San Francisco’s complex tax filings due February 29

In brief

What happened?

Companies engaging in business in San Francisco (the city) must register in the city and pay a license fee. The deadline for paying license fees for the 2024-2025 period is March 31, 2024. Additionally, businesses may be subject to up to four main city taxes: the San Francisco Gross Receipts, Homelessness Gross Receipts, Commercial Rents, and Overpaid Executive taxes. The 2023 filing and final payment deadline for these taxes is February 29, 2024 (extension to file but not pay available until April 30, 2024). 

For a discussion of the Los Angeles City Business Tax, due on February 29, 2024, access PwC’s Insight, available here. 

Why is it relevant?

San Francisco’s doing business (nexus) standards include maintaining a fixed place of business within the city; performing any work (including remote work and solicitation), within the city for all or part of any seven days during the calendar year; or generating more than $500,000 in San Francisco-sourced gross receipts during the calendar year. Except in certain limited circumstances, tax filings must be made online, through the city’s website. Penalties and interest will accrue for missed year-end payments and for late filings, and taxpayers should be aware of the potential for a higher bill if a missed or late filing occurs.

Actions to consider

The rules surrounding San Francisco taxes, as well as the city’s economic nexus standard, are unique and complex. Consideration should be given as to whether a filing obligation exists and how gross receipts should be apportioned to the city.

San Francisco Gross Receipts Tax

The gross receipts tax applies to every entity engaging in business within San Francisco and is measured by the entity’s gross receipts attributable to the city. Depending on the nature of a taxpayer's business, gross receipts are attributed to San Francisco based on either gross receipts attributable to customers in San Francisco, employee payroll incurred in San Francisco, or some combination thereof. The term “gross receipts” is 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.”

The San Francisco gross receipts tax return must be filed on the same worldwide or water’s edge basis as the California unitary corporate filing group. An additional level of analysis may be necessary when a combined group includes entity types other than corporations, such as partnerships or limited liability companies taxed as partnerships. Please note that the gross receipts tax calculation is completed on a calendar-year basis regardless of a taxpayer’s fiscal year end.

The gross receipts tax rates and apportionment methodologies depend on a taxpayer’s business classification, which generally is determined by the entity’s NAICS code. Due to Proposition F’s passage, gross receipts tax rates have changed and will continue to increase through 2026. A simplified table documenting some of those tax changes is below:

Observation: A key point to consider are the rate increases for companies with specific NAICS codes, making it important for taxpayers to self-determine their proper industry NAICS code. This has been a contested issue for many taxpayers under audit due to the lack of any rule-making body or set of rules that provides detailed guidance on how to determine a company’s applicable NAICS code. 

San Francisco Homelessness Gross Receipts Tax 

The Homelessness Gross Receipts Tax imposes an additional tax on most entities with gross annual San Francisco receipts of over $50 million. Entities currently paying a payroll tax under the alternative “administrative office” taxing regime also are subject to an additional payroll tax of 1.5%. For entities and combined groups with San Francisco-sourced gross annual receipts of over $50 million, the Homelessness Gross Receipts Tax imposes an additional rate ranging from 0.175% to 0.690%, depending on the line of business.

For a detailed discussion of this tax, access PwC’s prior 2018 Insight here.

San Francisco Overpaid Executive Gross Receipts Tax

San Francisco imposes an additional tax on businesses with high executive pay, deemed the “Overpaid Executive Gross Receipts Tax.” The tax is triggered based on a taxpayer or combined group’s executive pay ratio. The ratio is the annual compensation of the highest-paid managerial employee of the company, wherever geographically located, as compared to the annualized median compensation paid to full-time and part-time employees based in San Francisco for the tax year. 

Compensation is defined to include “wages, salaries, commissions, bonuses, property issued or transferred in exchange for the performance of services (including but not limited to stock options), compensation for services to owners of pass-through entities, and any other form of remuneration paid to employees for services.”

If the executive pay ratio exceeds 100:1, then an additional tax will be imposed on apportioned San Francisco gross receipts ranging from 0.1% to 0.6%, depending on the computed executive pay ratio. For example, an entity with an executive pay ratio of greater than 200:1, would pay a 0.2% overpaid executive tax rate; greater than 300:1, a 0.3% overpaid executive tax rate; and so forth up to a maximum of 0.6%. Entities currently paying a payroll tax under the alternative “administrative office” taxing regime also will be subject to an additional payroll tax of between 0.4% to 2.4%, again depending on the climbing executive pay ratio of over 100:1, 200:1, and so forth, up to a maximum additional rate of 2.4%, for executive pay ratios greater than 600:1.

Observation: Entities with irregular stock recognition events could have material increases in the San Francisco Overpaid Executive Gross Receipts Tax. Careful modeling of expected stock compensation milestones should be taken into account for provision modeling purposes.

Observation: In December 2023, General Motors filed suit in San Francisco Superior Court seeking a refund of more than $108 million in San Francisco city taxes and over $13 million in penalties on the basis that the Gross Receipts Tax, Homeless Gross Receipts Tax, and Overpaid Executive Gross Receipts Tax violated provisions of the California Government Code requiring fair apportionment, as well as the state and federal Constitutions. While the case is highly nuanced and contains multiple arguments, it raises several constitutional issues that, if taken to the extreme, could result in remedies that potentially invalidate the Overpaid Executive Gross Receipts Tax, the Gross Receipts Tax, and the Homeless Gross Receipts Tax, or potentially offer certain taxpayers the opportunity to shift to a payroll-based tax in lieu of the gross receipt tax paid. Given that San Francisco has a 12-month statute of limitations for refund claims, certain taxpayers may want to consider filing protective claims for 2022 by February 28, 2024, to preserve their right to potential refund claims after consulting with their legal and tax advisors.

Proposed legislative update

In 2023, the San Francisco Mayor and certain supervisors requested that city officials draft a tax reform plan that has several goals, the most notable of which was simplifying the existing taxing regime, as well as reducing tax burden on both small businesses and the largest taxpayers. In November, city officials released an outline of the proposed changes, which can be found here. Since the release of the proposed changes, the city has participated in several rounds of private meetings with San Francisco taxpayers to receive comments on the proposal. The city expects to have a ballot initiative drafted in the next two months, but at this time it is unknown whether a city-led initiative will be placed on the 2024 ballot. Due to the general uncertainty and potential for multiple proposals circulating, it will be imperative that taxpayers model out the various scenarios to avoid potential surprises and pitfalls