Commercial Rent Tax for Childcare

Proposition C—the Commercial Rent Tax for Childcare and Early Education—is set to take effect January 1, 2019, and increase the Gross Receipts Tax (“GRT”) on Commercial Rents.

The imposition of the Commercial Rent Tax is expected to be a significant increase to the local tax burden on commercial property owners in San Francisco. To that end, taxpayers’ advocacy groups have filed suit against the City and County of San Francisco seeking to invalidate the tax and claiming that Proposition C was passed in violation of the California Constitution.¹ At issue is whether San Francisco voters can circumvent the requirement that Propositions that constitute a “special tax” must attain a two-thirds majority to pass as compared to the voter initiative process, which only requires a simple majority for approval. Last year, the California Supreme Court held in California Cannabis Coalition v. City of Upland that certain procedural standards applicable to measures proposed by legislators do not apply to measures proposed by voter initiative. The business organizations challenging Proposition C argue that the Upland decision did not go so far, as it did not address required voter threshold.

The City’s existing Gross Receipts Tax (“GRT”) regime already imposes a tax on the gross receipts of many businesses operating within San Francisco, with a current GRT rate of approximately 0.3%  imposed on commercial rents. In addition to the existing GRT, the City’s new Commercial Rent Tax imposes a tax of 1% on amounts received for rentals of “warehouse space,” and a tax of 3.5% on amounts received from rentals of other “commercial space” in the City.

Commercial landlords in San Francisco who already pay tax on the lease of their space will find the process familiar, as returns for the new tax will be filed in the same manner and on the same schedule as the current gross receipts tax. The rules for filing combined returns applicable to the current rent tax will apply: the taxpayer must file returns on a combined basis with all of that taxpayer’s related entities, i.e., those entities with which the taxpayer is permitted or required by the California Franchise Tax Board to reflect income on the same combined report.

Generally, the Commercial Rent Tax would not apply to businesses exempt from the existing GRT, including businesses with less than $1 million total in gross receipts, leases of retail spaces, leases for “industrial use,” leases for “arts activities,” most residential real estate leases, nonprofit organizations that are leasing spaces as commercial landlords, and leases to nonprofit organizations or local, state, or federal governments.

The imposition of the Commercial Rent Tax, on top of the existing tax on gross receipts, will likely be a significant increase to the local tax burden on commercial property owners in San Francisco. Landlords may be able to pass some of the resulting expense on to their tenants with triple net leases, depending upon the expense pass through language in the leases. Going forward, landlords will need to consider this tax when drafting such provisions, and tenants will want to pay close attention as well when negotiating their leases.

To better understand the additional tax burden posed by the Commercial Rent Tax, a discussion of San Francisco’s existing GRT regime follows.

San Francisco’s Existing Gross Receipts Tax Regime

Gross receipts tax refers to the tax on the total amount of money received or accrued by a person from doing business in San Francisco, less specific statutorily excluded items. The tax is payable by “persons” engaged in business in San Francisco, which includes any individual, firm, company, partnership, LLC, joint venture, association, proprietorship, domestic or foreign corporation, or any other group acting as a unit.²

“Gross receipts” are defined broadly to include all amounts that constitute gross income for federal income tax purposes, such as all receipts; cash; credits; and property of any kind or nature, and including any amount for which a credit is allowed by the seller to the purchaser, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, interest paid or payable, losses or any other expense whatsoever.³

Phase-In of Gross Receipts Tax

On January 1, 2014, San Francisco began making the transition to the GRT for all business activities attributable to San Francisco. The GRT was to be phased in over five years, with incremental decreases in payroll expense tax corresponding to incremental increases in GRT. By 2018, the phase-in was to adopt the GRT base rate at 100% and the payroll expense should have been phased out to zero. However, this did not happen, and the current rates are shown below.⁴

Year	% of Adopted Gross Receipts Base Rate	Payroll Expense Tax Rate
2014	10%	1.350%
2015	25%	1.162%
2016	50%	0.829%
2017	75%	0.711%
2018	100%	0.380%

 

Therefore, for 2018, both payroll expense tax and GRT are payable by San Francisco businesses.

