San Francisco voters approved sweeping changes to the city’s business tax structure by approving the Proposition M ballot measure. The proposition, designed to simplify the city’s business tax system, makes several changes to San Francisco’s gross receipts tax (GRT) and homelessness gross receipts tax (HGRT), impacting businesses across industries.
These changes are effective January 1, 2024, and will first affect 2024 San Francisco returns originally due February 28, 2025.
Key Changes Introduced by Proposition M:
Revised Gross Receipts Apportionment
Proposition M shifts how businesses assign their gross receipts to San Francisco. For many industries, the calculation will move from a payroll-based apportionment formula to a heavier reliance on a market-based apportionment formula.
Effective January 1, 2025, most businesses will use a two-factor apportionment method, based on payroll within the city (weighted 25%) and where the product or service is delivered or consumed in San Francisco (weighted 75%). This marks a significant change for industries like professional and financial services, which previously were required to source gross receipts to San Francisco based entirely on payroll expense within the city.
Streamlined Industry Classifications
The number of business classifications and tax rates has been reduced from 14 to seven, making it easier for businesses to determine applicable tax rates and apportionment methodologies. However, businesses operating in multiple classifications will still be required to calculate their taxes separately for each unique business activity.
Increased Small Business Exemption
The small business exemption threshold for gross receipts taxes has been increased from $2.25 million to $5 million.
Homelessness Gross Receipts Tax Updates
The HGRT now applies to businesses with taxable gross receipts exceeding $25 million, down from the previous $50 million threshold. Certain categories, like real estate, maintain the $50 million threshold.
Changes to the Overpaid Executive Gross Receipts Tax (OEGRT)
The OEGRT, a tax targeting business with excessive executive pay ratios, has been significantly reduced. The tax now applies at 10% of its previous rates, adjusting the tax tiers from 0.1%–0.6% to 0.02%–0.129%.
Procedural and Compliance Updates
Businesses can now benefit from a new 110% safe harbor rule, which allows a nine-month extension for filing annual tax returns if a payment of 110% of the prior year’s liability is made by the original due date. The rule applies to registration fees and several taxes, including the GRT, HGRT, and OEGRT.
According to the Golden Gate Restaurant Association, which advocated for the measure, the approved changes will eliminate gross receipts taxes for more than 2,700 small businesses within the city while reducing licensing fees for restaurants, hotels, arts venues, and small retail shops.
The move will also reduce San Francisco’s reliance on large employers paying gross receipts taxes based on their payroll expenses. According to a 2023 report by the city’s controller’s office, San Francisco’s five largest employers accounted for nearly a quarter of the city’s payroll-based gross receipts taxes.
To discuss these tax changes and how they affect your company, contact us.
