Background
In 2012, San Francisco voters passed Prop E, which amended the City's business tax system to include a GRT.1 Pursuant to Prop E, the City gradually phased in the new GRT over a five-year period, beginning in the 2014 tax year.2 The City's GRT is "a privilege tax imposed upon persons engaging in business within the City" and "measured by the person's gross receipts from all taxable business activities3 attributable to the City."4
In 2018, the City placed Prop C on the ballot and on November 6, 2018 San Francisco voters passed it by a simple majority vote of 61.34 percent.5 Prop C imposes the Tax on all businesses located in San Francisco that receive more than $50 million in total San Francisco taxable gross receipts, effectively doubling the GRT rates for those businesses.6 Unlike Prop E, Prop C is a special tax, not a general tax, because the funds are to be placed in the "Our City, Our Home Fund", rather than the general fund.
Quickly after the passage of Prop C, a dispute arose regarding whether special voter initiatives, like Prop C, must be passed by supermajority vote to be valid.7 The uncertainty regarding the voting requirements stems from a 2017 California Supreme Court decision, California Cannabis Coalition v. City of Upland.8 While the San Francisco Superior Court recently upheld the validity of Prop C, holding that special tax voter initiatives do not need a supermajority to pass, that decision is currently being reviewed by the California Court of Appeal, First Appellate District.9
Next Steps
While the City is requiring taxpayers to pay the Tax during the pendency of the litigation, the City enacted an ordinance that provides that the Prop C revenue will not be spent unless a taxpayer irrevocably waives its right to a refund (based on any of the simple majority validity arguments).10 To induce taxpayers to waive their right to a refund of the Tax, the City is offering a 10 percent credit (the "Refund Credit") against a taxpayer's Tax liability if they sign a closing agreement waiving the right to a refund in the event the City loses the Prop C litigation.11
Taxpayers subject to the Tax, therefore, have two choices: (1) apply for the Refund Credit for the 2019 tax year by entering into a closing agreement with the City, or (2) file a claim for refund for the 2019 tax year.
Applying for the Refund Credit
To take advantage of the Refund Credit for the 2019 tax year, taxpayers must enter into a closing agreement with the City between January 1, 2020 and February 28, 2020.12 The Refund Credit offer will remain outstanding until the earlier of the finality of the Prop C litigation or the 2024 tax year.13 The City provides a draft Refund Credit form on its website, but taxpayers should carefully review the draft form to make sure they agree with all of the provisions before signing.14
Filing a Refund Claim
If a taxpayer decides not to apply for the Refund Credit, then it should file a claim for refund to preserve its statutory refund rights for the full amount of the Tax if Prop C is ultimately invalidated by the courts. A taxpayer must file a claim for refund within one year of the filing of its return.15
The decision to apply for the Refund Credit or file a refund claim should be carefully evaluated by every taxpayer based on its individual facts and circumstances. If you have any questions about either of these options, or about the San Francisco GRT in general, please do not hesitate to reach out us.
- San Francisco Business and Tax Regulations Code (the "SF Code"), art. 12-A-1 § 950.
- Id.
- "[T]axable business activities" and the resulting liability are outlined in sections 953.1 through 953.8. Although the tax on administrative office business activities imposed under section 953.8 is "measured by its total payroll expense that is attributable to the City", it "is intended as a complementary tax to the gross receipts tax" and is considered a GRT. SF Code, art. 12-A-1 § 953.
- SF Code, art. 12-A-1 § 953.
- See sfgov.org.
- SF Code, art. 28, § 2804.
- This issue is also being litigated in two other San Francisco Superior Court cases, as well as two Fresno Superior Court and Alameda Superior Court cases. The San Francisco Superior Court cases are (1) Howard Jarvis Taxpayers Assn, et. al v. City and County of San Francisco, No. CGC-18-568657 (Court held that the Prop C was valid even though it only received a simple majority vote, currently being appealed) and (2) City and County of San Francisco v. All Interested Parties in Prop G on the June 5, 2018 San Francisco Ballot, No. CGC-18-569987 (still pending). The Fresno Superior Court cases are (1) City of Fresno v. Fresno Building Healthy Communities, No. 19CECG00422 (Court held that voter initiatives that impose a special tax must receive a vote to pass, currently being appealed) and (2) Fresno Building Healthy Communities v. City of Fresno, No. 19CECG00432 (the judgment for No. 19CECG00422 also applied to this case, because both cases involved the same parties and issues, currently being appealed). The Alameda case is Jobs & Housing Coalition v. City of Oakland, No. RG19005204 (Court held that Measure AA was unenforceable because it did not receive the necessary two-thirds vote, currently being appealed).
- In California Cannabis Coalition v. City of Upland the California Supreme Court discussed the interplay between two California constitutional provisions: (1) the "people's initiative power", and (2) the limitations on local governments to "impose, extend, or increase any general tax." The California Supreme Court determined that article XIII C Section 2(b), which requires general tax increases imposed by local governments to be submitted for vote in a general election, did not apply to voter initiatives. California Cannabis Coalition v. City of Upland, 3 Cal. 5th 924 (2017).
- For a more detailed analysis of the San Francisco Superior Court's decision please refer to law360.com.
- Ordinance No. 73-19, City and County of San Francisco (effective May 27, 2019).
- SF Code, art. 28, § 2805.1.
- Id.
- Id.
- Provisions, such as the waiver of confidentiality language, should be carefully reviewed by taxpayers.
- SF Code, art. 6, § 6.15-1.
Client Alert 2020-005
