California Local Tax Updates

by Alex Thacher
October 06, 2020
With the November election a month away, here’s a look at proposed changes in local taxes that are on the ballot, as well as updates on a tax amnesty program in Los Angeles and a clarified business tax due date in San Francisco.

Los Angeles City Business Tax – Amnesty Program

In response to the economic downturn due to COVID-19, the Office of Finance will be offering a Tax Penalty Amnesty Program from October 1 to December 17, 2020, to provide financial relief to distressed businesses negatively impacted by the pandemic. The amnesty program will provide both registered and unregistered businesses an opportunity to pay any outstanding principal, interest and fees owed to the city and avoid penalties for up to 40% of taxes due with essentially no questions asked!

Eligible taxes include: business taxes, communication users taxes, transient occupancy taxes, electricity users taxes, gas users taxes, and commercial tenant’s taxes.

San Francisco Estimated Business Taxes Are Due November 2

Reminder! San Francisco’s third-quarter estimated business tax payments are normally due October 31, 2020, but since that is a Saturday, the deadline rolls forward to the next business day, which is November 2 this year.

The city previously communicated to various taxpayers that the Q3 payment was due September 30, which was incorrect. The city has since issued a revised communication indicating the September 30 deadline was a typo.

Can a Voter-Initiated Local Special Tax Pass With Only a Simple Majority? SF Says Yes!

As local jurisdictions look for ways to increase revenues, the California Supreme Court is currently leaving the door open for these jurisdictions to impose special taxes with only a simple majority for voter-initiated taxes. A “voter-initiated tax” is a proposed change in law that is submitted by voters for inclusion on an election ballot. The question CA district courts are now asking is, “Do voter-initiated local special taxes need a super majority to pass or do they only require a simple majority?”

First Some History…

In 1996, voters passed Proposition 218, which put increased restrictions on local governments' ability to impose taxes. Specifically, Article XIIIC, § 2(b) required local governments to obtain majority voter approval at a general election before imposing, extending, or increasing any general tax. Additionally, Article XIIIC § 2(d) stipulated that no local government may impose, extend, or increase a special tax without a two-thirds vote of the electorate (i.e., a super majority).

In 2017, the CA Supreme Court in California Cannabis Coalition v. City of Upland held that Article XIIIC, § 2(b) was not applicable to taxes proposed by voter initiatives. This decision left the door open to suggest that the procedural super-majority voter approval required pursuant to Article XIIIC § 2(d) would also not apply to special taxes proposed by voter initiative. However, the court never addressed explicitly Article XIIIC § 2(d) and whether or not the super-majority requirement had in fact been lowered for voter-initiated taxes to a simple majority.

What Is Happening Today

Many cities and counties across California have already passed special local taxes by a simple majority. However, the court decisions regarding these taxes have varied between cities and districts within California’s court system.

  • San Francisco
    • Most notable was San Francisco’s simple majority passing of the San Francisco Commercial Rents Tax (SFCRT) with a 50.87% approval vote and the San Francisco Homelessness Gross Receipts Tax (SFHGR) with a 61.34% approval vote.
    • Given that the SFHGR only passed with simple majority, the city and county of SF anticipated that the legality of the tax would be questioned and brought action in the trial courts. The trial court agreed in 2019 that a super majority was not required for the SFHGR to be valid. On June 30, 2020, the CA First District Court of Appeal affirmed the trial court’s decision. Then on September 9, 2020, the CA Supreme Court denied review of the opinion by the First District Court of Appeal, leaving the First District Court of Appeal’s decision to be finalized.
    • The legality of the SFCRT was also simultaneously challenged by a coalition of interested taxpayers, and in June 2019 the trial courts upheld the tax consistent with SFHGR. The case is currently on appeal to the First District Court of Appeal.
  • Fresno
    • In November 2018, the taxpayer initiative Measure P passed with a simple majority of 52.17%, which increased sales tax for 30 years. The city of Fresno concluded that in order for Measure P to pass, a super majority was required, as it was a “special tax” pursuant to Article XIIIC § 2(d) and therefore did not pass with only 52.17% of affirmative votes. The case was brought to the trial courts by Fresno Building Healthy Communities, which argued that as Measure P was a voter initiative, a super-majority vote was not required. The trial courts affirmed the city position and stated that it would be “erroneous to conclude that the two-thirds requirement in Article XIIIC § 2(d) applies only to a ‘local government.’” The case is currently on appeal with the Fifth District Court of Appeal.