Determining the Gross Receipts Tax

The rate of the GRT is dependent upon the type of business activities and the amount of gross receipts.⁵  Businesses conducting business both within and outside San Francisco must apportion their gross receipts to determine gross receipts subject to the GRT.⁶  Businesses located entirely outside San Francisco are still subject to the GRT to the extent their gross receipts are allocable to San Francisco.⁷

There are multiple methods of apportionment, and the method varies depending on type of business activity. The primary methods of allocation and apportionment are set forth in Code section 956.1, summarized as follows:

(1) Real or Personal Property. Gross receipts related to real property located in San Francisco and personal property delivered to San Francisco are allocable to San Francisco;
(2) Services. Gross receipts from services are allocable to San Francisco to the extent the purchaser of the services received the benefit in San Francisco;
(3) Intangible Property. Gross receipts from intangible property are allocable to San Francisco to the extent the property is used in San Francisco;
(4) Payroll. Gross receipts apportioned based on payroll is calculated by determining the amount of all non-exempt gross receipts multiplied by the fraction of payroll in San Francisco over combined payroll.

In addition to the GRT, there is a San Francisco Business Registration Fee, which is based on gross receipts for the immediately preceding year and the type of business activity.⁸  Under the current structure, there are thirteen levels of Registration Fees that may apply, ranging from $90 for businesses with $100,000 or less in gross receipts to $36,225 for businesses with $200,000,001 or more.⁹

Exemptions & Exclusions from Gross Receipts Tax

1. Small Business Exemption
Exempted from the GRT are small businesses with less than $1,000,000 in San Francisco gross receipts.¹⁰ This number is adjusted annually for inflation, putting the 2018 threshold at $1,090,000.  Note that businesses with $500,000 or more in San Francisco gross receipts must still file a GRT return or be subject to a penalty, and businesses operating in San Francisco must still pay the Business Registration Fee regardless of the amount of gross receipts.¹¹  A residential landlord is considered a “small business enterprise” within the meaning of the exclusion if and only if the landlord leases fewer than four units in any individual building.

2. Tax Reimbursement Exclusion
Excluded from the computation of gross receipts are federal, state and local taxes for which a taxpayer is reimbursed by means of a separately stated charge.¹²

3. Investment Exclusion
Gross receipts do not include any “investment receipts,” which are defined as interest, dividends, capital gains, other amounts received on account of financial instruments, and distributions from business entities, provided such amounts are derived exclusively from the investment of capital and not from the sale of property other than financial instruments or from the provision of services.¹³ 

Gross receipts do not include allocations of income or gain, or distributions from an entity treated as a pass-through entity for federal income tax purposes, provided such allocations or distributions are derived solely from an investment in such entity and not from the provision of services.¹⁴

4. Exclusion for Amounts Received from Related Persons
Amounts received from a related person or entity, including gross receipts of a pass-through entity which is itself subject to the GRT, are excluded from gross receipts.¹⁵

5. Rent Controlled Buildings Exclusion
Lessors of residential real estate may exclude from gross receipts 50% of the total amount received from the rental of real property to tenants in occupancy at any location in San Francisco that is subject to limits on rent increases.¹⁶

6. Other Exemptions
The following are also specifically exempt from the GRT:

Formally recognized tax-exempt organizations under either the California Revenue and Taxation Code or the Internal Revenue Code;

• Banks, financial corporations, and insurance companies;
• Businesses engaged as for-hire motor carriers;
• Businesses engaged in intercity transportation as a household goods carrier;
• Charter-party carriers operating limousines that are not domiciled or maintained in the City; and
• Any other person the City is prohibited from taxing under State law.¹⁷

