San Francisco voters approve significant changes to business taxes

In brief

What happened?

San Francisco (“the City”) voters on November 5 approved Proposition M, which significantly alters the City’s Business Tax rules. While deemed “revenue neutral over time” on an individual taxpayer basis, many taxpayers will see significant increases or decreases in their San Francisco Business Tax liabilities as a result of this tax measure passing. 

Major changes to the San Francisco Business Tax include increased tax rates for both the Gross Receipts Tax (“GRT”) and Homelessness Gross Receipts Tax (“HGRT”), greatly reduced rates for the Overpaid Executive Tax, a shuffling of business categories from 14 to 7, updated apportionment weighting (generally from either 100% payroll or 50% payroll/50% sales weighting to 75% sales/25% payroll weighting), and potential changes to sales factor sourcing.  

Why is it relevant?  

Taxpayers will need to reassess their projected San Francisco Business Tax liabilities for 2025, given the significant potential positive and negative cash tax changes this measure may create. Of particular note is the shift in apportionment factor weighting to emphasize the sales factor’s importance for all taxpayers. San Francisco and California have the same general gross receipts sourcing language. Companies may need to reassess their San Francisco (and, consequently, California) gross receipts sourcing methods, given the increased weight placed on the sales factor in the computation of San Francisco gross receipts. 

Actions to consider  

Taxpayers should consider the implications of their new business category (under one of seven newly created groupings by the City) and model their 2025 San Francisco Business Tax liabilities based upon the new changes to apportionment weighting, expected sales factor sourcing rulemaking, and updated tax rates.  

Of particular importance, companies that have historically had no physical nexus in San Francisco may now have a more material San Francisco liability with the passage of Proposition M. San Francisco has a $500,000 economic factor presence standard for doing business, and with the change in apportionment weighting and sale sourcing rules, non-San Francisco based companies may now have a filing requirement they have not had in previous years.