State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
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Taxpayers Reminded San Francisco Gross Receipts Tax and
Payroll Expense Tax Due on February 29, 2016
For tax years beginning on or after January 1, 2014, San Francisco imposes a gross
receipts tax on persons engaged in business activities in the city.1 The existing payroll
expense tax is being phased out in increments consistent with the phase-in of the gross
receipts tax over a five-year period starting in tax years beginning on or after January 1,
2014. A number of industries face higher taxes under the gross receipts tax, including
businesses engaged in construction, financial services, insurance, professional, scientific
and technical services, commercial and residential real estate, and arts, entertainment and
recreation services.
Background
Release date
February 24, 2016
States
California
Issue/Topic
San Francisco Business Tax
Contact details
Michael Boykin
Los Angeles
T 213.596.8420
E michael.boykin@us.gt.com
San Francisco is the only major city in California that previously levied its entire business
tax on payroll expense.2 The business tax was limited to companies doing business in San
Francisco that carried a payroll in excess of $250,000 annually.3 The business tax was
computed as 1.5 percent of the taxable payroll expense which included all compensation
paid to individuals for services performed in San Francisco.4 During the five-year phase-in
period, a formula in the ordinance provides for an increase in the gross receipts tax rate
and an adjustment in the payroll expense tax rate that is expected to reduce the payroll
expense tax rate to zero by 2018.5
Rob Putzier
Irvine
T 949.608.5330
E rob.putzier@us.gt.com
Imposition of Gross Receipts Tax and Phaseout of Payroll Expense Tax
www.GrantThornton.com/SALT
Tax Structure
San Francisco imposes a tax for the privilege of engaging in a business in San Francisco
that is measured by the taxpayer’s gross receipts from business activities attributable to San
Francisco. The term “gross receipts” is very broadly defined as “the total amounts
received or accrued by a person from whatever source derived, including, but not limited
to, amounts derived from sales, services, dealings in property, interest, rent, royalties,
dividends licensing fees, other fees, commissions and distributed amounts from other
1
S.F. Bus. & Tax. Reg. Code, Art. 12-A-1.
S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 950.
3 S.F. Bus. & Tax. Reg. Code, Art. 12-A, § 905-A.
4 S.F. Bus. & Tax. Reg. Code, Art. 12-A, §§ 903; 903.1(a).
5 S.F. Bus. & Tax. Reg. Code, Art. 12-A, § 903.1(b)-(d); Art. 12-A-1, §§ 950; 959.
2
.
Christian Burgos
Irvine
T 949.608.5210
E christian.burgos@us.gt.com
Steven Cabrera
Los Angeles
T 213.596.3458
E steven.cabrera@us.gt.com
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business entities.”6 According to the ordinance, gross receipts includes, but is not limited
to amounts constituting gross income for federal income tax purposes.7 There are several
classes of receipts that are not considered to be gross receipts, including most forms of
federal, state and local taxes received, amounts received from related parties, and amounts
received from the sale of financial instruments.8
Businesses with gross receipts in San Francisco for the preceding tax year of not more
than $1 million are exempt from the gross receipts tax, but are subject to a higher annual
business registration fee.9 In addition, certain gross receipts, such as sales of real property
subject to the transfer tax, are excluded.10 Also, persons or entities, such as banks and
financial corporations exempt from local taxation,11 insurance companies, certain for-hire
motor carriers, intercity transporters and charter-party carriers, are exempt from the gross
receipts tax.12 The tax rates are based upon the activities of a business and are progressive
within each industry group.13
Apportionment
Businesses with gross receipts from business activities both within and outside San
Francisco must allocate and apportion their gross receipts.14 Gross receipts from the sale,
lease, rental, or licensing of real property are attributable to San Francisco if the real
property is located in the city.15 Gross receipts from sales of tangible personal property are
in San Francisco if the property is delivered or shipped to a purchaser within the city
regardless of the conditions of the sale.16 Gross receipts from the rental, lease or licensing
of tangible personal property are in San Francisco if such property is located in the city.17
To the extent the purchaser of services received the benefit of the services in San
Francisco, the gross receipts from those services are treated as within the city.18 Finally,
gross receipts from intangible property are in San Francisco if the intangible property is
used in the city.19
6
S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 952.3(a).
Id.
8 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 952.3(c)-(e).
9 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855; Art. 12-A-1, § 954.1.
10 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 954(e).
11 Pursuant to S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 954, banks and financial corporations
exempt from local taxation under Cal. Rev. & Tax. Code § 23182 are exempt from the gross
receipts tax. However, the gross receipts tax is applicable to the business activities of financial
services, which includes the activities of engaging in or facilitating financial transactions and those
business activities described in NAICS codes 521, 522 and 523. S.F. Bus. & Tax. Reg. Code, Art.
12-A-1, § 953.6(b).
12 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 954.
13 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, §§ 953.1-953.7.
14 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.
15 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(b).
16 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(c).
17 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(d).
18 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(e).
19 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(f).
