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San Francisco voters approve amendments to gross receipts tax

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Dana Lance
San Jose
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Stuart Jeffries
San Francisco
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Lauren Drayer
San Francisco
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Washington, DC
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Chuck Jones 
Chicago
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Lori Stolly 
Cincinnati
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On Nov. 6, 2018, San Francisco voters approved Propositions C and D, which enact amendments to the Gross Receipts Tax on persons or combined groups engaged in business activities in San Francisco.1 Generally effective Jan. 1, 2019, the changes under Proposition C levy a new and additional tax consisting of either: (1) an industry-specific tax on persons earning more than $50 million; or (2) a tax on persons earning more than $1 billion with administrative offices in the city. The changes under Proposition D impose economic nexus on persons with more than $500,000 in total gross receipts in the city during the tax year.

Background Historically, San Francisco levied its business tax solely based on payroll expense, which purportedly discouraged job creation and economic growth, lowered wages and provided an unstable revenue stream.2 To address these issues and promote revenue stability by diversifying the tax base, the city adopted a tax based on gross receipts which was phased in beginning in 2014.3 Beginning in 2014, the gross receipts tax phase in began at 10 percent of the voter approved maximum in 2014, rising to 25% in 2015, 50% in 2016, 75% in 2017, and finally 100% (the voter approved maximum amount) in 2018.4 However, after the gross receipts tax was fully phased in, the anticipated revenue was less than expected, so the 0.380% payroll expense tax rate remains in effect.

Gross Receipts Tax modifications Proposition C - Gross Receipts Tax

Under Proposition C, for tax years beginning on or after Jan. 1, 2019, San Francisco imposes an additional tax of between 0.175% to 0.690% (based on business activity type) on each person engaged in business in the city that receives or is a member of a combined group that receives, more than $50 million in taxable gross receipts.5 Specifically, Proposition C enacts seven fixed rate schedules ranging from 0.175% to 0.690% of gross receipts over $50 million, depending on the person or combined group’s industry.6 People with business activities in multiple industries will determine their taxable gross receipts on an aggregate and ordered basis.7 Taxpayers are assigned to a rate schedule based on their North American Industry Classification System (NAICS) code.8

Notably, gross receipts are defined as amounts received from whatever source derived, including but not limited to all amounts that constitute gross income for federal tax purposes.9 They do not include amounts received from or charged to related entities to the taxpayer, investment receipts, any allocations of income or gain or distributions from an entity treated as a pass-through entity for federal income tax purposes, any amount of third-party taxes that a taxpayer collects from consumers and remits to the government, or tax refunds.10

Further, Proposition C enacts an annual tax on certain businesses with over $1 billion in gross annual receipts and administrative offices in San Francisco.11 The homelessness administrative office tax is imposed on the total payroll expense that is attributable to the city at a rate of 1.5% for each tax year and will be directed to fund homelessness services. If taxpayers are liable for the homelessness administrative office tax, they will not also be liable for the additional gross receipts tax imposed under Proposition C. However, such taxpayers remain liable for the administrative office tax previously adopted by the city.12

The measure requires the city to deposit all the revenue from the additional taxes into a new special fund for the following purposes: (1) at least 50% to permanent housing through the Mayor’s Office of Housing and Community Development (MOHCD); (2) at least 25 percent to mental health services for homeless individuals through the Department of Public Health; (3) up to 15% to homelessness prevention through MOHCD or the Department of Homelessness and Supportive Housing (HSH); and (4) up to 10% to short-term shelters through HSH.

Proposition D – Nexus

A person “engaging in business within the City” is subject to the annual gross receipts tax. Proposition D amends the definition of “engaging in business” to include any person that has more than $500,000 in total gross receipts in the city during the tax year, using the existing rules for assigning gross receipts.13 This amendment applies to many of the city’s business taxes, including the new cannabis business tax also enacted under Proposition D.
 
Notably, receipts are sourced to the city using the following methods:
 
  • Gross receipts from the sale, lease, rental or licensing of real property are in the city if the real property is located in the city
  • Gross receipts from sales of tangible personal property are in the city if the property is delivered or shipped to a purchaser within the city regardless of the f.o.b. point or other conditions of the sale
  • Gross receipts from the rental, lease or licensing of tangible personal property are in the city if the property is located in the city
  • Gross receipts from services are in the city to the extent the purchaser of the services received the benefit of the services in the city
  • Gross receipts from intangible property are in the city to the extent the property is used in the city. In the case of financial instruments, sales are in the city if the customer is located in the city.14

Other activities that are considered engaging in business within the city are described below:

