The Taxman Cometh – Gross Receipts Tax Likely on November Ballot

Board of Supervisors President David Chiu wants to put a commercial rent tax for voter approval on the November ballot. The proposition also would revise the payroll expense tax to establish a progressive rate structure and reduce selected payroll expense tax rates. Proponents of the proposed commercial rent tax claim that this tax will create substantial revenue for San Francisco, approximately $24,500,000 in the first year, and that any additional costs to commercial landlords could be passed through to their tenants. Proponents also look to recover taxes from banks and insurance companies since they are exempt from the payroll tax. Those opposed to the commercial rent tax argue that it imposes an additional economic burden on businesses and hinders job growth. San Francisco Mayor, Gavin Newsom, who is against the proposed tax, maintains that its passage would stunt the nascent economic recovery. The proposed tax will be heard at a Rules Committee hearing at the Board of Supervisors on July 15, 2010.

The legislation would tax all “gross receipts” received by commercial landlords. “Gross receipts” would be defined as (1) cash, credit, property or other consideration from the rental of commercial property and (2) all payments made to a person subject to the tax, and/or paid to third parties on behalf of a person subject to the tax as part of a rental agreement, including insurance proceeds, mortgage payments, taxes, expenses and cash value of services to or on behalf of the landlord in lieu of rental payments. (The ordinance does not explain how a landlord would “receive” mortgage payments.) The schedule of percentage tax imposed on the total “gross receipts” would be as follows:

2011: 0.632%

2012: 1.263%

2013 and subsequent years: 1.895%

For example, if a landlord received $1,000,000 in gross receipts for the 2013 tax year, the tax due for that year would be $18,950. Residential and small commercial landlords whose gross receipts do not exceed $200,000 per tax year would be exempt from the tax.

The timing of the tax payments would depend on the amount owed by the taxpayer. For any amounts between $2,500 and $50,000, the tax would be paid in two installments, one in August and one in February. If the amount of tax is in excess of $50,000 then the tax would be paid in four installments.

Proponents of the tax have argued that it will have a limited impact on commercial owners since the owners can simply pass the additional costs through to its tenants. However, this ignores the fact that many existing leases, especially those negotiated in a more “tenant friendly” environment, do not include landlord favorable provisions that allow the landlord to pass through new taxes or fees. Many leases do not address this issue at all, which could lead to disputes and possible litigation, further depressing productivity. Even if the taxes are passed through, commercial tenants, including many small businesses, would then bear the burden of this new expense. Either way, the cost of doing business will increase – again. In a recent editorial, Supervisor Chiu pointed out that many other California cities have imposed a commercial rent tax. While this may be true, it does not take into consideration all of the other regulatory costs of doing business in San Francisco. Owners are justifiably concerned that yet another expense will hinder the anticipated recovery of the San Francisco real estate market.

The San Francisco Controller – Office of Economic Analysis estimated in its June 28, 2010 report that the commercial rent tax will cause approximately 600 – 700 job losses per year, but that this would be offset by the changes to the payroll tax that are part of the proposed ballot measure. However, the complete offset is not expected to occur for 15 years. The Controller anticipates that higher government spending will save about 200 jobs per year in the public and private sectors.

We will keep you updated once the Board of Supervisors makes their decision. We expect the ordinance to reach the ballot.  Please contact Kevin Rose or Lindsay Petrone if you would like a copy of the proposed ordinance or if you have any questions.

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