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Businesses required to apportion gross receipts based on payroll are required to use a
fraction, the numerator of which is payroll in San Francisco over the denominator of
which is the total worldwide compensation paid by the business and all related entities.20
Industry Classifications
The gross receipts tax has seven progressive rate schedules with rates ranging from 0.075
percent to 0.650 percent (in other words, $0.75 to $6.50 per $1,000 of revenue) depending
on the taxpayer’s industry and the amount of gross receipts earned in San Francisco. A
business will be assigned to a rate schedule based on its North American Industry
Classification System (NAICS) code.21 The gross receipts tax is imposed on the following
business activities: (i) retail trade and wholesale trade; (ii) manufacturing, transportation
and warehousing, information, biotechnology, clean technology, and food services; (iii)
accommodations, utilities, arts, entertainment and recreation; (iv private education and
health services, administrative and support services, and miscellaneous business activities;
(v) construction; (vi) financial services, insurance and professional, scientific and technical
services; and (vii) real estate, rental and leasing services.22 A business providing
administrative office business services for itself or a related entity pays a tax rate of 1.4
percent on its payroll expense.23
Combined Returns
The San Francisco gross receipts tax is required to be filed on a combined basis by a
person doing business in San Francisco, along with all of the person’s related entities.24
Combined groups engaging in more than one of the above industry classifications
generally compute the gross receipts tax for each set of business activities on a separate
basis, although such calculation is subject to a series of modifications and ordering rules.25
Business Registration Fees
San Francisco historically has imposed an annual business registration fee ranging from
$25 to $500 on businesses, depending upon the amount of payroll expense tax paid to the
city.26 With the advent of the gross receipts tax, the registration fee imposed on businesses
is changing, and dramatically increasing for some businesses. For business registration
years beginning on July 1, 2014, and before June 30, 2015, business registration fees are
based on the amount of payroll expense incurred in San Francisco.27 For business
20 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.2 (if the taxpayer has made an election provided
for in Cal. Rev. & Tax. Code § 25110, the combined payroll must be computed consistently with
the water’s edge election).
21 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 952.4.
22 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, §§ 953.1-953.7.
23 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 953.8.
24 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.3.
25 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 953.9.
26 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(a).
27 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(c).
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registration years after June 30, 2015, business registration fees are based on gross receipts
of the immediately preceding year.28
Substantially higher registration fees are imposed on businesses with significant presence
in San Francisco.29 Under the business registration fee structure, there are 13 levels of
registration fees. For businesses with minimal presence in San Francisco ($100,000 or less
in gross receipts for the immediately preceding tax year), a registration fee of $90 applies.30
In contrast, businesses with gross receipts of more than $200 million for the immediately
preceding tax year are required to pay a registration fee of $35,000.31 Finally, the annual
business registration fee for a business engaging in administrative office business activities
ranges between $15,000 and $35,000, depending upon the amount of payroll expense paid
in the immediately preceding tax year.32 Businesses that fail to register business locations
and fictitious business names with the San Francisco Tax Collector will be subject to a
penalty.33
Due Dates
For the annual filing for tax year 2015, the deadline for the gross receipts tax and payroll
expense tax is February 29, 2016.34
For quarterly payments, the first, second, and third quarterly installments shall be due and
payable, and shall be delinquent if not paid on or before, April 30, July 31, and October
31, respectively, of that tax year.35 The fourth installment shall be reported and paid on or
before the last day of February of the immediately following tax year.36
Penalties and Interest
Any unpaid gross receipts tax or payroll tax will result in a penalty of 5 percent of the tax
for the first month the tax is unpaid, plus an additional 5 percent for each following
month or fraction of a month, up to 20 percent in aggregate, until date of payment.37
Additionally, all unpaid taxes accrue interest at the rate of 1 percent per month through
the date the taxpayer or operator pays the delinquent taxes, penalties, interest and fees
accrued to the date of payment in full.38
Commentary
Companies with business activities in San Francisco should carefully consider the gross
receipts tax and payroll expense tax ordinances. The companies subject to the gross
receipts tax are gradually phasing in the tax over a five-year period as a replacement to the
28
S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(e).
S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(c), (e).
30 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(e)(1). The amount of this fee applies for registration
years ending after June 30, 2015.
31 Id.
32 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(g).
33 S.F. Bus. & Tax. Reg. Code, Art. 12, § 856(k).
34 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.9-1(b); 2015 Gross Receipts Tax & Payroll Expense Tax
Online Filing Instructions, San Francisco Treasurer & Tax Collector.
35 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.9-3(a)(3)(A).
36 Id.
37 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.17-1(a).
38 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.17-1(c).
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payroll expense tax. The gross receipts tax is complicated because the rates vary according
to the taxpayer’s type of business activity. Also, the rates currently are changing on an
annual basis due to application of the formula that is being used to phase-in the tax.
Simultaneously, a formula is being applied to the payroll expense tax rate to phase-out the
tax. Notably, the small business tax exemption excludes a significant number of businesses
whose annual gross receipts are below $1 million from the purview of the gross receipts
tax.
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