Multistate Tax Alert: San Francisco Voters Pass New Gross Receipts Tax; Current Payroll Expense Tax To Be Phased Out
The voters of San Francisco (the “City”) recently approved Proposition E, a gross receipts tax that will be phased in over five years beginning in 2014. This gross receipts tax will gradually replace the existing 1.5% payroll expense tax, which will be phased out by 2018 other than as applied to administrative offices. During the five-year phase-in period taxpayers will pay both the payroll tax and gross receipts tax. As with the current payroll tax, the new gross receipts tax is imposed at the entity level on the person “engaging in business” within the City. Each separate business activity is assigned to one of seven industry classifications, which determine the applicable tax rates, apportionment methodology and, in certain cases, special industry-related rules.
The new gross receipts tax appears to be unique among jurisdictions that impose a tax of this nature in that the new tax is based on the gross receipts of all members of the California worldwide combined unitary group, or the water’s-edge unitary group if there is a water’s-edge election in effect. Receipts received from a related entity that is part of the same combined unitary group for California income tax purposes are excluded. Gross receipts are then apportioned based on the location of the property, payroll, or the benefit received - or some combination of these factors. There are a number of exemptions and exclusions from the gross receipts tax such as for small businesses with San Francisco gross receipts under $1 million.
In the attached Tax Alert we highlight some of the key features of the new gross receipts tax.