United States: Taxpayers Reminded San Francisco Gross Receipts Tax And Payroll Expense Tax Due On Feb. 29, 2016

For tax years beginning on or after January 1, 2014, San Francisco imposes a gross receipts tax on persons engaged in business activities in the city.¹ The existing payroll expense tax is being phased out in increments consistent with the phase-in of the gross receipts tax over a five-year period starting in tax years beginning on or after January 1, 2014. A number of industries face higher taxes under the gross receipts tax, including businesses engaged in construction, financial services, insurance, professional, scientific and technical services, commercial and residential real estate, and arts, entertainment and recreation services.

Background

San Francisco is the only major city in California that previously levied its entire business tax on payroll expense.² The business tax was limited to companies doing business in San Francisco that carried a payroll in excess of $250,000 annually.³ The business tax was computed as 1.5 percent of the taxable payroll expense which included all compensation paid to individuals for services performed in San Francisco.⁴ During the five-year phase-in period, a formula in the ordinance provides for an increase in the gross receipts tax rate and an adjustment in the payroll expense tax rate that is expected to reduce the payroll expense tax rate to zero by 2018.⁵

Imposition of Gross Receipts Tax and Phaseout of Payroll Expense Tax

Tax Structure

San Francisco imposes a tax for the privilege of engaging in a business in San Francisco that is measured by the taxpayer's gross receipts from business activities attributable to San Francisco. The term "gross receipts" is very broadly defined as "the total amounts received or accrued by a person from whatever source derived, including, but not limited to, amounts derived from sales, services, dealings in property, interest, rent, royalties, dividends licensing fees, other fees, commissions and distributed amounts from other business entities."⁶ According to the ordinance, gross receipts includes, but is not limited to amounts constituting gross income for federal income tax purposes.⁷ There are several classes of receipts that are not considered to be gross receipts, including most forms of federal, state and local taxes received, amounts received from related parties, and amounts received from the sale of financial instruments.⁸

Businesses with gross receipts in San Francisco for the preceding tax year of not more than $1 million are exempt from the gross receipts tax, but are subject to a higher annual business registration fee.⁹ In addition, certain gross receipts, such as sales of real property subject to the transfer tax, are excluded.¹⁰ Also, persons or entities, such as banks and financial corporations exempt from local taxation,¹¹ insurance companies, certain for-hire motor carriers, intercity transporters and charter-party carriers, are exempt from the gross receipts tax.¹² The tax rates are based upon the activities of a business and are progressive within each industry group.¹³

Apportionment

Businesses with gross receipts from business activities both within and outside San Francisco must allocate and apportion their gross receipts.¹⁴ Gross receipts from the sale, lease, rental, or licensing of real property are attributable to San Francisco if the real property is located in the city.¹⁵ Gross receipts from sales of tangible personal property are in San Francisco if the property is delivered or shipped to a purchaser within the city regardless of the conditions of the sale.¹⁶ Gross receipts from the rental, lease or licensing of tangible personal property are in San Francisco if such property is located in the city.¹⁷ To the extent the purchaser of services received the benefit of the services in San Francisco, the gross receipts from those services are treated as within the city.¹⁸ Finally, gross receipts from intangible property are in San Francisco if the intangible property is used in the city.¹⁹

Businesses required to apportion gross receipts based on payroll are required to use a fraction, the numerator of which is payroll in San Francisco over the denominator of which is the total worldwide compensation paid by the business and all related entities.²⁰

Industry Classifications

The gross receipts tax has seven progressive rate schedules with rates ranging from 0.075 percent to 0.650 percent (in other words, $0.75 to $6.50 per $1,000 of revenue) depending on the taxpayer's industry and the amount of gross receipts earned in San Francisco. A business will be assigned to a rate schedule based on its North American Industry Classification System (NAICS) code.²¹ The gross receipts tax is imposed on the following business activities: (i) retail trade and wholesale trade; (ii) manufacturing, transportation and warehousing, information, biotechnology, clean technology, and food services; (iii) accommodations, utilities, arts, entertainment and recreation; (iv private education and health services, administrative and support services, and miscellaneous business activities; (v) construction; (vi) financial services, insurance and professional, scientific and technical services; and (vii) real estate, rental and leasing services.²² A business providing administrative office business services for itself or a related entity pays a tax rate of 1.4 percent on its payroll expense.²³

Combined Returns

The San Francisco gross receipts tax is required to be filed on a combined basis by a person doing business in San Francisco, along with all of the person's related entities.²⁴ Combined groups engaging in more than one of the above industry classifications generally compute the gross receipts tax for each set of business activities on a separate basis, although such calculation is subject to a series of modifications and ordering rules.²⁵