Quarterly Estimated Tax Payments

In February 2017, the San Francisco Board of Supervisors passed Ordinance 026-17, which requires quarterly estimated payments for payroll expense taxes and GRT, and permits taxpayers to apply refunds of overpayments of the business registration fee, the payroll expense tax, and the GRT to subsequent tax periods.  Every business with San Francisco gross receipts of more than $1,090,000 or payroll expense of more than $300,000 is required to make three quarterly estimated tax payments and file an annual tax return. Residential landlords that rent four or more units, with annual gross receipts less than $1,090,000 and payroll expense less than $300,000 are only required to file an annual tax return.¹⁸ For businesses not fitting these criteria, no annual return is required for GRT and payroll expense tax.

The required quarterly estimated payments are the lesser of (1) 25% of the prior year or (2) 25% of the current year tax liabilities. If a taxpayer fails to make the estimated payment, there is a penalty equal to 5% of the underpayment.¹⁹ The quarterly estimated payments due are billed and posted in March. The first, second, and third estimated tax payments for a tax year are due on or before April 30, July 31, and October 31, respectively. The fourth quarter payment is due by February 28 of the following year. These payments are credited against a person or combined group’s total annual payroll expense tax or GRT for the year in which the payments are made.²⁰

For more information, contact Tax Partner Jeffry Bernstein at jbernstein@coblentzlaw.com or Real Estate Partner Barbara Milanovich at bam@coblentzlaw.com. Research analysis provided by Jessica N. Wilson and Heather Webb.

 

¹See Complaint to Invalidate Special Tax, Howard Jarvis Taxpayers Assn. v. City and County of San Francisco, Superior Court of California (filed August 3, 2018).
²Code § 6.2.
³Code § 952.3(a).
⁴ OFF. OF THE CONTROLLER AND OFF. OF THE TREAS. & TAX COLLECTOR, SAN FRANCISCO BUS. TAX REFORM:  ANNUAL REPORT FOR 2017  8 (Oct. 2017).
⁵See Chart 1.
⁶See Code §§ 956.1; 956.2.
⁷Code § 956.1(f).
⁸Code § 855(e).
⁹See City and County of San Francisco Treasurer & Tax Collector, Business Registration Fees for the Registration Year Ending June 30, 2018, http://sftreasurer.org/RG18Rates (last visited August 17, 2018).
¹⁰Code § 954.1(b).
¹¹Code § 954.1(c).
¹²Code § 952.3(c).
¹³Code § 952.3(d).
¹⁴Code § 952.3(e).
¹⁵Code § 952.3(d).
¹⁶Code § 954(d). The limits on rent increases must be imposed by San Francisco’s Residential Rent Stabilization and Arbitration Ordinance.
¹⁷Code § 952.3(f)(1) – (6); see also Code § 954(a).
¹⁸City and County of San Francisco Treasurer & Tax Collector, Gross Receipts and Payroll Expense, http://sftreasurer.org/2017GRPY.
¹⁹See San Francisco Ord. No. 26-17 (Feb. 10, 2017).
²⁰See City and County of San Francisco Treasurer & Tax Collector, Gross Receipts Tax and Payroll Expense Tax Quarterly Estimated Payments, http://sftreasurer.org/gross-receipts-tax-and-payroll-expense-tax-quarterly-estimated-tax-payments (last visited August 17, 2018).

How do we, the legal paraprofessionals, build a consistent, reliable bridge between the attorney and the clerk, while delivering our pleadings through the Court’s gatekeepers?

Whether we are Legal Secretaries, Paralegals or Legal Assistants, we need to ensure that our pleadings are successfully filed without being rejected by the clerk. When filing, we need to comply with both the California Rules of the Court (“CRC”) as well as the local rules of each court. Many of us did not go to law school, so how do we understand the legalese when reading these rules? Even attorneys with decades of legal practice experience may encounter obstacles when their best attempts at compliance with the California and local rules do not satisfy the clerk.

