As San Francisco continues to transition to a gross receipts tax on businesses and away from its payroll expense tax, will city businesses suffer or will they flourish? The law, which was first phased in last year, requires that every person who is engaged in business in San Francisco pay an annual tax on gross receipts from taxable business activities attributable to the city. Businesses in San Francisco must also obtain a registration certificate and pay the annual fee. The certificate is not a new requirement, however, changes to the fee structure could result in higher tax bills for businesses.
The San Francisco gross receipts tax is a tax on the privilege of engaging in a business or occupation in the city. Since 2001, the payroll expense tax of 1.5 percent of payroll was the lone business tax the city imposed. While such a tax may generate significant revenue from businesses in industries that necessitate large workforces, such as retail, manufacturing, and the technology industry, other less labor dependent businesses are minimally impacted.
Under the new business tax regime in San Francisco, the gross receipts tax rate is based on the classification of business activity, and the city has defined seven classifications that break down by industry type. The highest tax rates are imposed on the private education and health services classification, while the lowest rates are imposed on the retail and wholesale trade classification.
In 2014, the initial phase-in year, the gross receipts tax rate was imposed at 10 percent of the statutory rate, while the payroll expense tax rate was reduced to 1.35 percent. In 2015, the tax rate manipulations become more complex. The gross receipts tax is imposed at 25 percent of the statutory rate plus an excess payroll expense tax revenue factor, while the applicable payroll expense tax rate is 1.125 percent plus a payroll expense tax rate adjustment factor. The phase-in will continue until 2018 with the incremental decrease of payroll expense tax and the incremental increase of gross receipts tax. As long as the gross receipts revenue equals or exceeds the revenue that would have been yielded by the payroll expense tax, the payroll tax will be eliminated.
Another change businesses will see in 2015 is that the registration certificate fee structure changes to one that is based on prior year gross receipts. The minimum annual fee is $90 but the fee could reach a maximum of $35,000 for a business with gross receipts of more than $200 million. San Francisco may see a significant increase in business registration revenue because under the former business tax regime, the minimum annual fee was $25 while the maximum fee was $500.
Only time will tell whether the gross receipts tax is the best option for San Francisco.
Publications detailing the implementation of San Francisco’s gross receipts tax can be found at:
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is a gross receipts tax right for San Francisco?
by Jequetta Byrd
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