Effective January 1, 2019, the city of San Francisco adopted major changes to its business tax laws after voters approved Proposition D in the 2018 election.
New city economic nexus standard
One significant change was the adoption of an economic nexus standard for select city taxes and for its business registration fee. The threshold for this new nexus standard will be $500,000 of annual sales into the city, determined by using a “market sourcing” method.
Because the 2019 tax year is the first one covered by this new law, the first city tax return required for businesses that have nexus in the city based solely on this new law won’t be due until February 28, 2020. However, companies that already had nexus in the city under the old law for calendar year 2018 must file their 2018 return by February 28, 2019.
New taxes on rents and gross receipts
Another major change was the adoption of two new city taxes, also effective January 1, 2019:
- The commercial rents tax (CRT), imposed on a landlord’s gross receipts from leases or subleases of business rental properties in the city, at the rates of 1 percent for warehouse/industrial space and 3.5 percent for commercial space.
- The homelessness gross receipts Tax (HGRT), imposed on the amount of a taxpayer’s gross receipts sourced to the city in excess of $50,000,000 annually. The HGRT is imposed in addition to the city’s historical gross receipts tax (GRT).
San Francisco tax FAQs
What constitutes nexus in San Francisco?
Prior to January 1, 2019, nexus for purposes of city taxes and fees generally required a physical presence in the city, such as by soliciting business, performing work/rendering services, or using city streets for business purposes for seven or more days per tax year; or by employing or loaning capital on property.
Effective January 1, 2019, for purposes of the city’s historical registration fee, gross receipts tax, and payroll expense tax, as well as the city’s new commercial rents tax, nexus can also be created by having at least $500,000 of annual receipts sourced to the city.
What is the San Francisco gross receipts tax?
First enacted in 2014, the gross receipts tax (GRT) is imposed on the amount of a taxpayer’s gross receipts that are sourced to San Francisco. The GRT is based on a taxpayer’s city receipts for each calendar year, regardless of the taxpayer’s fiscal year end. It is due annually on February 28 and must be filed online.
Depending on the taxpayer’s business, receipts are sourced using either a market sourcing methodology, a payroll factor sourcing methodology, or a 50-50 split of the two methods.
Gross receipts can include receipts from the sale of services, property, interest, rent, royalties, dividends, licensing and other fees, commissions, and distributions from pass-through entities. The tax rate relating to the gross receipts tax is determined using the business’ NAICS code on the taxpayer's federal tax return.
The city annually computes a “small business” exemption limit for the GRT based on a taxpayer’s city-sourced receipts for the preceding tax year, and for the 2018 tax year the threshold is $1.12 million. While a taxpayer with city receipts exceeding the $500,000 economic nexus threshold but below the “small business” exemption, would not owe the GRT, it would still be required to pay the registration fee.
What is the payroll expense tax?
The payroll expense tax applies to any business that pays compensation for work performed within the city. The rate is adjusted periodically, and for the 2018 tax year, is 0.38 percent. While this tax was originally scheduled to phase out completely during 2018, it was retained at 0.38 percent because GRT revenue was lower than expected.
For purposes of the payroll expense tax, compensation includes items such as board of directors’ fees, management fees, fringe benefits, bonuses, medical expenses, income earned by pass-through entity owners, and fees associated with independent contractors.
The city annually computes a small business exemption limit for the payroll expense tax. For the 2018 tax year the threshold is $300,000.
What is the city’s business registration fee?
If a company engages in business within the city, it must register and pay a related fee within 15 days of creating nexus within the city as described previously. The registration fee for most businesses ranges from $90 to $36,225, depending upon the amount of the business’ city-sourced gross receipts from the immediately preceding calendar tax year.
What is the new homelessness gross receipts tax (HGRT)?
The HGRT is a new gross receipts tax, imposed in addition to the city’s historical GRT, calculated on the amount of a taxpayer’s annual gross receipts sourced to the city in excess of $50 million. The tax base for the HGRT is the same as for the GRT, and its tax rates vary from 0.175 percent to 0.69 percent on taxable receipts exceeding $50 million.
What is the new commercial rents tax (CRT)?
The CRT is a tax imposed on the landlord (unlike New York city’s CRT, which is imposed on the tenant), and applies to the annual gross receipts from leases or subleases of business rental properties in the city, at the rates of 1 percent for warehouse space and 3.5 percent for commercial space. Because the existing GRT applied to commercial rents at the rate of 0.3 percent, the new CRT (due in addition to the GRT) may significantly increase the local tax burden of owners of commercial property located in the city.
Even though the first CRT filing will not be due until 2020, the annual GRT and payroll expense tax filing due Feb. 28, 2019 will ask businesses to report their gross receipts from the lease of warehouse and commercial space during the 2018 tax year.
How we can help
CLA’s state and local tax professionals can help your business evaluate whether you are subject to any of these San Francisco city taxes, calculate how much you may owe, and help you comply with the new laws.