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Proposed Initiative to Amend San Francisco Business Taxes

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Seal_of_San_FranciscoA proposed initiative (available here) is being circulated to place on the November 5, 2024 ballot, an ordinance amending the Business and Tax Regulations Code effective January 1, 2025.

The proposal would initially decrease total business taxes by almost $100 million a year making it one of the biggest tax cuts in San Francisco history. It would cut taxes and fees for small companies while potentially increasing taxes for retailers and biotech companies. The proposal would partially shift the City’s Gross Receipts Tax apportionment methodology away from payroll expenses and focus more on sales. The proposal would make major changes in rate schedules which would reduce the impact of the tax on Wholesalers, Construction, Arts and Entertainment, Hotels, Real Estate, and Financial Services. Ten million dollars in license fees would be eliminated for certain small businesses. All of these various changes are being proposed in an effort to stimulate the City’s economy.

The proposal includes:

  1. Modifying the Gross Receipts Tax rates, the classification of a taxpayer’s business activities for purposes of the Gross Receipts Tax, and the methods of attributing a taxpayer’s gross receipts to the City for purposes of the Gross Receipts Tax;
  2. Increasing the small business exemption ceiling for gross receipts taxes to $5,000,000;
  3. Providing Gross Receipts Tax credits for grocery retailers, for lessees of certain buildings, and for the Stadium Operator Admission Tax and substantially similar local taxes paid;
  4. Conforming the Homelessness Gross Receipts Tax to the Gross Receipts Tax, except as to rates, credits, and certain exclusions, but without changing existing revenue allocations for the Homelessness Gross Receipts Tax;
  5. Reducing the Overpaid Executive Gross Receipts Tax rates by 80% and modifying the businesses to which the Overpaid Executive Gross Receipts Tax applies;
  6. Modifying Business Registration Fees;
  7. Making other changes to the City’s business taxes and filing requirements; and
  8. Increasing the City’s appropriations limit by the total revenues collected under Articles 12, 12-A-1, 28, and 33 of the Business and Tax Regulations Code for four years from the November 5, 2024 election.

Some of the more significant changes would include:

  • Reducing the tax incentive for employers to keep their employees working remotely by changing the apportionment method to 75%/25% for sales/payroll;
  • Simplifying the overall tax structure through reducing rate categories from fourteen to seven;
  • Administrative changes mandating the Tax Collector to lead a public process and promulgate regulations about gross receipts sourcing; and to create a process for taxpayers to request and receive advanced determinations by June 30, 2025.
  • Procedural changes: deadline extension to November 30 to file certain returns which in turn extends time to issue assessments and for filing refund claims.

Set forth below is a brief summary of some of the amended sections which can be referenced in full in the attached proposed initiative.

SEC. 6.9-4. EXTENSION OF TIME FOR FILING A RETURN AND PAYING TAX.
Subsection (b)(2) effective beginning January 1, 2025, for certain return returns, including the Gross Receipts Tax, persons may request from the Tax Collector an extension of time to file one or more such returns, which extension would extend the deadline to file such return to November 30 of the calendar year in which the return was originally due under Section 6.9-1 of Article 6.

SEC. 6.11-2. DEFICIENCY DETERMINATIONS; REVOCATION DETERMINATIONS; NOTICE AND SERVICE.
Subsection (a)(3) effective beginning January 1, 2025, for purposes of serving a notice of a deficiency determination under Section 6.11-2 for certain returns, including the Gross Receipts Tax, the date that a return was due shall be November 30 of the calendar year in which the return for such respective tax was originally due.

SEC. 6.15-1. REFUNDS.
Subsection (h)(3) effective beginning January 1, 2025, for certain taxpayers, including the Gross Receipts Tax, the date from which the deadline for filing a claim under subsection (a) of this Section 6.15-1 is determined and the date on which a claim shall be deemed to accrue under subsection (d) of this Section shall be the later of:

(A) the payment of such amount;

(B) November 30 of the calendar year in which the return for such respective tax was originally due; or

(C) the date on which such amount requested on a return, amended return, or request for refund timely filed under subsection (g) of this Section 6.15-1 was denied under that subsection (g).

SEC. 6.25-1. ADVANCE DETERMINATIONS.
Subject to annual appropriations to cover its costs that exceed any fees charged, by June 30, 2025, the Tax Collector shall establish a program to provide advance determinations to certain taxpayers, including the Gross Receipts Tax (Article 12-A-1) regarding: (a) the Business Activity Category for a particular business activity; (b) whether a person or combined group may use an alternative apportionment formula under Sections 957, 2108, 2807, 3007, and 3306; and (c) any other issues that the Tax Collector, in the Tax Collector’s sole discretion, deems appropriate. The Tax Collector may charge a fee for requests for advance determinations to cover some or all of its costs of issuing such determinations.

SEC. 952.4. NAICS CODE.
References in Sections 953.20 through 953.26, 960.1, and 960.3 of Article 12-A-1 to particular numerical NAICS codes are intended to apply the definitions and descriptions adopted in that system as of January 1, 2022.

SEC. 956. ALLOCATION AND APPORTIONMENT FOR ALL PERSONS DERIVING GROSS RECEIPTS FROM BUSINESS ACTIVITIES BOTH WITHIN AND OUTSIDE THE CITY.
All persons deriving gross receipts from business activities both within and outside the City shall allocate and/or apportion their gross receipts to the City, for taxable years beginning on or after January 1, 2025, in the manner directed in Sections 953.20 through 953.26, inclusive, and using the rules set forth in Sections 956.1 and 956.2, as applicable. Subsection (c) in the relevant Sections 953.20 through 953.26 provide the amount of taxable gross receipts from the applicable Business Activities Category subject to the gross receipts tax shall be three-quarters of the amount determined under Section 956.1 plus one-quarter of the amount determined under Section 956.2.

SEC. 956.1. ALLOCATION OF RECEIPTS FROM SERVICES.
Subsection (e) provides that 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. The Tax Collector shall promulgate regulations interpreting whether the purchaser of services received the benefit of services in the City for purposes of this Section 956.1(e). In promulgating such regulations, the Tax Collector shall comply with the requirements of Section 6.16-1 of Article 6 of this Business and Tax Regulations Code, including but not limited to the requirement that the Tax Collector hold a public hearing and allow public comment prior to the adoption of the regulations. Further, in promulgating such regulations, the Tax Collector shall review and consider sourcing rules and safe harbor provisions adopted by the State of California and other jurisdictions.

SEC. 956.2. APPORTIONMENT OF RECEIPTS BASED ON PAYROLL.
Subsection (e) sets forth amended criteria for determining compensation paid in the City.

The proposed measure was filed on May 6 by two business leaders. Supporters need to gather about 10,000 petition signatures by July 8, 2024 in order for the measure to qualify for the November 5 ballot.