What Does It All Mean?

Whether a voter initiative requires a simple or super majority is still unknown and leaves both taxpayers and local governments looking for guidance. It appears that in the First District, a super majority is not required, while at least for now in Fresno, a super majority is required. If the Fifth District Court of Appeal ultimately sides with the trial court, then the CA Supreme Court will most like have to eventually weigh in and clarify whether a super or simple majority is required.

San Francisco’s November 2020 Ballot Overhauls the City’s Local Taxes

Back in June, Mayor London Breed and the SF Board of Supervisors began discussing how best to raise new tax revenue from the business community due to the substantial lost revenue from COVID-19 and the burden of the city’s increasing homeless population. At the time there were many proposals for how best to do this, with most centering around restructuring the city’s business taxes, but it was unknown what would make it to the November ballot.

Fast forward to today, and two items that made it to the ballot are Proposition F, which overhauls the city’s business taxes and Proposition L, which adds the “CEO Tax,” as expected. The only item that didn’t make the November ballot is the proposed version 2.0 of the “IPO Tax,” but it is not the first time it hasn’t made it, so this may not be the last time we see it proposed.

Proposition F – SF Business Tax Overhaul

If passed, Proposition F would:

  1. Reduce the annual Business Registration Fee for businesses with ≤ $1,000,000 in SF gross receipts
  2. Increase the small business exemption ceiling for the Gross Receipts Tax to $2,000,000
  3. Increase the annual Business Registration Fee for businesses with between $1,000,000 and $2,000,000 in SF gross receipts (i.e. businesses that benefit directly from the small business exemption ceiling increase)
  4. Modify the various Gross Receipts Tax rates
  5. Repeal the Payroll Expense Tax
  6. Increase the Gross Receipts Tax on certain taxpayers for 20 years if final judicial decision invalidates the Homelessness Gross Receipts Tax Ordinance (i.e., see super vs. simple majority ruling above)
  7. Impose a new general tax on the gross receipts from the lease of commercial space for 20 years if final judicial decision invalidates the Commercial Rents Tax Ordinance (i.e., see super vs. simple majority ruling above)
  8. Other changes to the city’s business taxes (i.e., mostly the setup of the various funds to be created to direct the additional revenues created, requiring the SF Controller to publish and certify taxable gross receipts amounts as reported by taxpayers, etc.)

Proposition L – Tax on Businesses With Disproportionate Executive Pay

If passed, Proposition L would impose an additional tiered gross receipts tax or an administrative office tax on businesses with a greater than 100:1 ratio of the compensation of the business’s highest-paid managerial employee to the median compensation paid to the business’s employees based in the city, beginning with tax years on or after January 1, 2022. The gross receipts tax rates would range from 0.1% to 0.6%, with the administrative office tax rates ranging from 0.4% to 2.4%.

“Highest-paid managerial employee” is defined as the “individual employee or officer of a person or combined group with managerial responsibility in a business function who received the most compensation for a tax year. This may not be the CEO!

We’ll keep you posted. In the meantime, if you have any questions, contact our experts.

Stay In Touch

Sign up to stay up-to-date with the latest accounting regulations, best practices, industry news and technology insights to run your business.

Alex Thacher - Partner, Tax - San Jose, CA | Armanino
Related News & Insights
Sage Transform VIP Experience
Live Event
VIP luncheon for top finance executives attending Sage Intacct 2022.

October 12, 2022 | 09:30 AM - 10:45 AM PT
Women in Life Sciences: Women’s Health & Wellness
Spill the Tea With Delphine O’Rourke on the State of Women’s Health

October 11, 2022 | 02:00 PM - 03:30 PM PT
ASC 842: Lessons Learned From Early Adopters
Get the scoop from early adopters who have implemented ASC 842.

October 6, 2022 | 09:00 AM - 10:00 AM PT