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Construction Tax Update

Post Date:03/11/2019 3:32 PM

What’s in your office?

The Silicon Valley workplace has changed significantly over the past two decades. You’re now more likely to see open collaboration spaces and fire pits than you are closed door offices or even cubicles. Also gone are many of the traditional labs that provided space for hardware and materials research and development (it is “Silicon” Valley after all). The changing nature of workspaces throughout San Jose and the rest of the Valley has been as dynamic and diverse as the companies that call this home, but this means that the regulatory environment by which the City considers types of uses can sometimes lag behind.ASSEMBLY rendering interior

The City’s pro-job growth vision has meant that all variations of these types of uses can be accommodated in most of our key employment areas, however, the definitions we use for certain taxes date back more than four decades.

Two years ago, OED led a study to better understand how we should apply different definitions to the companies we work with to ensure transparency, but without having to go through a major tax overhaul, and without diminishing the funds we have available to invest in our roads and infrastructure.

The two major construction taxes collected by the City (Building and Structures Tax, and Commercial Residential and Mobile Home Tax) are currently applied to the dollar value of the improvements you are getting a permit for, and are separated into three broad categories: Residential (3.96%), Commercial (4.5%), and Industrial (1%). The tax code (San Municipal Code Title 4) has its own definitions for each of these uses that were established when the difference between them was more clearly delineated. The definition for Commercial is very broad, while the one for Industrial is very narrow – and, depending which you fall into could mean a significant difference in the cost of your permits.

The biggest challenge in making today’s industries fit into yesterday’s definitions has been with tech users who, back when the code was written, mainly occupied traditional R&D labs with higher electricity requirements, more infrastructure, and clean rooms. As technology, and all the different industries that work to develop it in San Jose, has evolved, so too have the buildings that you find in our “industrial” areas.

As early as 2003, the City saw the challenges in categorizing these uses, and created new categories that spanned the gap. Because of the way our tax code works, the City has always included sunset provisions in these categories so we can go back and make changes.

The latest of these changes, which used a definition of “office, research and development” to identify high tech users as “industrial,” expired in March, 2017. City staff brought forward a plan to create a new category that treated all types of office the same, regardless of whether it is tech, finance or some other general business office, and tax them at a reduced 2% rate. Rather than implementing the change right away, the City Council gave a two-year extension to the previous program to allow projects that had already been planned to move forward.  On March 31, that current program will discontinue and the new 2% office rate will go into effect.

If you’d like to learn more, we’ve included links to the staff memo’s - 3/23/17 Staff Memo and 4/4/17 Supplemental Memo - or contact Emily Lipoma, OED Development Facilitation Officer, 408 535-7903.

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