San Francisco Tax Propositions on the November Ballot

By Jeffry Bernstein, Jessica Wilson, and Kit Driscoll

San Francisco voters will confront a number of tax measures on the November ballot. These measures are summarized below.

Proposition F – Adjustment of Baseline Funding and Business Tax Changes

Current Law:

San Francisco imposes a number of taxes under the Business and Tax Regulations Code (the “SF Tax Code”) on businesses engaged in business within the City. Three general taxes—so called because the revenues from which go to the City’s General Fund—imposed by the City are (1) the Business Registration Fee, (2) the Payroll Expense Tax, and (3) the Gross Receipts Tax. Currently, the SF Tax Code includes a small business exemption from the Gross Receipts Tax for businesses with less than $1 million in gross receipts attributable to the City.

The City also imposes special taxes on certain businesses, the revenues from which are dedicated to specific purposes. Two such special taxes are (1) the Early Care and Education Commercial Rents Tax and (2) the Homelessness Gross Receipts Tax.

Proposed Changes:

Business Registration Fee. Effective beginning in the 2021-2022 fiscal year, Proposition F would amend the SF Tax Code to reduce the annual Business Registration Fee for businesses with $1 million or less in San Francisco gross receipts. The amendment would also provide for an increase in the Business Registration Fee for businesses benefiting from the increased ceiling for the small business exemption from the Gross Receipts Tax (discussed below). For most businesses with over $1 million to $1.5 million in gross receipts attributable to the City, the increase would be $230 to $245, depending on the activities of the subject business. For most businesses with over $1.5 million to $2 million in gross receipts attributable to the City, the increase would be $435 to $460, depending on the activities of the business.

Payroll Expense Tax. Proposition F would repeal the Payroll Expense Tax, effective as of January 2021.

Gross Receipts Tax. Under Article 12-A-1 of the SF Tax Code (the provisions governing the Gross Receipts Tax), Proposition F would make the following changes:

Revise the Gross Receipts Tax rates and incrementally increase the Gross Receipts Tax rates for certain business activities, beginning with the 2021 tax year and continuing through the 2024 or 2025 tax year.[1] For certain business activities, the measure would initially reduce the Gross Receipts Tax rates from what they are currently, and incrementally increase the rates over the next four tax years.[2]
Increase the ceiling for the small business exemption from the Gross Receipts Tax from $1 million to $2 million of gross receipts attributable to the City.
Eliminate the credit for taxpayers that have paid a substantially similar tax to any other jurisdiction on the gross receipts attributable to and taxable by the City.
Beginning with the 2021 tax year, adjust the required quarterly payments of the Gross Receipts Tax to the lesser of (1) 25 percent of the Gross Receipts Tax liability shown on the business’s return for the tax year, or (2) 25 percent of the Gross Receipts Tax liability, as determined by applying the applicable Gross Receipts Tax rates and small business exemption for the current tax year to the taxable gross receipts shown on the business’s return for the preceding tax year.
If a final judicial decision invalidates the Homelessness Gross Receipts Tax, Proposition F would increase the existing Gross Receipts Tax on certain businesses for a period of 20 years, beginning with the tax year following the year a decision becomes final. This provision would include additional tiers of Gross Receipts Tax rates for businesses with taxable gross receipts over $50 million.
If a final judicial decision invalidates the Early Care and Commercial Rents Tax, Proposition F would add a new Article 36 to the SF Tax Code to impose a new tax on the gross receipts from the lease of certain commercial space in the City for a period of 20 years. Proposed Article 36 would be substantially similar to the existing Early Care and Commercial Rents Tax, except that revenues would go to the City’s general fund.

Proposition I – Real Property Transfer Tax Rate Increase on Transfers of Properties of at Least $10 Million

San Francisco currently imposes a transfer tax on each commercial and residential property transferred, which includes transactions involving leases with a term of 35 years or more and certain transfers involving legal entities that own real property in San Francisco. Under the current provisions of San Francisco’s Real Property Transfer Tax Ordinance (the “Transfer Tax”), the Transfer Tax rate is variable, depending on the purchase price or the fair market value of the property transferred.

Currently, the Transfer Tax imposed on applicable transfers of property with a purchase price or value between $10 million and $25 million is approximately 2.75 percent.[3] The current Transfer Tax rate for transfers involving property with a purchase price or value equal to or in excess of $25 million is approximately 3 percent. Proposition I would amend the SF Tax Code to double the Transfer Tax applicable to transfers within these two tiers of consideration or value. For transfers within the $10 million to $25 million tier, Proposition I would increase the Transfer Tax to $27.50 per $500 of value or consideration, or 5.5 percent. For transfers in the $25 million or above range, the measure would increase the Transfer Tax to $30.00 per $500, or 6 percent.

Proposition J – Parcel Tax for San Francisco Unified School District

In June 2018, voters passed a measure very similar to Proposition J, but the funding to schools and education that the June 2018 measure proposed to provide has been indefinitely postponed due to pending litigation. Proposition J would change the City’s existing Parcel Tax from the current rate of $320 per parcel to $288 per parcel and make the revenues generated from the tax more specifically targeted toward educators’ compensation and educational improvements.

[1] The incremental increases in the Gross Receipts Tax rates vary across business activities, but the increased rate each year remains steady within each category of business activity. For example, businesses within the category of Real Estate, Rental and Leasing Services would be subject to an increase of .014 percent to .015 percent each year.

[2] For example, some businesses within the Retail Trade business activity category would initially experience a reduction in Gross Receipts Tax rate by .022 percent.

[3] The Transfer Tax for this value tier imposes a tax of $13.75 for “each $500 or fractional part thereof” for the entire value or consideration, so the actual tax paid may not be exactly 2.75 percent of the value or consideration.