What to expect for tax season
The Gross Receipts Tax and Business Registration Fees Ordinance, or simply “Ordinance,” was approved by San Francisco voters on November 6, 2012. The Ordinance replaces the existing payroll expense tax on the privilege of doing business in San Francisco with a tax that is based on gross receipts from business conducted within the city.
Beginning in tax year 2014, for five years, the San Francisco payroll expense tax rate will be incrementally reduced, and the gross receipts tax rate will be correspondingly increased to allow time to adjust to the gross receipts tax. Tax year 2018 will be the last year of the payroll expense tax. Starting in 2019, businesses will pay only the gross receipts tax.
Who is subject to San Francisco gross receipts tax?
Any person engaging in business within San Francisco is subject to the gross receipts tax. A person is considered “engaging in business” if that person (or any employee, representative, or agent of that person) conducts any of the following activities:
- Maintaining a fixed place of business in San Francisco
- Owning, renting, or leasing real or personal property in San Francisco for a business purpose
- Maintaining tangible personal property for sale in San Francisco in the ordinary course of business
- Employing or loaning capital on property located in San Francisco for a business purpose
- Performing work, solicitation or services in San Francisco, including operating motor vehicles on San Francisco streets in a business activity, for any part of seven or more days of the year
- Exercising corporate or franchise powers in San Francisco
- Liquidating a business when the liquidator holds itself to the public as conducting a San Francisco business
There are exemptions for entities with limited activities within San Francisco, including:
- Contracting with or acting through the San Francisco services of an unrelated investment advisor
- Maintaining formation, incorporation or registration documents in San Francisco
- Owning an interest in a pass-through entity doing business in San Francisco
- Having trustees or directors that meet or reside in San Francisco
Small Business Enterprise Thresholds
Small businesses are exempt from payment of the gross receipts or payroll expense tax if their payroll expenses or gross receipts in the city are within the “small business enterprise thresholds.” However, small businesses may still be required to file an annual return with the city. Every business with gross receipts of $500,000 or more, or payroll expense of $150,000 or more is subject to filing the annual return.
With respect to the tax year 2017, the small business enterprise thresholds are:
- $1,090,000 for gross receipts tax
- $300,000 for payroll expense tax
A lessor of residential real estate is considered a “small business enterprise” if and only if the lessor leases fewer than 4 units in any individual building.
Gross Receipts Tax Rates
The gross receipts tax rates vary depending on the type of business and the annual gross receipts from business activity in the city. There are seven different tax rates based on different business activities (see below for a summary of the business activity categories). For tax year 2017, the gross receipts tax rates range from 0.05625% to 0.4875%.
- Retail and wholesale (Code Sec 953.1)
- Manufacturing, transportation and warehousing, information, biotechnology, clean technology and food services (Code Sec 953.2)
- Accommodations, utilities, arts, entertainment and recreation (Code Sec 953.3)
- Private education and health services, administrative and support services (Code Sec 953.4)
- Construction (Code Sec 953.5)
- Financial services, insurance, professional, scientific and technical services (Code Sec 953.6)
- Real estate and rental and leasing services (Code Sec 953.7)
Additional information can be found at: https://sftreasurer.org/.
Businesses deriving receipts from activity both within and outside of San Francisco
Depending on the business activity, businesses must use one of these three methods to determine the portion of gross receipts that are within San Francisco:
- Allocation: allocate receipts based on rules that assign receipts to a particular location
- Apportionment: apportion receipts among multiple locations based on payroll
- A combination of the above two methods
Payroll Expense Tax Rate
The payroll expense tax rate for tax year 2017 is 0.711%, down from 0.829% for tax year 2016.
Filing Due Dates
The 2017 gross receipts tax and payroll expense tax return is due February 28, 2018. An extension can be filed by February 28, 2018 to extend the filing due date to May 1, 2018 under the condition that the person made payments of at least 90% of their tax liability for that period. Failure to file the return or the extension by the due date may result in penalties and interest.
Quarterly Estimated Tax Payments
Beginning 2017, businesses are required to make quarterly estimated payments for payroll expense taxes and gross receipts taxes. Businesses may apply refunds of the business registration fee, the payroll expense tax and the gross receipts tax to subsequent tax periods.
The required quarterly estimated payments are each 25% of the prior year or current year tax liabilities, whichever is less.
The first, second and third quarterly installments will be due and payable on April 30, July 31, and October 31 respectively of the tax year. You may pay all quarterly estimated tax at one time or individually by their respective due dates. The fourth quarter payment is due by February 28 of the following year.
Failure to pay these quarterly amounts results in a penalty of 5% of the underpayment, with no interest.