State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP San Francisco Voters Approve New Gross Receipts Tax On November 6, San Francisco voters approved Measure E, which imposes a gross receipts tax on persons engaged in business activities in San Francisco. 1 The measure will phase out the payroll expense tax 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 will 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 currently levies its entire business tax on payroll expense. 2 The business tax is limited to companies doing business in San Francisco that carry a payroll in excess of $250,000 annually. The business tax is computed as 1.5 percent of the taxable payroll expense which includes all compensation paid to individuals for services performed in San Francisco. 3 The current ordinance imposing the business tax on payroll expense will fully remain in effect for tax years beginning before January 1, 2014. Enactment of Gross Receipts Tax and Phaseout of Payroll Expense Tax Amended Tax Structure For tax years beginning on or after January 1, 2014, San Francisco will impose 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 in excess of $1 million. 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. 4 According to the ordinance, gross receipts includes, but is not limited to amounts constituting gross income for federal income tax purposes. 5 There are several classes of receipts that are not considered to be gross receipts, including most forms of Release date December 7, 2012 States California Issue/Topic San Francisco Business Tax Contact details Scot Grierson Irvine T 949.608.5320 E scot.grierson@us.gt.com Eddie Delgado Los Angeles T 213.596.3448 E eddie.delgado@us.gt.com Steven Cabrera Los Angeles T 213.596.3458 E steven.cabrera@us.gt.com Taylor Jensen Irvine T 949.608.5216 E taylor.jensen@us.gt.com Giles Sutton Dallas T 704.632.6885 E giles.sutton@us.gt.com Jamie C. Yesnowitz Washington, DC T 202.521.1504 E jamie.yesnowitz@us.gt.com www.grantthornton.com/salt 1 Measure E, Unofficial Election Results, City & County of San Francisco Department of Elections, November 15, 2012. Approximately 71 percent of the voters approved this measure. 2 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 950. 3 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 903, 905-A. 4 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 952.3(a). 5 Id.
Grant Thornton LLP - 2 federal, state and local taxes received, amounts received from related parties, and amounts received from the sale of financial instruments. 6 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 will be subject to a higher annual business registration fee. 7 In addition, certain gross receipts, such as sales of real property subject to the transfer tax, will be excluded. Also, persons or entities, such as banks and financial corporations exempt from local taxation, 8 insurance companies, certain for-hire motor carriers, intercity transporters and charter-party carriers, will be exempt from the gross receipts tax. 9 The tax rates are based upon the activities of a business and are progressive within each industry group. Apportionment Businesses with gross receipts from business activities both within and outside San Francisco must allocate and apportion their gross receipts. 10 Gross receipts from the sale, lease, rental, or licensing of real property will be attributable to San Francisco if the real property is located in the city. 11 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. 12 Gross receipts from the rental, lease or licensing of tangible personal property are in San Francisco if such property is located in the city. 13 To the extent the purchaser of services received the benefit of the services in San Francisco, the gross receipts from those services will be treated as within the city. 14 Finally, gross receipts from intangible property are in San Francisco if the intangible property is used in the city. 15 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. 16 Industry Classifications The gross receipts tax has seven progressive rate schedules with rates ranging from 0.075% to 0.650% (in other words, $0.75 to $6.50 per $1,000 of revenue) depending upon 6 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 952.3(c)-(e). 7 S.F. Bus. & Tax. Reg. Code, Art. 12, 855, 954.1. 8 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 shall be 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. 9 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 954. 10 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 956. 11 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 956.1(b). 12 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 956.1(c). 13 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 956.1(d). 14 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 956.1(e). 15 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 956.1(f). 16 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).
Grant Thornton LLP - 3 the industry of the taxpayer 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. 17 The gross receipts tax will be applicable to business activities of: 1) retail trade and wholesale trade; 2) manufacturing, transportation and warehousing, information, biotechnology, clean technology, and food services; 3) accommodations, utilities, arts, entertainment and recreation; 4) private education and health services, administrative and support services, and miscellaneous business activities; 5) construction; 6) financial services, insurance and professional, scientific and technical services; and 7) real estate, rental and leasing services. 18 A business providing administrative office business services for itself or a related entity will continue to pay a tax rate of 1.4 percent on its payroll expense. 19 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. 20 Combined groups engaging in more than one of the above industry classifications will 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. 21 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. 22 With the advent of the gross receipts tax, the registration fee imposed on businesses will change, and will dramatically increase for some. For business registration years beginning on July 1, 2014, and before June 30, 2015, business registration fees will be based on the amount of payroll expense incurred in San Francisco. 23 For business registration years after June 30, 2015, business registration fees will be based on gross receipts of the immediately preceding year. 24 Substantially higher registration fees will be imposed on businesses with significant presence in San Francisco. 25 Under the new 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), a registration fee of $90 applies. 26 In contrast, businesses with gross receipts of more than $200,000,000 are required to pay a registration 17 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 952.4. 18 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 953.1-953.7. 19 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 953.8. 20 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 956.3. 21 S.F. Bus. & Tax. Reg. Code, Art. 12-A-1, 953.9. 22 S.F. Bus. & Tax. Reg. Code, Art. 12, 855(a). 23 S.F. Bus. & Tax. Reg. Code, Art. 12, 855(c). 24 S.F. Bus. & Tax. Reg. Code, Art. 12, 855(e). 25 S.F. Bus. & Tax. Reg. Code, Art. 12, 855(c), (e). 26 S.F. Bus. & Tax. Reg. Code, Art. 12, 855(e)(1). A registration fee of $75 applies for the year in which the registration fee is imposed on payroll expense for the immediately preceding tax year (but is only applicable to businesses with $66.66 or less in payroll expense). S.F. Bus. & Tax. Reg. Code, Art. 12, 855(c)(1).
Grant Thornton LLP - 4 fee of $35,000. 27 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. 28 Businesses that fail to register business locations and fictitious business names with the San Francisco Tax Collector will be subject to a penalty. 29 Commentary San Francisco has required businesses to pay a payroll tax for nearly 40 years. The policymakers of the City and County of San Francisco sought an alternative tax structure that would increase economic growth, promote tax equity, and achieve greater revenue stability. The gross receipts tax will generate approximately $28.5 million in additional annual revenues and will broaden the number and types of businesses subject to the gross receipts tax and business registration fees from approximately 7,500 to 33,000. Notably, the small business tax exemption will exclude a significant amount of businesses whose annual gross receipts are below $1 million from the purview of the gross receipts tax. Those companies subject to the gross receipts tax will be allowed to gradually phase in the new gross receipts tax over a five-year period as a replacement to the payroll tax. The phased approach allows businesses time to adjust to the change and to minimize the risk to San Francisco and to taxpayers of instability in the city s revenues during the transition. 30 The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. 27 S.F. Bus. & Tax. Reg. Code, Art. 12, 855(e)(1). A registration fee of $35,000 applies for the year in which the registration fee is imposed on payroll expense for the immediately preceding tax year (but is only applicable to businesses with more than $40 million in payroll expense). S.F. Bus. & Tax. Reg. Code, Art. 12, 855(c)(1). 28 S.F. Bus. & Tax. Reg. Code, Art. 12, 855(g). 29 S.F. Bus. & Tax. Reg. Code, Art. 12, 856(k). 30 San Francisco Business Tax Reform: Status Report on Work to Date, City and County of San Francisco Office of the Controller and Office of Economic Analysis, May 10, 2012.
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