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San Francisco’s New Early Care and Education Commercial Rents Tax Ordinance

03.01.19

In addition to Gross Receipts and Payroll Expense taxes, San Francisco businesses leasing warehouse or commercial space are now subject to a new gross receipts tax to fund Early Care and Education (“ECE”) programs in the city. When 50.87% of voters passed Proposition C last summer, they approved the tax to directly fund quality early care and education operations in San Francisco. 

If you think you are subject to the tax and need our assistance interpreting and implementing the nuances of the new ordinance for your business, we’re here to help. Below is a high-level, general terms summary of the ECE gross receipts tax to get you started. In addition, and possibly more important, the tax is currently being challenged in court with some attorneys believing it has a chance of being overturned. We can help affected businesses understand their options in light of the courts potentially overturning the ordinance.

Summary:  SF’s Early Care and Education (“ECE”) Commercial Rents Tax 

When did the new tax go into effect?

  • The tax became operative on January 1, 2019. 
  • Voters passed Prop C, a citizens’ initiative, on June 5, 2018. 

What activities are subject to this Gross Receipts tax?  

  • Gross receipts from the lease of warehouse space in San Francisco.  
  • Gross receipts from the lease of all other commercial space in San Francisco. 
  • Exemptions to the ECE tax do exist. See below. 

What is the rate of tax? 

  • Warehouse lease gross receipts are taxed at a 1% tax rate.  
  • Commercial lease gross receipts are taxed at a 3.5% tax rate. 

What are the commercial leasing exemptions? 

  • Any space used for industrial use, arts activities, retail operations or services that are not formula retail are exempt from the 3.5% tax rate.   
  • Formula retail is defined as retail sales/service activity that have 11 or more establishments in operation. 
  • Space that stores contractor’s equipment, building equipment, building material, or goods or materials used by other business at other locations, volatile materials storage and wholesale storage are all not considered “commercial space” under the ECE tax ordinance.   

Additional Exempt Businesses and Exempt Lease Receipts (not inclusive) 

  • Small businesses with gross receipts within the City from the preceding tax year that did not exceed $1,120,000. 
  • Specified organizations or businesses exempted from income taxation under certain sections of the CA Revenue and Taxation Code or the IRS Code of 1986. 
  • Any receipts from a lease for a commercial space to: (1) a nonprofit described above, (2) federal, state, or local governments or (3) any business activity from which San Francisco is prohibited from taxing its gross receipts.  

Returns Must Be Filed on a Combined Basis 

  • Combined returns must be filed at the same time as returns filed for the regular gross receipts tax. 
  • Combined returns must be filed in the same manner as returns filed for the regular gross receipts tax.  

Deadline for Remittance and Filing 

  • Estimated payments during the year for the ECE gross receipts tax must be paid at the same time as the existing gross receipts tax estimates.  
  • A timely annual Early Care and Education Commercial Rents Tax return must be filed regardless of the amount of liability, if any, shown on the return after claiming the credit for child care facilities, described as follows. 

Credit for Child Care Facilities  

  • Any business subject to the ECE tax that leases or provides commercial space within the City to a qualifying child care facility is entitled to a credit against its ECE tax 
  • The qualifying child care facility must operate for more than six months in a tax year to allow the lessor a credit against their ECE tax for that tax year. The credit is based on the following information and expires December 31, 2023: 
    • Number of Infants, Toddlers and Preschool aged children | Amount of Credit
      • 1 to 49 | $7,200
      • 50 to 99 | $16,000
      • 100 or more | $36,000

If you have any questions, please contact a member of our SALT Team by emailing BPMSALT@bpmcpa.com.