Commercial Property Owners Beware: Another Tax (Yes, One More) Could be Coming

The San Francisco Board of Supervisors, in an effort to help close the City’s budget gap, is considering a June special election to ask the voters to approve a new gross receipts tax. If the measure makes the ballot and receives voter approval, then most businesses that operate in San Francisco would be saddled with another tax, starting January 1, 2010.

The City of San Francisco previously maintained a gross receipts tax, but this tax was repealed in 2001 after successful legal challenges. Now, the Board seeks to revive this tax.

The New Tax Hits Commercial Landlord’s the Hardest

The proposed tax would be 1.395% of all gross receipt taken in by lessors of commercial real estate. For all other businesses, the tax is only 0.1%. This raises the obvious question, why the approximately 140% disproportionate impact on landlords? The legislative digest of the proposed ordinance explains this disparity:

“The higher rate for commercial real estate leasing is intended to ensure that such businesses pay their fair share of the costs of city services in exchange for the benefits and protections afforded by the City (e.g., fire and police services, public transportation, street maintenance, etc.). These businesses received a significant reduction in their tax liability when the former gross receipts tax was repealed because of the high gross receipts, low payroll expense nature of the industry.”

This comment referred to San Francisco’s payroll tax, and the perception that commercial real estate owners do not maintain a large number of employees. (The payroll tax is based on the salaries paid to employees.) The gross receipts tax is an attempt to find a way to tax these “low employee/high wage” business owners. Many property owners will ask whether the Board of Supervisors has considered the existing high real estate transfer tax charged by the City and County of San Francisco for real property sales, and that commercial property owners already pay real estate taxes.

What are Gross Receipts?

The calculation is simple. The entire sales price of all goods or services is used to calculate the tax. There are no deductions, with the exception of prompt payment discounts. All commercial rent, including payments made by tenants for utilities, repairs, services, and taxes, are part of the gross receipts. Notably, there is no exception for tenant improvements, which seem to fit within the definition of “services.” This could add another cost to new leases and improvements.

However, gross receipts do not include the cash received for the sale of real property. Left unstated is whether the tax would apply to the sale of an entire business, or a share of the business, rather than goods in the normal course of business.

Gross receipts are specifically stated to include commissions earned by real estate agents or brokers.

Who is Exempt?

There are some significant exemptions. These include revenue received from residential leases, and small businesses (defined as businesses that make less than $2,000,000 per year in gross receipts).

Other Issues

There are provisions in the ordinance for businesses that derive gross receipts inside and outside the City of San Francisco. Business owners should also be aware that the payroll tax will continue to burden business owners, in addition to the gross receipts tax. Some owners may recall that under the old ordinance, this was not the case.

Only time will tell if this tax will drive more business away from San Francisco, or just be passed through to customers and tenants as a cost of doing business. Many commercial lease forms contain provisions that could allow for such pass throughs. Another possible outcome are more lease disputes (possible litigation?) where leases may not have clear pass through provisions.


Today, the proposed legislation was on the agenda of the Board of Supervisors Budget and Finance Committee. The Committee continued the legislation, without debate or public comment, to next week’s meeting. Supervisor Avalos noted that there was plenty of time to debate these measures in the upcoming months. We will be tracking this legislation and continue to report relevant developments. For further information, please contact us.

Reuben & Junius, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.