and October 31, respectively. The fourth quarter payment is due by February 28 of the following year. These payments are credited against a person or combined group’s total annual payroll expense tax or GRT for the year in which the payments are made.20

For more information, contact Tax Partner Jeffry Bernstein at or Real Estate Partner Barbara Milanovich at Research analysis provided by Jessica N. Wilson and Heather Webb.


1See Complaint to Invalidate Special Tax, Howard Jarvis Taxpayers Assn. v. City and County of San Francisco, Superior Court of California (filed August 3, 2018).
2Code § 6.2.
3Code § 952.3(a).
5See Chart 1.
6See Code §§ 956.1; 956.2.
7Code § 956.1(f).
8Code § 855(e).
9See City and County of San Francisco Treasurer & Tax Collector, Business Registration Fees for the Registration Year Ending June 30, 2018, (last visited August 17, 2018).
10Code § 954.1(b).
11Code § 954.1(c).
12Code § 952.3(c).
13Code § 952.3(d).
14Code § 952.3(e).
15Code § 952.3(d).
16Code § 954(d). The limits on rent increases must be imposed by San Francisco’s Residential Rent Stabilization and Arbitration Ordinance.
17Code § 952.3(f)(1) – (6); see also Code § 954(a).
18City and County of San Francisco Treasurer & Tax Collector, Gross Receipts and Payroll Expense,
19See San Francisco Ord. No. 26-17 (Feb. 10, 2017).
20See City and County of San Francisco Treasurer & Tax Collector, Gross Receipts Tax and Payroll Expense Tax Quarterly Estimated Payments, (last visited August 17, 2018).