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California Sales and Use Taxes May or May Not Apply to Special District Assessment and Fees

Tax Development Apr 11, 2023

California Sales and Use Taxes May or May Not Apply to Special District Assessment and Fees

California sales and use taxes are imposed on the retail sale or the use of tangible personal property in California. But do sales and use taxes apply to fees and assessments levied under the Property and Business Improvement District (PBID) Law of 1994, which allows for the creation of special districts like Tourism Business Improvement Districts (TBIDs)?

According to a California Department of Tax and Fee Administration (CDTFA) written opinion dated October 6, 2022, regarding the application of sales and use tax to assessments levied under the PBID Law of 1994, TBID “assessments from lodging such as motel, hotel, apartment, house, duplex, and other charges for short-term or long-term use of real property are not subject to sales or use taxes since such charges do not constitute consideration for the sale or use of tangible personal property. In other words, since the [TBID] assessment is related to the sale or rental of real property that is not subject to sales or use tax, the assessment will also not be subject to sales and use taxes. However, if the assessment is charged in connection with taxable sales of tangible personal property, tax applies to gross receipts from such sales which would include the assessment. In other words, if the [TBID] assessment is levied against businesses that sell tangible personal property and those businesses pass on the assessment to their customers as part of the sale of tangible personal property that is subject to tax, then the assessment will also be subject to tax.”

CDTFA opined that fees or assessments imposed under a TBID related to the retail sale of tangible personal property are subject to sales tax. In its opinion, CDTFA stated that this is consistent with its guidance found in its Tax Guide for Restaurant Owners [], which states that separate surcharges added to a customer’s bill to defray the increased costs of doing business are subject to sales tax.

The CDTFA opinion came on the heels of discovering that some CDTFA auditors were not following this guidance. Therefore, some TBIDs are announcing this policy as new, even stating that sales tax on TBID assessments has “never been required before.”

Background: Special assessment districts—or benefit assessment or improvement districts—have a long history in California. To enhance the desirability, vibrancy, and safety of its cities by improving local public services and reviving downtown commercial areas without raising general taxes, the California PBID Law of 1994 was enacted, and it was amended in 2014 to conform to the requirements of Proposition 218, approved by California voters in 1996.

PBIDs are one model for how local governments use assessment financing to pay for projects to attract and retain businesses. The PBID Law allows property owners to petition a city or county to set up a special district and levy property-based or business-based assessments on property or business owners to pay for promotional activities and physical improvements. PBIDs benefit real property within their districts.

The nearly 100 PBIDs in California’s downtowns offer services that include things like cleaning public rights of way, sidewalk and gutter maintenance, trash removal, security services, and economic development. Business-Based Improvement Districts (BBIDs), another type of special assessment district, benefit businesses within their districts. The services often include things like benches, trash receptacles, decorations, and parks; or activities that benefit the assessed businesses, such as sponsoring public events, providing music in public spaces, or other promotional activities.

Finally, TBIDs, the subject of the CDTFA’s 2022 opinion, benefit hospitality and tourism businesses within their districts. There are more than 70 TBIDs in California, and they are used to raise awareness of the destination, sponsor special events that attract overnight visitors, and create sales programs that bring large groups into hotels and resorts. An example is the San Francisco Tourism Improvement District, which assesses all tourist hotels operating in the city and county of San Francisco. Its services include creating hotel-specific marketing and promotions programs, generating large-group business events, and upgrading and expanding the Moscone Convention Center.

Ryan is developing a comprehensive technological reporting solution for the hospitality industry that will include various taxes and fees, such as the TBID assessments, hotel occupancy taxes, food and beverage taxes, and the like. Ryan’s industry knowledge and technology investments make our solution unmatched with anything currently being provided to clients with these reporting obligations. If you are subject to special district taxes or fees, contact one of the knowledgeable California experts listed below today.

Gina Rodriquez

John Lyon

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at