Should San Francisco Taxpayers File Protective Claims for Recovery of the Homelessness Tax and the Commercial Rents Tax?

In 2018, San Francisco voters approved, by simple majority vote, two new gross receipts taxes: the Homelessness Gross Receipts Tax (SF-HT) and the Commercial Rents Tax (SF-CRT), with both taxes effective as of January 1, 2019.[1] Because these taxes fund specific governmental services, they are designated as special taxes (specifically, the SF-HT funds homelessness services and the SF-CRT funds early childhood education). Since the California Constitution specifies that special taxes imposed by local government need two-thirds voter approval (i.e., a “supermajority”), taxpayer groups have filed lawsuits to invalidate these special taxes, as both were approved by only a majority vote (61% for the SF-HT and 51% for the SF-CRT).[2] As discussed more fully below, the courts have ruled against these taxpayer groups and the California Supreme Court to date has refused review.

The pressing question is whether San Francisco taxpayers, who paid the SF-HT and/or the SF‑CRT for 2019 and 2020, should be filing claims to protect their rights to refunds in the unlikely (but not impossible) event that these taxes are ultimately rendered invalid.

Any such protective claims would likely need to be filed by the end of this month (February 2021). San Francisco requires that taxpayers file refund claims (or requests for refund – see our explanation of these different procedural options here) to recover previously paid taxes within one year of filing the subject return. Taxpayers subject to the SF-HT and SF-CRT in 2019 were generally required to file their returns by February 28, 2020 (absent filing extensions). As a result, these taxpayers generally would need to file any protective refund claims by the end of February 2021.[3]

Filing such a protective claim while a tax is being challenged is standard practice. However, here the difficulty is that the California Courts of Appeal have already issued decisions confirming the validity of both the SF-HT and the SF-CRT (as well as another special tax approved by majority vote in Fresno).[4] These Court of Appeal decisions universally find that a special tax placed on the ballot by voter initiative does not qualify as a “special tax imposed by local government” and therefore, is not subject to the two‑thirds majority vote threshold. Since each of these taxes were brought to voters by voter initiatives instead of by action of a local governmental body (e.g., a board of supervisors; mayor), these decisions all conclude that a majority vote was sufficient to pass these taxes. In so doing, these decisions build upon the California Supreme Court’s 2017 decision in California Cannabis Coalition v. City of Upland (2017) 3 Cal.5th 924, which held that the constitutional limits on “taxes imposed by local government” apply only to taxes brought to the voters by actions of a local governmental body and do not extend to taxes brought to voters by voter initiative.

The California Supreme Court rejected the petition for review of the First District Court of Appeal decision confirming the validity of the SF-HT, suggesting it will allow the Court of Appeal’s reasoning to stand.[5] While a petition for review is expected to be filed in the SF-CRT case and a petition for review in the Fresno case is currently pending before the California Supreme Court, it is likely the Supreme Court will deny these petitions as well.

Notwithstanding the appellate decisions upholding the SF-HT and the SF-CRT, there are still two reasons taxpayers may want to consider filing claims this month to protect their rights to refunds for 2019. First, while somewhat remote, there is still a possibility the California Supreme Court could grant review of the Court of Appeal decision upholding the SF-CRT, and thus, ultimately could invalidate the SF-CRT. Second, it is possible that the two-thirds voter approval requirement for special taxes of local government, which the courts have found inapplicable to voter initiatives, could be resurrected through corrective action by either the Legislature or through a separate voter initiative. Either of these possibilities could, in theory, retroactively invalidate these taxes, warranting taxpayer refunds.

Since some possibility remains that protective claims could be fruitful and recognizing that such claims are usually fairly easy to prepare, taxpayers should consider protecting their rights. If you need assistance considering this option, please reach out to a member of Pillsbury’s State and Local Tax team listed above.

[1] San Francisco Business and Tax Regulations Code, art. 21 (Commercial Rents Tax); art. 28 (Homelessness Tax).

[2] Cal. Const., art. XIII A, section 4 (two-thirds voting requirement for special taxes); Cal. Const., art. XIII C, section 2 (majority requirement for general taxes imposed by local government).

[3] San Francisco Business and Tax Regulations Code, art. 6, section 6.15.

[4] City & County of San Francisco v. All Persons Interested in the Matter of Proposition C (2020) 51 Cal.App.5th 703 (SF-HT); Howard Jarvis Taxpayers Association et al. v. City & County of San Francisco, 1st District Court of Appeal Case No. A157983 (SF-CRT); City of Fresno v. Fresno Building Healthy Communities, 5th District Court of Appeal Case Nos. F080264 & F080265 and CA Supreme Court Case No. S266846 (Fresno Measure P).

[5] City & County of San Francisco v. All Persons Interested in the Matter of Proposition C (2020) 51 Cal.App.5th 703 (petition for review denied 09/09/2020).