United States

2016 San Francisco GRT and Payroll Expense Tax return due in February

Combined annual filing due Feb. 28, 2017

INSIGHT ARTICLE  | 

San Francisco is mid way through its five-year phase-in of the new Gross Receipts Tax (GRT) and the phase-out of its Payroll Expense Tax (PET). The 2016 combined GRT and PET annual return is due Feb. 28, 2017.

The GRT was approved by San Francisco voters in November of 2012, and first applied to installment payments due April 30, 2014 for the 2014 tax year. The GRT will be fully phased in for the 2018 tax year. The GRT and PET are generally imposed on sole proprietors, limited liability companies, partnerships, corporations and other entities if those businesses meet both the nexus standards and tax thresholds described below.

Nexus standards

Like all state and local taxes, the question of whether a business is subject to San Francisco’s taxing jurisdiction will depend on whether the business is engaged in any of the following “nexus activities”:

  • Maintaining a fixed place of business in San Francisco;
  • Owning, renting, or leasing real or personal property in San Francisco for a business purpose;
  • Employing or loaning capital on property located in San Francisco for a business purpose;
  • Performing work, solicitation or services in San Francisco or operating motor vehicles on San Francisco streets in a business activity for any part of seven or more days in the year;
  • Exercising corporate or franchise powers in San Francisco; or
  • Liquidating a business when the liquidator holds itself to the public as conducting a San Francisco business.

Please note that San Francisco does provide exemptions for entities which limit their San Francisco activities to the following:

  • Engaging the San Francisco services of an unrelated investment advisor;
  • Maintaining formation, incorporation or registration documents in San Francisco;
  • Owning an interest in a pass-through entity doing business in San Francisco; or
  • Having trustees or directors that meet or reside in San Francisco.

Activity thresholds for the Gross Receipts Tax and Payroll Expense Tax

Businesses maintaining sufficient nexus with the city are subject to the GRT and PET if certain gross receipts and payroll expense thresholds are met, respectively.

The 2016 GRT is imposed on businesses meeting or exceeding $1,060,000 of San Francisco gross receipts. Entities with gross receipts below this threshold are not subject to the GRT but may still be required to file the combined GRT/PET return with the San Francisco Treasurer’s Office. The 2015 tax year gross receipts threshold was $1,030,000.

The PET payroll expense threshold for the 2015 and 2016 tax years is $280,000. Entities with payroll below this threshold are not subject to the PET but may still be required to file the combined GRT/PET return with with the San Francisco Treasurer’s office. 

Tax Rates and Apportionment

Gross Receipts Tax

The 2016 GRT rates range from .0375 percent to .2625 percent based on the industry and how operations are performed in San Francisco. San Francisco imposes seven different tax rates on gross receipts depending on the business activity, generally including: retail and wholesale; manufacturing, transportation and warehousing; utilities and arts and entertainment; private education and health services; construction; financial services; and real estate services. For businesses with large headquarters and back office operations in the city, San Francisco imposes a special administrative office activities tax based on payroll, in lieu of a tax on San Francisco gross receipts.

The GRT law also provides rules for businesses deriving receipts from business activity both within and outside of San Francisco. Those businesses must allocate and/or apportion their gross receipts to the city. Depending on the business activity, one of three methods are used to determine the portion of total gross receipts within San Francisco, i.e., allocation based on a particular location, apportionment of receipts based on payroll, or a combination method.

Payroll Expense Tax

The 2016 PET rate is 0.829 percent and is applied to San Francisco payroll.

Takeaways

The 2016 combined GRT and PET return is due Feb. 28, 2017. Businesses that are not subject to either the San Francisco GRT or PET, but have nexus and are below the dollar filing thresholds, will still have a San Francisco business registration filing/renewal requirement. Additionally, penalties and interest may apply to late or unpaid liabilities. Businesses with gross receipts or payroll derived within San Francisco should contact their tax advisor to determine whether their receipts or payroll are subject to either, or both, of the GRT and PET. 

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