Companies engaging in business within San Francisco (“the city”) need to understand their potential obligations associated with more than 180 taxes and fees required by the city’s Business and Tax Regulations code, and to keep up with the latest regulatory changes.
In this article, we’ll review new and amended requirements under Proposition F, the Gross Receipts Tax (GRT), the Overpaid Executive Tax (OET), and the Commercial Rents Tax (CRT). Not every tax will apply to your situation, but it’s important to understand the city’s requirements and expectations to ensure timely compliance.
Understanding Proposition F
Effective at the start of 2021, Proposition F completed San Francisco’s transition away from a reliance on payroll taxes toward gross receipt taxes. The legislation eliminated San Francisco’s Payroll Expense Tax and gradually raised Gross Receipts Tax rates (discussed below) across most industries, while temporarily reducing rates for some small businesses in certain industries.
In Summary, Proposition F:
- Increased the Small Business Exemption ceiling to $2 million.
- Decreased the Business Registration Fee for most businesses with less than $1 million in San Francisco taxable gross receipts.
- Modified the city’s Gross Receipt tax rates.
- Increased the Business Registration Fee for most businesses with $1-2 million in San Francisco taxable gross receipts.
Who Is Subject to San Francisco Gross Receipts Tax?
Any person engaging in business within San Francisco is subject to the gross receipts tax. A person is considered “engaging in business” if that person (or any employee, representative, or agent of that person) conducts any of the following 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.
- Maintaining tangible personal property for sale in San Francisco in the ordinary business.
- Employing or loaning capital on property located in San Francisco for a business purpose.
- Performing work, solicitation, or services in San Francisco, including operating motor vehicles on San Francisco streets in a business activity, for any part of seven or more days of the year.
- Exercising corporate or franchise powers in San Francisco.
- Liquidating a business when the liquidator holds itself to the public as conducting a San Francisco business.
Starting in 2022, persons other than lessors of residential real estate became required to file a return if they were engaged in business in San Francisco, were not otherwise exempt, and had more than $2,090,000 in combined taxable gross receipts.
There are exemptions for entities with limited activities within San Francisco, including:
- Contracting with or acting through 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.
- Having trustees or directors that meet or reside in San Francisco.
Small Business Exemption Thresholds
Small businesses are exempt from payment of the gross receipts tax if their taxable gross receipts are within the “small business enterprise thresholds.” However, small businesses may still be required to register with the city and pay an annual license registration renewal fee. Every business with San Francisco gross receipts of $500,000 or more, or employees working within the city for more than seven days is required to register and pay the annual renewal fee even though a business tax return may not be required.
With respect to the tax year 2022, the small business enterprise gross receipts tax threshold is $2,090,000.
- It is important to note that lessors of residential real estate have different rules for determining registration requirements and are not entitled to the city’s small business enterprise gross receipts tax exemption.
Gross Receipts Tax Rates
The gross receipts tax rates vary depending on the type of business and the annual gross receipts from business activity in the city. There are 14 different tax rates based on various business activities as determined by the taxpayer’s NAICS code. For tax year 2022, the gross receipts tax rates range from 0.053% to 0.84%. See below for a summary of 2022 tax rates by business activity category and their related NAICS code(s):
|Business Activity (NAICS code)||0-$1m||$1-$2.5m||$2.5-$25m||$25m +|
|Retail Trade (44, 45); and Certain Services (811, 812, 813)||0.053%||0.070%||0.095%||0.224%|
|Wholesale Trade (42)||0.105%||0.140%||0.189%||0.224%|
|Manufacturing (31, 32, 33); and Food Services (722)||0.088%||0.144%||0.259%||0.665%|
|Transportation and Warehousing (48, 49); and Clean Technology*||0.175%||0.287%||0.518%||0.665%|
|Accommodations (721); and Arts, Entertainment, and Recreation (71)||0.210%||0.228%||0.228%||0.560%|
|Utilities, excluding waste management services (22)||0.435%||0.471%||0.471%||0.580%|
|Private Education and Health Services (61, 62); and Administrative and Support Services (56)||0.761%||0.798%||0.870%||0.943%|
|Financial Services (521, 522, 523); and Professional, Scientific, and Technical Services (54)||0.600%||0.690%||0.765%||0.840%|
|Real Estate and Rental and Leasing Services (53)||0.413%||0.413%||0.435%||0.435%|
|Miscellaneous Business Activities (all other codes)||0.788%||0.825%||0.900%||0.975%|
*The city has specifically defined these industries for which a taxpayer may qualify regardless of their NAICS code.
Additional information can be found at: https://sftreasurer.org/.
Businesses Earning from Both SF and Non-SF Operations
Depending on the business activity, businesses must use one of three apportionment methods to determine the portion of gross receipts considered to be taxable within San Francisco:
- Market: receipts are assigned to within the city if the location of the real property is in the city, if the tangible good was delivered or shipped in the city, or if the benefit of the service was received in the city.
- Cost of Performance: receipts are assigned to within the city based on the percentage of within city payroll expense divided by worldwide payroll expense (unless the taxpayer has made a valid California Water’s-edge election).
- Mixed: A combination of the above two methods.
Quarterly Estimated Tax Payments
Businesses are required to make quarterly estimated payments for gross receipts taxes. Businesses may apply refunds of the business registration fee and the gross receipts tax to subsequent tax periods.
The first, second, and third quarterly estimated tax payments are due and payable on April 30, July 31, and October 31 respectively of the tax year. The required quarterly estimated payments are each 25% of the prior year or current year’s tax liabilities, whichever is less. You may pay all quarterly estimated taxes at one time or individually by their respective due dates. The fourth quarter payment along with the annual return is due by February 28 of the following year.
For 2022, Residential Landlords with less than $2,090,000 in taxable gross receipts are exempt from estimated quarterly business tax payments and will not receive an estimated business tax payment notice.
Failure to pay these quarterly amounts results in a penalty of 5% of the underpayment, with no interest.
San Francisco Overpaid Executive Tax (OET)
Starting in 2022, San Francisco began imposing an additional tax on certain businesses in which the highest-paid managerial employee earns more than 100 times the median compensation of its San Francisco employees. The tax rate will increase for every additional 100 times that the managerial employee’s compensation exceeds the median San Francisco worker’s pay.
For purposes of the tax, an employee is considered to be based in the City of San Francisco for a tax year if his or her total working hours within the city during the tax year exceeds his or her total working hours in another location. Compensation includes wages, bonuses, commissions, and stock compensation.
Compensation to a part-time employee will be determined on a full-time equivalency, and compensation paid to an employee who worked for a portion of the year will need to be annualized.
As this tax is specifically designed to target large business taxpayers, taxpayers exempt from San Francisco’s GRT as a “small business enterprise” are also exempt from the OET.
Commercial Rents Tax (CRT)
The Commercial Rents Tax generally applies to lessors of commercial space in the city, and generally does not apply to businesses exempt from the GRT. This measure imposes an additional gross receipts tax of:
- 1% on the amounts a business receives from the lease or sublease of warehouse space in the city.
- 5% on the amounts a business receives from the lease or sublease of other commercial spaces in the city.
Don’t let confusing business tax regulations get in the way of your success in San Francisco. If you have any questions about San Francisco’s business taxes or other obligations, we are here to help.