California – San Francisco Voters Approve New Gross Receipts Tax

SALT Report 1887 – On November 6, 2012, San Francisco voters overwhelmingly approved a measure that will create a new city business tax based on gross receipts rather than payroll costs.  Currently, San Francisco businesses are required to pay a flat 1.5% tax on their payroll costs for every job they create, even if they aren’t generating revenue.  This will change, as Proposition E will impose a graduated tax on sales and profits rather than jobs.

Highlights of Proposition E

The payroll tax will be phased out over a five-year period beginning in 2014 and replaced with the gross receipts tax.

The gross receipts tax rate will range from 0.075% to 0.650% depending on the type of business and the total gross receipts derived from business activity in the city.  In other words, businesses with higher gross receipts will pay higher taxes.

Businesses with gross receipts of less than $1million per year will be exempt from the gross receipts tax.

Businesses with administrative offices in San Francisco but primarily operate in other locations, will pay an administrative office tax of 1.4% on their total payroll costs.

Every year, the Controller will increase the gross receipts tax rate and decrease the payroll tax based on a formula that is designed to maintain the city’s business tax revenue. The new rates will be published annually by September 1.

The final rate at the end of the five-year period will depend on the receipts the city receives from the gross receipts tax.  If the gross receipts tax revenue exceeds the revenue the city would have received under the payroll tax, then the payroll tax will be phased out and the final gross receipts tax rates will be lower than the base rates.

However, if the gross receipts tax revenue never equals the revenue the city would have received from the payroll tax, then the payroll tax will be reduced, but not phased out, and businesses will pay taxes on both payroll costs and gross receipts.

The measure also replaces the current business registration fee structure.  The increased fees will range from $75 for small businesses up to $35,000 for businesses with more than $200 million a year in gross receipts. This fee will be adjusted each year to account for inflation.

The city estimates that Proposition E will raise the same amount of tax revenue as the payroll tax but will double the number of businesses that are paying.  It’s also expected to generate an additional $28.5 million a year from increased business license fees and create more than 2,200 jobs in the short term.

For Further Information:

Proposition E