Business Registration Fees

San Francisco historically has imposed an annual business registration fee ranging from $25 to $500 on businesses, depending upon the amount of payroll expense tax paid to the city.²⁶ With the advent of the gross receipts tax, the registration fee imposed on businesses is changing, and dramatically increasing for some businesses. For business registration years beginning on July 1, 2014, and before June 30, 2015, business registration fees are based on the amount of payroll expense incurred in San Francisco.²⁷ For business registration years after June 30, 2015, business registration fees are based on gross receipts of the immediately preceding year.²⁸

Substantially higher registration fees are imposed on businesses with significant presence in San Francisco.²⁹ Under the business registration fee structure, there are 13 levels of registration fees. For businesses with minimal presence in San Francisco ($100,000 or less in gross receipts for the immediately preceding tax year), a registration fee of $90 applies.³⁰ In contrast, businesses with gross receipts of more than $200 million for the immediately preceding tax year are required to pay a registration fee of $35,000.³¹ Finally, the annual business registration fee for a business engaging in administrative office business activities ranges between $15,000 and $35,000, depending upon the amount of payroll expense paid in the immediately preceding tax year.³² Businesses that fail to register business locations and fictitious business names with the San Francisco Tax Collector will be subject to a penalty.³³

Due Dates

For the annual filing for tax year 2015, the deadline for the gross receipts tax and payroll expense tax is February 29, 2016.³⁴

For quarterly payments, the first, second, and third quarterly installments shall be due and payable, and shall be delinquent if not paid on or before, April 30, July 31, and October 31, respectively, of that tax year.³⁵ The fourth installment shall be reported and paid on or before the last day of February of the immediately following tax year.³⁶

Penalties and Interest

Any unpaid gross receipts tax or payroll tax will result in a penalty of 5 percent of the tax for the first month the tax is unpaid, plus an additional 5 percent for each following month or fraction of a month, up to 20 percent in aggregate, until date of payment.³⁷ Additionally, all unpaid taxes accrue interest at the rate of 1 percent per month through the date the taxpayer or operator pays the delinquent taxes, penalties, interest and fees accrued to the date of payment in full.³⁸

Commentary

Companies with business activities in San Francisco should carefully consider the gross receipts tax and payroll expense tax ordinances. The companies subject to the gross receipts tax are gradually phasing in the tax over a five-year period as a replacement to the payroll expense tax. The gross receipts tax is complicated because the rates vary according to the taxpayer's type of business activity. Also, the rates currently are changing on an annual basis due to application of the formula that is being used to phase-in the tax. Simultaneously, a formula is being applied to the payroll expense tax rate to phase-out the tax. Notably, the small business tax exemption excludes a significant number of businesses whose annual gross receipts are below $1 million from the purview of the gross receipts tax.

Footnotes

1 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1.

2 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 950.

3 S.F. Bus. & Tax. Reg. Code, Art. 12-A, § 905-A.

4 S.F. Bus. & Tax. Reg. Code, Art. 12-A, §§ 903; 903.1(a).

5 S.F. Bus. & Tax. Reg. Code, Art. 12-A, § 903.1(b)-(d); Art. 12-A-1, §§ 950; 959.

6 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 952.3(a).

7 Id.

8 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 952.3(c)-(e).

9 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855; Art. 12-A-1, § 954.1.

10 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 954(e).

11 Pursuant to S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 954, banks and financial corporations exempt from local taxation under Cal. Rev. & Tax. Code § 23182 are exempt from the gross receipts tax. However, the gross receipts tax is applicable to the business activities of financial services, which includes the activities of engaging in or facilitating financial transactions and those business activities described in NAICS codes 521, 522 and 523. S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 953.6(b).

12 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 954.

13 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, §§ 953.1-953.7.

14 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.

15 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(b).

16 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(c).

17 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(d).

18 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(e).

19 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.1(f).

20 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.2 (if the taxpayer has made an election provided for in Cal. Rev. & Tax. Code § 25110, the combined payroll must be computed consistently with the water's edge election).

21 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 952.4.

22 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, §§ 953.1-953.7.

23 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 953.8.

24 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 956.3.

25 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, § 953.9.

26 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(a).

27 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(c).

28 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(e).

29 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(c), (e).

30 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(e)(1). The amount of this fee applies for registration years ending after June 30, 2015.

31 Id.

32 S.F. Bus. & Tax. Reg. Code, Art. 12, § 855(g).

33 S.F. Bus. & Tax. Reg. Code, Art. 12, § 856(k).

34 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.9-1(b); 2015 Gross Receipts Tax & Payroll Expense Tax Online Filing Instructions, San Francisco Treasurer & Tax Collector.

35 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.9-3(a)(3)(A).

36 Id.

37 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.17-1(a).

38 S.F. Bus. & Tax. Reg. Code, Art. 6, § 6.17-1(c).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.