Here are three simple steps that can help overcome those obstacles:

1. Locate the applicable rules
2. Understand those rules
3. Clarify any remaining ambiguity with the clerk

1. Locating the Rules

Since the diminutive, spiral-bound desk books we once received annually have now become obsolete, the best modern day reference is to go straight to the source – the California Rules of Court website, where you can find the CRC’s. Each county’s local rules can be found at http://www.courts.ca.gov/find-my-court.htm, where you can find not only the links, locations, and contacts, but also the proper District for the Court of Appeal for each county.

2. Comprehending the Rules

Foundationally, we must understand the relationship between the Local Rules of the Court and the California Rules of the Court (hereinafter “CRC”). The California Rules of Court (“California Rules” or “CRC”) are rules that govern all the state Courts in California – that is, they apply statewide. They are administered, managed and updated by the Judicial Council of California (“The Judicial Council”), which is a body of highly qualified people employed by the State of California and under the leadership of the Chief Justice of the California Supreme Court, the highest court in our state judicial system. Local Rules cannot supersede the California Rules of the Court. CRC. 3.20.

However, at times, the California Rules often give the “green light” to the Local Rules, providing there is no conflict with higher authority. For example, to open a case, CRC Rule 2.220(a) requires, “The first paper filed in an action or proceeding must be accompanied by a case cover sheet” and that cover sheet “must be on a form prescribed by the Judicial Council and must be filed in addition to any cover sheet required by local court rule.” For example, the Los Angeles Superior Court includes within its Local Rules, LR 2.3(a)(1)(E), which instructs us that a Civil Case Cover Sheet Addendum is required for all new civil case filings in “addition to the Civil Case Cover Sheet required by the California Rules of the Court.” This Civil Case Cover Sheet Addendum is a locally approved form (LACIV109), which can be found on that court’s website. Therefore, to successfully file a first paper and open a new case in the Los Angeles Superior Court, this Civil Case Cover Sheet Addendum must also be filed in addition to documents required by the California Rules, the Complaint and Case Cover Sheet. If this local rule is not followed, your filing may be rejected or sent back asking for that form in order to open your case.

The second most basic rule is to learn to have patience in understanding the grueling legalese in so many of our rules. One way of breaking through the Court’s language as swiftly as possible is to take time in advance.

Here are two ways to get started. Let’s consider how the following two rules work: CRC Rule 1.5 and CRC Rule 1.6.

CRC Rule 1.5, “Construction of Rules and Standards” sets forth a series of requirements that require special attention. In this section, you should notice the mandatory words such as “must,” which are required, as compared to words such as “should,” which are simply strong suggestions. This will help you look out for and locate the words that flag a rule that unquestionably needs to be followed, versus words that may make your life easier if you follow them, but are not mandated.

Second, take a careful look at the definitions set forth in CRC Rule 1.6, “Definitions and Use of Terms.” The context of these rules is not the same in the everyday English we speak. For example, in Rule 1.6 (14), the word “Person” is not just a “natural person” but this word also includes a “corporation.” Who would have ever thought that a corporation would be considered a person when speaking everyday English? It is important to recognize when a term is specifically defined for the Court, and demands certain rules are followed, and when a term is free to be used on Friday night (such as ‘party’).

3. Contacting the Court Clerk

For many of us, the all-important interaction with the Clerk may be the most challenging task of all. As a general rule, it is always best to learn how the Clerk prefers to be contacted, by telephone or email, and then proceed from there. Some courts have designated phone hours. Other courts prefer contact by email. All of this vital information can usually be found on each individual court’s website.

Our communication with the Court will likely be much smoother if we have all the information available: case number, type of hearing, date and question. Just remember to keep your eye on the ball, and that ball is getting the document successfully filed without any delay. Don’t be intimidated by the comportment of the Clerk; these folks are constantly dealing with the public, and often are happy to help a legal professional. Think of yourself and the Clerk working together for a successful filing and representation of your client and strive to do your job in a kind and professional manner. As your career develops, a friendly Clerk who recalls your professionalism and good cheer will almost certainly prove to be one of your most trusted professional contacts.

