San Francisco voters pass changes to city’s business taxes

Historically, San Francisco has imposed various business taxes on specific taxpayers including the San Francisco gross receipts tax, the homelessness gross receipts tax and the overpaid executive gross receipts tax. In California’s recent election, voters in the City of San Francisco approved Proposition M, the “Local Small Business Tax Cut Ordinance,” which includes many significant changes to these San Francisco business taxes effective Jan. 1, 2025.

Proposition M components

Proposition M includes many changes to the city’s business tax regime including but not limited to:

Gross receipts tax:

• Reduce the number of business industry classifications from 14 to seven;
• Increase the exemption threshold for most businesses to $5 million;
• Change the calculation of gross receipts so it is based more on sales (e.g., 75%) and less on payroll (e.g., 25%);
• Adjust the tax rate.

Homelessness gross receipts tax:

• Applicable to business activities with San Francisco gross receipts over $25 million for most categories;
• Reduce the number of business industry classifications from 14 to seven;
• Adjust the tax rate.

Overpaid executive gross receipts tax:

• Modification to the calculation of the tax;
• Changes in the applicability;
• Adjust the tax rate.

Various other administrative and procedural changes including:

• Increase the business registration fees for some taxpayers;
• Adjust the administrative office tax rate for certain large businesses and corresponding business registration fees;
• Apportionment rule changes;
• Filing extensions (e.g., 110% safe harbor rule) for specific taxpayers.

Further, the office of the San Francisco Treasurer & Tax Collector has announced that it is drafting new regulations to provide clarity on the following: (1) market-based sourcing, (2) a voluntary disclosure program and (3) taxpayer requests for binding Advanced Determinations.

Potential impact

According to the Controller for the City and County of San Francisco, Proposition M would reduce revenue by $40 million during the first three fiscal years. However, beginning in 2027, projected revenue would increase by $50 million annually due to scheduled rate increases. By fiscal year 2029-30, the increased revenue collected would offset the reduced revenue during the first three years after implementation. As such, Proposition M’s economic impact appears to be neutral over the next several years.

Further, by increasing the gross receipts tax threshold to $5 million, many businesses will be absolved from the gross receipts tax. Additionally, the shift away from payroll expenses and towards sales when calculating the San Francisco gross receipts tax has the potential to encourage businesses to have employees return to their San Francisco offices.

What’s next?

As these changes will take effect on Jan. 1, 2025, businesses with operations in San Francisco should review the changes detailed in Proposition M in detail, including the rate adjustments as they may have a significant impact on specific taxpayers.

If your business has any questions, please reach out to your Baker Tilly state tax advisor.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.