California court affirms SF Prop C tax


On June 30, 2020, the California Court of Appeal for the First Appellate District affirmed a trial court judgment that the passage of the San Francisco Gross Receipts Tax for Homelessness Services in 2018 (Proposition C) is valid and enforceable. Proposition C was adopted by a simple majority of the San Francisco electorate, falling short of the two-thirds supermajority often required to implement tax increases in California.1






San Francisco voters passed Proposition C in November of 2018 with a 61.34% vote in favor of the proposition. Under Proposition C, for tax years beginning on or after Jan. 1, 2019, San Francisco imposes an additional tax on San Francisco gross receipts at a rate of 0.175%-0.69% (based on business activity type) on 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 taxable gross receipts.2 Shortly after passage, the city and county of San Francisco filed an action in San Francisco Superior Court seeking to validate that Proposition C was legally enacted through the ballot initiative process with only a simple majority voting in favor, rather than a two-thirds supermajority required for approval of certain California tax increases. In response, three defendants (collectively, the Associations) alleged that Proposition C was invalid because it imposes a special tax by less than two-thirds of the voting electorate.3

As background to California’s ballot initiative process, in 1911, the California Constitution was amended to give California voters the power to put new initiatives on the ballot before their fellow voters.4 This process allows acts, laws, and constitutional amendments submitted by either initiative or referendum petition to be approved by a majority vote of the electorate in any election. For many years, California voters have used this process to enact state and local legislative or constitutional changes, including Proposition C as a local San Francisco ballot initiative in 2018.

In 1978, California voters enacted Proposition 13, adding Article XIII A to the California Constitution, which, among other provisions, requires “that any special tax imposed by a local government entity be approved by two-thirds of the qualified electors.”5 In 1991, the California Supreme Court in Kennedy Wholesale v. State Board of Equalization rejected a taxpayer’s argument that Proposition 13 impliedly repealed the voters’ power to raise state taxes by voter initiative, and interpreted the measure’s two-thirds requirement as inapplicable to state-wide voter initiatives.6

Almost two decades after the passage of Proposition 13, California voters approved Proposition 218 in 1996, adding Articles XIII C and D to the California Constitution. Article XIII C defined local taxes as either “general” or “special,” and required that “[l]ocal governments may not impose, increase, or extend: (1) any general tax, unless approved by a majority vote at a general election; or (2) any special tax, unless approved by a two-thirds vote.”7 In California Cannabis Coalition v. City of Upland, the California Supreme Court interpreted Proposition 218 to apply only to general tax measures put on the ballot by a local government body, and not to tax measures that qualified via signature gathering.8 The Court concluded that the term “local government” does not refer to voter initiatives.

In light of Proposition 13 and Proposition 218, the question posed to the trial court was whether the people of a city or county may exercise the initiative power to adopt a special tax with only a simple majority of the voters ratifying the proposition, as opposed to a two-thirds vote. The trial court held that Proposition C was valid and enforceable as an initiative approved by a simple majority vote, and the Associations appealed the decision to the Court of Appeal.




Court of Appeal decision


The Associations challenged the validity of Proposition C on three grounds. First, they argued that the two-thirds vote requirement under Article XIII A, section 4 of the California Constitution applies to voter-circulated initiatives, and that this requirement was not satisfied with regard to Proposition C. Second, under Article XIII C, section 2(d) of the California Constitution, the Associations alleged that the supermajority vote requirement applies to a special tax proposed by voter initiative, referring to the provision that “[n]o local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-thirds vote.” Third, the Associations argued that under San Francisco’s Charter, the voters’ initiative power is recognized only within the powers of the San Francisco Board of Supervisors to enact, requiring a two-thirds vote to impose a special tax.9 In other words, the Associations contended that since the Board did not have the authority to enact a special tax without concurrence of a two-thirds electorate, the voters also lacked that power.

Disagreeing with the Associations on each of their arguments, the Court of Appeal affirmed the trial court’s decision that Proposition C is valid and enforceable with a simple majority vote of the city’s electorate. Notably, the opinion characterized the language of Article XIII A, section 4 of the California Constitution as ambiguous in various respects due to its silence on the voting requirements for ballot initiatives. On this issue, the Court interpreted the requirement that “cities, counties and special districts” impose special taxes by a two-thirds vote as not extending to the people of such districts exercising the initiative power. Thereby, the Court rejected the Associations’ argument that the reference to “cities” or “counties” must also include the electorate in these jurisdictions. Rather, the Court concluded that Proposition 13 did not repeal or abridge the people’s power to raise taxes by initiative and with only a simple majority vote.

The Court of Appeal similarly rejected the Associations’ argument that Proposition 218 reaffirmed the two-thirds supermajority requirement for a special tax. The Court determined that the language added to the California Constitution in Article XIII C, section 2(d) imposes a two-thirds requirement on local government, but not the voting electorate. Under controlling precedent from both California Cannabis and Kennedy Wholesale, the Court concluded that the term “local government” was not defined broadly enough to include the voting electorate.