So, to wrap this up, remember three simple steps: first, locate the applicable rules; second, understand those rules, and third, clarify any remaining ambiguity with the clerk. You got this!

Francie Skaggs is a legal assistant at Coblentz Patch Duffy & Bass LLP. She is the Educational Chair for the San Francisco Legal Professionals Association.

Internal Revenue Code (IRC) Section 1031 allows nonrecognition of gain or loss where property held for investment or for productive use in a trade or business is exchanged for like-kind property held for the same purpose. An issue arising under Section 1031 involves multiple owners of a real estate business entity holding one or more investment properties, where some owners want to maintain their investment while others want to cash out their investment. One common technique when the owners want to go their separate ways with investments is for the entity to redeem the interest of the member in exchange for an undivided interest in the property (a so-called “drop-and-swap”). Thereafter, the entity and the former owner join in the sale of the property to a buyer. Following the sale, the former owner can direct its share of the sale proceeds to a qualified intermediary to be reinvested in like-kind property without recognizing gain.

While California law conforms to Section 1031, the California Franchise Tax Board (FTB) has historically taken a much more restrictive approach than the IRS. Particularly in the area of drop-and-swaps, the FTB has disqualified attempted 1031 exchanges by asserting the step transaction doctrine and examining a series of integrated transactions as a whole. But in 2015, the California State Board of Equalization (BOE) departed from the FTB’s narrow interpretation of the rules, unanimously overruling the FTB’s disallowance of like-kind exchange treatment under Section 1031. The BOE does not often issue formal guidance that may be cited as precedent. However, the 2015 decision—In re Rago Development Corp., 2015-DBR-001— was issued as a formal opinion. The decision involved a “swap-and-drop,” which is an exchange followed by a capital contribution of the replacement property to an entity in return for an ownership interest in the entity. In that opinion, the BOE rejected the FTB’s assertion that the step transaction doctrine should treat it as though the taxpayer had exchanged real property interests for interests in an LLC.

More recently, in August 2018, the new California Office of Tax Appeals (OTA) (which replaced the BOE as an administrative board) issued an opinion rejecting the FTB’s disqualification of Section 1031 like-kind treatment based on the step transaction doctrine. In Appeal of Mitchell, the taxpayer held an interest in a general partnership owning a single property as its sole asset. The majority of the other partners sought to cash out their interest, but the taxpayer wanted to maintain her investment in real estate through a 1031 exchange. A sale of the property was arranged and the partnership redeemed the taxpayer’s partnership interest for a TIC interest in the property. Thereafter, through a qualified intermediary, the taxpayer’s proceeds from the sale were reinvested in qualified property outside of California.

The FTB issued a Notice of Proposed Assessment to the taxpayer in Mitchell, asserting that the transaction did not qualify as a 1031 exchange and that she must recognize gain from the sale of the property. Asserting the step transaction doctrine, the FTB argued that the taxpayer failed to meet the “exchange” requirement of Section 1031 because the partnership, rather than the taxpayer, made the sale of the property and the taxpayer was only a conduit for the sale.. On this point, the FTB stressed the fact that the partnership, and not the taxpayer, negotiated the sale of the property with the buyer. Additionally, the FTB asserted that the taxpayer did not satisfy the holding requirement for a Section 1031 property because she only held her TIC interest in the property for two days—the days between the redemption of her partnership interest and the sale of her TIC interest in the property to the buyer. The OTA disagreed.

As to FTB’s argument that the step transaction doctrine applied, the OTA referred to the Tax Court and Ninth Circuit decisions in Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985) and Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985) to ignore the series of integrated transactions accomplishing the exchange. In Magneson, the court acknowledged that combining the steps of a transaction may not be appropriate if the transaction could not have been achieved directly. In Mitchell, the fact that some of the partners sought to cash out their investment while others sought to continue their investment presented such a situation. The OTA also rejected the FTB’s support for the argument that the transaction failed because the taxpayer did not negotiate directly for the sale, since the taxpayer worked directly with the managing partner and the partnership’s attorney in structuring the multiple steps leading up to the sale. Further, in response to the FTB’s argument that the taxpayer did not “hold” the property for investment, the OTA explained that Section 1031 does not require ownership of the relinquished property for any period of time. Moreover, citing Bolker, the OTA noted that courts have allowed simultaneous or immediate transfers of replacement property following an exchange.

