United States

San Francisco gross receipts tax phasing in

Payroll expense tax to phase out by 2018

TAX ALERT  | 

In November 2012, San Francisco voters approved Proposition E, phasing in a new gross receipts tax and phasing out the city's payroll expense tax over a five-year period starting on Jan. 1, 2014, and ending with 100 percent gross receipts tax for tax year 2018. The due date for the gross receipts tax and payroll expense tax report and final fourth quarter payment is the last day in February, which for the 2014 report due in 2015 is extended to March 2 because the last day of February falls on a Saturday. This report must be filed and tax must be paid on or before midnight of the due date, or San Francisco will assess interest and penalties.

Although the gross receipts tax has been in operation for nearly a year and should come as no surprise to businesses with activities in San Francisco, guidance from the city's tax authority is still forthcoming, and there have been problems with implementation. Businesses should be aware that the city released revised filing instructions on Feb. 19, 2015, which may have an impact on some businesses' obligations.

Businesses may request a 60-day extension of the due date for the 2014 report by filing an extension request with the San Francisco Office of the Treasurer and Tax Collector on or before the March 2, 2015, due date. A business seeking an extension must make a payment of not less than 90 percent of its estimated tax liability for the period. The due date for filing an extended report and making payment is May 1, which in leap years and years where the last day of February falls on a weekend or holiday may be less than a full 60 days.

"Doing business" standard applicable to gross receipts tax

Only businesses engaged in business in San Francisco are subject to these taxes. A business is engaged in business in San Francisco if it, or its employees, representatives or agents, performs any of the following activities within the city:

  • Maintaining a fixed place of business, including a home office from which business activities are conducted
  • Owning or renting real property for a business purpose
  • Maintaining tangible personal property for sale in the ordinary course of business
  • Employing or loaning capital on property
  • Soliciting business, performing any work, rendering any services or utilizing streets for business purposes for all or part of any seven days during a tax year
  • Exercising any corporate or franchise powers
  • Liquidating any business

However, businesses, other than lessors of residential real estate, with taxable payroll expenses less than $150,000 and taxable gross receipts less than $500,000 are exempt from the tax and are not required to file a report.

Apportioning gross receipts

The gross receipts tax ordinance provides two different methods for sourcing receipts. Under the first method, receipts are specifically allocated as follows:

  • Gross receipts from the sale, lease, rental or licensing of real property are sourced to San Francisco if the real property is located in the city
  • Gross receipts from sales of tangible personal property are sourced to San Francisco if the property is delivered or shipped to a purchaser within the city, regardless of the free-on-board point or other conditions of the sale
  • Gross receipts from the rental, lease or licensing of tangible personal property are sourced to San Francisco if the property is located in the city
  • Gross receipts from services are sourced to San Francisco to the extent the purchaser of the services received the benefit of the services in the city
  • Gross receipts from intangible property are sourced to San Francisco to the extent the property is used in the city, except that, in the case of financial instruments, sales are sourced to San Francisco if the customer is located in the city

Under the second method, receipts are sourced based on a payroll factor, which consists of payroll within San Francisco divided by payroll everywhere. For this purpose, payroll in San Francisco is the total amount paid for compensation in the city as determined based on working hours. Compensation is defined as "wages, salaries, commissions and any other form of remuneration paid to employees for services." In the case of any business that has no employees, compensation is defined as all taxable income for federal income tax purposes of the individual owners or proprietors of the business.

Businesses engaged in wholesale trade; retail trade; utilities, repair and maintenance services; personal and laundry services; manufacturing; transportation; warehousing; information services; biotechnology; clean technology; or food services, as well as religious, grantmaking, civic, professional and similar organizations that are not otherwise exempt, are required to apportion gross receipts using a 50-50 split of both apportionment methods. Businesses engaged in providing accommodations and real estate rental and leasing are required to apportion gross receipts using solely the specific allocation method. Businesses engaged in the arts; entertainment; recreation; private education; health services; administrative services; support services; financial services; insurance; or professional, scientific or technical services are required to apportion gross receipts using solely the payroll factor method. Businesses engaged in construction are required to apportion gross receipts using a 50-50 split of both apportionment methods, except that such businesses are permitted to reduce the amount of receipts calculated under the specific allocation method by amounts paid to San Francisco subcontractors.

Two or more related businesses are required to report their gross receipts tax on a combined basis. For this purpose, two businesses are related if they are permitted or required by the California Franchise Tax Board to have their income reflected on the same combined report for state tax purposes. Additionally, if two or more businesses derive gross receipts from sources wholly within California, and their business activities are such that, if conducted both within and outside California, a combined report would be required under the California Revenue and Taxation Code, those businesses are related regardless of whether they file a combined report with the state.

Gross receipts tax rates

The applicable gross receipts tax rate varies depending on the business activity from which the gross receipts were earned.

For businesses engaged in wholesale trade, retail trade, repair and maintenance services, or personal and laundry services, as well as religious, grantmaking, civic, professional and similar organizations that are not otherwise exempt, the following rates are applicable:

  • 0.075 percent for gross receipts between $0 and $1,000,000
  • 0.100 percent for gross receipts between $1,000,001 and $2,500,000
  • 0.135 percent for gross receipts between $2,500,001 and $25,000,000
  • 0.160 percent for gross receipts over $25,000,000

For businesses engaged in manufacturing, transportation, warehousing, information services, biotechnology, clean technology or food services, the following rates are applicable:

  • 0.125 percent for gross receipts between $0 and $1,000,000
  • 0.205 percent for gross receipts between $1,000,001 and $2,500,000
  • 0.370 percent for gross receipts between $2,500,001 and $25,000,000
  • 0.475 percent for gross receipts over $25,000,000

For businesses engaged in providing accommodations, utilities, arts, entertainment or recreation, the following rates are applicable:

  • 0.300 percent for gross receipts between $0 and $1,000,000
  • 0.325 percent for gross receipts between $1,000,001 and $25,000,000
  • 0.400 percent for gross receipts over $25,000,000

For businesses engaged in private education, health, administrative or support services, the following rates are applicable:

  • 0.525 percent for gross receipts between $0 and $1,000,000
  • 0.550 percent for gross receipts between $1,000,001 and $2,500,000
  • 0.600 percent for gross receipts between $2,500,001 and $25,000,000
  • 0.650 percent for gross receipts over $25,000,000

For businesses engaged in construction, the following rates are applicable:

  • 0.300 percent for gross receipts between $0 and $1,000,000
  • 0.350 percent for gross receipts between $1,000,001 and $2,500,000
  • 0.400 percent for gross receipts between $2,500,001 and $25,000,000
  • 0.450 percent for gross receipts over $25,000,000

For businesses engaged in financial services, insurance or professional, scientific or technical services, the following rates are applicable:

  • 0.400 percent for gross receipts between $0 and $1,000,000
  • 0.460 percent for gross receipts between $1,000,001 and $2,500,000
  • 0.510 percent for gross receipts between $2,500,001 and $25,000,000
  • 0.560 percent for gross receipts over $25,000,000

For businesses engaged in real estate rental and leasing, the following rates are applicable:

  • 0.285 percent for gross receipts between $0 and $1,000,000
  • 0.285 percent for gross receipts between $1,000,001 and $5,000,000
  • 0.300 percent for gross receipts over $5,000,000

Taxpayer assistance

In addition to releasing revised filing instructions on Feb. 19, the city's tax authority has acknowledged that the new gross receipts tax online reporting system is experiencing issues with respect to matching quarterly payments to taxpayers. Businesses are encouraged to contact the city tax collector's office at 415.701.2311 to obtain assistance with payment issues.

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