  • The person maintains a fixed place of business within the city
  • An employee, representative or agent of the person maintains a fixed place of business within the city for the benefit or partial benefit of the person
  • The person or one or more of the person’s employees, representatives or agents owns, rents, leases, or hires real or personal property within the city for business purposes for the benefit or partial benefit of the person
  • The person or one or more of the person’s employees, representatives or agents regularly maintains a stock of tangible personal property within the city, for sale in the ordinary course of the person’s business
  • The person or one or more of the person’s employees, representatives or agents employs or loans capital on property within the city for the benefit or partial benefit of the person
  • The person or one or more of the person’s employees, representatives or agents solicits business within the city for all or part of any seven days during a tax year
  • The person or one or more of the person’s employees, representatives or agents performs work or renders services within the city for all or part of any seven days during a tax year
  • The person or one or more of the person’s employees, representatives or agents utilizes the streets within the city in connection with the operation of motor vehicles for business purposes for all or part of any seven days during a tax year
  • The person or one or more of the person’s employees, representatives or agents exercises corporate or franchise powers within the city for the benefit or partial benefit of the person
  • The person or one or more of the person’s employees, representatives or agents liquidates a business when the liquidators thereof hold themselves out to the public as conducting such business.15

Commentary The full implementation of San Francisco’s gross receipts tax, which was enacted in 2012, was recently finalized in 2018. The latest changes adopted by Proposition C, and requiring interaction of the two gross receipts tax systems (the phased in 2014-2018 system and Proposition C) could lead to taxpayer confusion. For purposes of Proposition C, the additional industry-specific tax rate applies only to gross receipts exceeding $50 million of the person or combined group’s total taxable gross receipts from all taxable business activities.16 For purposes of the gross receipts tax enacted in 2012, total gross receipts will continue to be taxed per the industry-specific defined brackets system described above.17

The city is proactively seeking judicial endorsement of the approved tax under Proposition C in anticipation of expected legal challenges to the new tax.18

Other California cities which have not adopted municipal-level taxes to date could consider similar measures to promote revenue stability in their own jurisdictions. For example, the City of Mountain View passed Measure P (nicknamed the “head tax”)19 on Nov. 6, 2018. Measure P implements a per-employee business license tax ranging from $5 to $150 per employee, in addition to a flat tax assigned to each bracket.20 Businesses located outside the city, but who send employees into the city to conduct business, are taxed at 25%, 50% or 100% of the applicable tax rate based on the number of days the employees conduct business or provide services in the city. Further, taxpayers should be aware that several other municipalities, including Los Angeles, also impose gross receipts taxes.21 In Los Angeles, nexus is established based on the taxpayer having gross receipts from tangible or intangible property located or having situs in the city.22


 
1 Taxes Passed by the Voters in the November 6th, 2018 Election, Treasurer & Tax Collector, City and County of San Francisco, Nov. 7, 2018, https://sftreasurer.org/taxes-passed-voters-november-6th-2018-election.
2 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 950.1.
3 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 950.4.
4 Payroll Expense Tax 2018, Treasurer & Tax Collector, City and County of San Francisco, https://sftreasurer.org/py2018.
5 S.F. Bus. & Tax. Reg. Code, Art. 28, § 2804(a). November 6, 2018 Election Results – Summary, Department of Elections, City and County of San Francisco (updated Nov. 20, 2018). For additional information, see GT SALT Alert: Ballot Initiatives in 2018 Midterm Elections Address Income, Sales/Use, and Specialty Taxes
6 S.F. Bus. & Tax. Reg. Code, Art. 28, § 2804(b).
7 S.F. Bus. & Tax. Reg. Code, Art. 28, § 2804(c)(1). For example, the taxable gross receipts of activities in S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 953.1 should be determined first, activities in S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 953.2 second, and so on.
8 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 952.4.
9 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 952.3.
10 See S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 952.3 for a full list of items that are or are not considered gross receipts.
11 As defined in S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 953.8.
12 Id.
13 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.2-12(k), referencing the sourcing rules contained in S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1.
14 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1.
15 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.2-12.
16 S.F. Bus. & Tax. Reg. Code, Art. 28, § 2804(c)(2).
17 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, §§ 953.1 – 953.7.
18 Cutler, Joyce E., San Francisco Heading to Court Over High-Earner Corporate Tax, BLOOMBERG TAX, DEC. 11, 2018, www.bloomberglaw.com/product/tax/document/X51T7V80000000?bna_news_filter=daily-tax-report-state&jcsearch=BNA 000001679f50d4b6a9f7ffd12c670000#jcite. Approximately 61 percent of San Francisco voters approved Proposition C. In California, a special tax generally requires a two-thirds vote for approval. Due to the California Supreme Court’s decision in California Cannabis Coalition v. City of Upland, 401 P.3d 49 (Cal. 2017), it is unclear whether Proposition C requires a two-thirds vote. Proposition C is expected to face a legal challenge because it was not approved by two-thirds of the voters. 
19 Mountain View Voters Approve Measure P, “Head Tax” on Google, Other Businesses, ABC7 San Francisco, Nov. 7, 2018, https://abc7news.com/business/mountain-view-voters-approve-measure-p-head-tax-on-google-other-businesses/4634793/.
20 Impartial Analysis of Measure P, City of Mountain View, California, Aug. 8, 2018, www.mountainview.gov/civicax/filebank/blobdload.aspx?BlobID=27115.
21 L.A. Charter and Administrative Code, Art. 1, Ch. II, §§ 21.41 – 21.49.
22 L.A. Charter and Administrative Code, Art. 1, Ch. II, § 21.49(c)(4).

 


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