A potential distinction between the facts of Mitchell and Magneson is the nature of the interests held by the taxpayers. While both cases involved general partnership interests, Magneson involved a limited partnership and Mitchell involved a general partnership. While the court in Magneson did focus a significant portion of its opinion on the nature of a general partnership interest, it did not make any distinction based on which type of partnership the general partner held its interest in. Rather, the opinion explained the similarities between holding property via a general partnership interest and through a TIC interest. This portion of the decision, however, was mostly aimed at distinguishing partnership interests from corporate shares. Ultimately, the court in Magneson focused much more on the underlying property, providing that the “critical basis for [the] decision is that the partnership, in this case, had as its underlying assets property of like kind to the Magnesons’ original property, and its purpose was to hold that property for investment.”

In both Magneson and Bolker, the court reasoned that the individual transactions in either series would not have triggered a tax, and therefore the combination of transactions should not have triggered a tax. Following this reasoning, the OTA found that the transaction involved “the use of a series of reasonable, necessary, and integrated transactions to delay, not avoid, the recognition of gain, which section 1031 allows.” These decisions by the BOE and the OTA are an indication that California may be finally aligning itself with the federal standards for qualifying 1031 exchanges (although the FTB has not yet decided whether it will request a rehearing).

For more information, contact Tax Partner Jeffry Bernstein at jbernstein@coblentzlaw.com. Research analysis provided by Jessica N. Wilson.

The California Supreme Court recently issued its long-awaited opinion in Dynamex Operations West v. Superior Court, clarifying the standard for determining whether workers in California should be classified as employees or independent contractors. To ensure conformity with the Court’s ruling we recommend a review of your independent contractor relationships. Given the potentially very high costs of misclassification – multiple violations of California and Federal wage and hour laws with attendant back pay, overtime, penalties, interest and attorney fees – it is prudent to confirm that your agreements are fully compliant.

The Dynamex Court held that individuals are employees unless the entity classifying the individuals can shoulder the burden of establishing that they should, in fact, be independent contractors under the ABC test. To meet the ABC test, each of the following three factors must be established:

A. That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

B. That the worker performs work that is outside the usual course of the hiring entity’s business; and

C. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Factor A which requires that the worker must be free of the control of the hiring entity in the performance of the work can be based on a myriad of related factors evidencing control of the employer over the worker’s performance of work, including whether the worker supplies his own tools or controls the specific details of his work, without interference by the hiring entity.

Factor B mandates that to be considered an independent contractor, a worker must perform work that is outside the usual course of the hiring entity’s business. To illustrate the meaning of the “usual course of business,” the Supreme Court gave the example that “when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having “suffered or permitted” the plumber or electrician to be working as its employee. On the other hand, “when a clothing manufacturing company hires work-at-home seamstresses to make dresses form cloth and patterns supplied by the company that will thereafter be sold by the company,” or “when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes,” the works are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees” and not as independent contractors.

Factor C which requires that workers must be customarily engaged in an independently established trade, occupation or business of the same nature as the work performed, requires a showing that the worker has “independently made the decision to go into business for himself or herself.” Such workers would be expected to have taken “the usual steps to establish and promote his or her independent business,” for example through “incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”

One final note, the Dynamex ruling only applies to wage orders, which set rules on minimum pay and basic working conditions such as meal and rest breaks. While the decision does not directly apply to other employment claims, such as workers’ compensation claims or tax claims, it seems probable that trial courts and courts, in general, will apply the Dynamex case to other California labor code claims that protect workers’ rights. Indeed, the case will likely trigger more litigation over each of the three factors and what they really mean, as applied to various types of workplaces.