Finally, the Court of Appeal rejected the Associations’ argument that the San Francisco city charter prevented the passage of Proposition C. Finding that the charter limits only the substance of voter initiative power, the Court found that the power of voters to make law is coexistent with the California legislature, but does not extend to legislative procedures such as voting requirements. For these reasons, the Court affirmed the trial court’s ruling that supermajority requirements are generally procedural limitations on legislative bodies that do not generally apply to the initiative power, absent evidence of a clear indication of intent to impose such a restriction.






Because this decision may be appealed to the California Supreme Court, it is unclear whether the Court of Appeal’s decision will be the final disposition of the case. Generally, Court of Appeal decisions become final 30 days from the date they are filed unless a petition for rehearing is requested and granted within that time frame. Absent a granted petition for rehearing, the parties would have ten days to petition the California Supreme Court for review, which has discretionary authority to hear the case. While San Francisco has collected hundreds of millions of dollars in Proposition C tax revenue to date, the city is prohibited from spending such revenue pending the outcome of the litigation.10 However, San Francisco’s mayor and the San Francisco Board of Supervisors reached an agreement on July 21, 2020, that would provide a mechanism to unlock the collected revenues in the event Proposition C is ultimately invalidated. Subject to a final vote by the Board, the proposal would add to the November ballot a measure that would replace the current Proposition C with a similar “backstop” tax with a 20-year duration if San Francisco loses the current litigation. The proposal would also complete the phase-out of the city’s payroll expense tax by 2021 and replace this tax with a revenue-neutral gross receipts tax. To offset the revenue loss from the phase-out of the payroll tax, the agreement proposes a uniform 40% increase to the progressive gross receipts tax rates beginning in 2021.11 However, certain industries adversely affected by the COVID-19 pandemic would receive a 50% reduction in their gross receipts tax liability from January 2021 through January 2023 for the first $25 million in gross receipts, followed by a 25% reduction in liability through January 2024.

As it currently stands, the Court of Appeal’s decision may have broad implications for future local California initiatives seeking to raise taxes, and could potentially embolden the use of the initiative process to increase local tax revenues, which have substantially diminished during the COVID-19 pandemic. Critics of California’s initiative process may point to narrow election margins and low voter turnout as reasons why requiring only a simple majority for approving tax increases effectuated through the initiative process may not truly represent the will of the electorate. In San Francisco’s November 2018 election, as noted by the Court, Proposition C received approximately 61.34% support of the 351,326 voters that weighed in on the issue, translating to a final count of just 215,491 affirmative votes. In a city of approximately 890,000 people, this means that only 24% of San Francisco’s population voted in favor of Proposition C.

The Proposition C case is one among several cases currently proceeding through the California court system weighing in on the validity of special local taxes proposed through ballot initiatives and passed by a simple majority vote. Interestingly, two trial courts reached the opposite conclusion that the Court of Appeal arrived at regarding Proposition C by holding that special local taxes placed on the ballot via signature gathering require a two-thirds voter approval.12 Should one of these cases be affirmed at the appellate level, the California Supreme Court may be more likely to accept an appeal in order to resolve a potential split of authority regarding the intent of Propositions 13 and 218. Further developments related to the validity of Proposition C should be monitored closely by companies with a taxable presence in San Francisco.


1 City & County of San Francisco v. All Persons Interested in the Matter of Proposition C, No. A158645, California Court of Appeal, First Appellate District, Division Four, June 30, 2020.
2 For additional information on the specifics of Proposition C, see GT SALT Alert: San Francisco Voters Approve Amendments to Gross Receipts Tax, Feb. 1, 2019.
3 The three defendants in this matter were the California Business Properties Association, The Howard Jarvis Taxpayers Association and the California Business Roundtable.
4 CAL. CONST. former art. IV, § 1.
5 CAL. CONST. art. XIII A, § 4.
6 Kennedy Wholesale v. Cal. State Board of Equalization, 53 Cal.3d 245 (1991).
7 CAL. CONST. art. XIII C, § 2(b), (d).
8 California Cannabis Coalition v. City of Upland, 3 Cal. 5th 924 (2017).
9 San Francisco Charter, art. XVII, § 14.100.
10 Joe Eskenazi, Court of Appeal sides with San Francisco on Prop. C, MISSION LOCAL, June 30, 2020.
11 Business Tax Changes: Economic Impact Report, San Francisco Office of the Controller, July 21, 2020.
12 See Jobs & Housing Coalition v. City of Oakland, No. RG19005204, Superior Court of California, Alameda County, Oct. 15, 2019; City of Fresno v. Fresno Building Healthy Communities, No. 19CECG00422, Superior Court of California, Fresno County, Sep. 5, 2019.





Dana Lance

Dana Lance is the Tax Practice Leader for the Greater Bay Area and the SALT Practice Leader for the West Region. Dana is based in San Jose, California.

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