Portland and San Francisco slap special taxes on big businesses
- Sales and Use Tax
- November 26, 2018 | Gail Cole
Voters in San Francisco, California, and Portland, Oregon, have approved new taxes on large sellers, effective January 1, 2019. Could this be a harbinger of trends to come?
San Francisco’s gross receipts tax on large businesses
Slightly more than 60 percent of voters in San Francisco approved Proposition C, the Homelessness Gross Receipts Tax Ordinance, on November 6, 2018. Starting January 1, 2019, the new gross receipts tax applies to certain businesses operating in San Francisco.
Affected businesses. The gross receipts tax is for the privilege of engaging in business in San Francisco. It applies to each person engaged in business in the city that receives, or is a member of a combined group that receives, more than $50 million in total taxable gross receipts annually. Organizations exempt from income tax under state or federal law are exempt from the Homelessness Gross Receipts Tax.
Due to the approval of Proposition D on November 6, 2018, the gross receipts tax may also apply to businesses based outside of San Francisco. Although called the San Francisco Marijuana Business Tax Increase, the measure doesn’t just affect marijuana businesses: It also taxes sales by businesses with no physical presence in San Francisco that have more than $500,000 in annual gross receipts from sales in the city.
States won the right to tax businesses based on their economic activity (economic nexus) rather than physical presence in South Dakota v. Wayfair, Inc., the June 21, 2018 decision by the Supreme Court of the United States. Close to 30 states have adopted economic nexus provisions since Wayfair, but San Francisco is the first city to do so. Learn more about economic nexus.
The Homelessness Gross Receipts Tax imposes different rates on different business activities. For example, retail and wholesale sales of goods and certain services are taxed at 0.175 percent, while accommodations, arts/entertainment/recreation, and utilities are taxed at 0.425 percent. The tax doesn’t apply to receipts excluded from the gross receipts tax imposed by Article 12-A-1, or to gross receipts on commercial rents (as approved by voters of San Francisco on June 5, 2018).
The rate is 0 percent for the first $50 million of the total taxable gross receipts from all taxable business activities. The rate for individuals or combined groups engaged in more than one of the above activities will be determined on an aggregate basis.
Pros and cons. Proponents of the Homelessness Gross Receipts Tax point out that “the tax will affect only the largest and wealthiest” businesses in San Francisco, those that “received very large federal tax cuts this year.” Opponents argue it could push businesses out of the city, leading to job losses.
Show me the money. Proposition C is expected to generate between $250 million to $300 million annually, revenue that will fund homelessness relief projects and mental health and substance abuse services. Within five years, it’s expected to house at least 4,000 homeless people and add 1,000 shelter beds.
Effective date and penalties. The gross receipts tax takes effect January 1, 2019. Failure to comply with the Homelessness Gross Receipts Tax Ordinance will lead to penalties and other charges imposed by Article 6 of San Francisco’s Business and Tax Regulations Code.
Portland’s surcharge on large retailers
Roughly 65 percent of voters in Portland said yes to Measure 26-201 — the Portland Clean Energy Community Benefits Initiative — on November 6, 2018. It requires certain large retailers to pay a 1 percent surcharge on gross revenue from their Portland retail sales. According to the Tax Foundation, “while the initiative is described as a gross receipts tax, it is really in many ways a well-designed sales tax.”
Affected retailers. The measure applies to retailers with:
- A Portland Business License Tax
- More than $500,000 in annual revenue from Portland retail sales
- More than $1 billion in total annual revenue starting January 1.
Within six months of passage of the measure, the Revenue Division of the City of Portland will notify businesses it knows meet the definition of a “large retailer.” Qualifying businesses that aren’t notified by the Revenue Division aren’t off the hook.
The surcharge doesn’t apply to businesses with no retail sales in Portland, cooperatives recognized under federal or state law, federal or state credit unions, or utility operators in Portland.
Affected retail sales. In addition to tangible personal property, the 1 percent surcharge applies to retail sales of services in the city of Portland, “including but not limited to retail banking services.”
Allowable deductions. Qualifying large retailers may take a deduction for all the following:
- The cost of the Portland Business License Tax
- Retail sales of qualifying groceries
- Retail sales of qualified medicines or drugs
- Retail sales of qualified health care services
The measure doesn’t specify whether foreign sales would be included in the thresholds.
Pros and cons. Proponents of the surcharge say large retailers “have the financial resources — and obligation — to support the goal of decreasing carbon emissions while maximizing community benefits.” Opponents argue the surcharge will be passed on to the very people it’s supposed to help, making Portland yet more unaffordable.
Show me the money. The large retailer surcharge is expected to generate $30 million. Approximately 50 to 75 percent of revenue generated from the surcharge will fund clean energy projects such as green building design, renewable energy, and green infrastructure projects. Twenty to 25 percent will fund workforce training for “traditionally underemployed, economically disadvantaged workers.” Finally, approximately 5 percent of the revenue will fund “future innovation.”
Effective date and penalties. Qualifying large retailers must collect the tax on all applicable sales starting January 1, 2019. However, no penalties or interest charges will be applied for failure to make quarterly estimated payments for the Large Retailer Surcharge for the 2019 tax year. Penalties and interest charges will apply starting January 1, 2020.
Learn more about upcoming tax changes at the Avalara blog.