For further information on determining whether workers in California should be classified as employees or independent contractors, or assistance in reviewing your employee agreements for compliance, contact Coblentz Business and Employment partner Steve Lanctot at slanctot@coblentzlaw.com.

Authored by Lindsay Gehman; Originally published in The Daily Journal, May 24, 2018.

Advertisers continue to utilize influencer marketing as an effective means of connecting with their target consumers and achieving a high ROI.  As such, it is imperative that advertisers and influencers enter into written agreements at the outset in order to ensure an effective campaign and a mutually beneficial relationship between the parties. Written influencer agreements allow the advertiser and influencer to get on the same page about expectations and risk allocation in order to help prevent future disputes.

Here are five essential provisions of every influencer agreement, which are drafted from the perspective of the advertiser/agency. Another key consideration when drafting influencer agreements from the agency’s perspective is to ensure that the influencer agreement (just like any other vendor agreement) ladders up to the agreement between the agency and its client, the advertiser, as tightly as possible.

Content Ownership and Rights

It is imperative to specify who owns the content created by the influencer. If the influencer retains ownership and the advertiser only receives a license to use such content, the scope of such license should be drafted as broadly as possible, both in terms of what the advertiser may do with the content (i.e., repost, create derivative works, etc.) and the type of media it covers (i.e., the advertiser’s website and social channels, broadcasts, publications, etc.). In connection with these rights, the influencer should also provide a license to use his or her name, blog name or social media handle, likeness, voice, image and testimonials to the advertiser in connection with the use of the content.

Exclusivity

In some cases, advertisers expect that they will be the only brand featured in the content they are asking the influencer to create. Accordingly, the influencer agreement should include a clause that prohibits the influencer from monetizing the content in any way without the advertiser’s consent. In addition, advertisers oftentimes expect that the influencer will not work with a competitor of the advertiser during the campaign and sometimes for some period thereafter. In such cases, the influencer agreement should include an exclusivity provision that lists the competitors that are off limits as well as the term of the restriction.

Termination

Because digital campaigns are fluid and can change on a dime, advertisers typically require broad termination rights that allow them to terminate the influencer agreement without cause on little to no advance notice. On the flip side, since influencers are typically selected for their unique expertise or influence (and are therefore difficult to replace), advertisers seek to limit the influencer’s ability to terminate without cause. In terms of what the influencer must be paid in the event of early termination, advertisers typically push for paying only for deliverables that have been accepted prior to the termination date.

Regardless of where the termination notice period nets out, advertisers should include a morals clause that allows them to terminate the influencer agreement immediately in the event the influencer violates any law or if the influencer’s conduct violates generally acceptable standards of behavior such that the advertiser’s association with the influencer could damage the advertiser’s reputation. Related to this, a clause that requires the influencer to take down any content featuring the advertiser from the influencer’s website or social channels upon the advertiser’s request should be included.

Representations, Warranties, Covenantsand Indemnification

In addition to standard representations, warranties and covenants like authority and no conflict, advertisers will also want influencers to represent, warrant and covenant that the influencer has obtained all rights and licenses necessary for the advertiser to use the content, that the content will not infringe or violate any intellectual property rights and that the content will comply with all applicable laws, rules and regulations, including the Federal Trade Commission’s then current Guides Concerning the Use of Endorsements and Testimonials in Advertising and the applicable social media platform’s terms of service.

Advertisers will also expect the influencer to indemnify the advertiser in certain instances, including if the influencer breaches the agreement or if the influencer acts in a negligent or willful fashion.

Social Media Policy

To the extent the advertiser has its own Social Media Policy – which every advertiser should – that Social Media Policy should be attached to the influencer agreement as an exhibit, and the influencer should be required to comply with the policy. Social media policies typically include practical guidance around disclosures, the editorial process and other “best practices” that the influencer should follow.

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