California Update: San Francisco Gross Receipts Taxes, San Francisco Commercial Rent Tax, and San Francisco Tax Law Updates

The city of San Francisco imposes various business taxes, including three types of gross receipts taxes as well as a commercial rent tax. All these taxes are included in the San Francisco Annual Business Tax Return and must be submitted and paid before the last day of February. For example, the 2024 Annual Business Tax Return will be due February 28, 2025. 

Additionally, on November 6, 2024, San Francisco voters passed Measure M, which will enact significant changes to business taxes. It is important to understand how these changes, which are effective January 1, 2025 and are outlined below, will affect different businesses.  

San Francisco Gross Receipts Tax 

The Gross Receipts Tax is a tax on the total revenue a business earns from all activities within San Francisco. This includes income from sales, services, property dealings, interest, rent, royalties, dividends, licensing fees, commissions, and more. 

If a business (excluding residential real estate lessors) earned more than $2.25 million in gross receipts, they need to file a tax return. This applies to all businesses engaged in activities within San Francisco, unless they are exempt, such as a nonprofit organization. 

The tax rates and calculations vary based on your business’s total gross receipts and the type of business activity (as classified under the North American Industry Classification System, or “NAICS”). Taxpayers are responsible for choosing the most applicable NAICS code for their business, and taxpayers should exercise care in choosing their NAICS code.  Choosing the correct NAICS classification for a business is critical, as it determines the method of apportionment and the tax rate applicable to a business.  The choice of an NAICS code is not an irrevocable decision and is subjective.  Taxpayers may change their NAICS code to more accurately classify their activities.  For San Francisco Gross Receipts Taxes, a change to a taxpayer’s chosen NAICS code can often result in an increase or decrease in the tax by 50% or more.  Tax rates range from 0.105% to 1.008% and the gross receipts apportionment and/or allocation method is either based on payroll apportionment within San Francisco or a combination of income allocated to San Francsico and payroll apportionment. 

Estimated business tax payments are due on April 30, July 31, and October 31. Residential landlords with less than $2.25 million in gross receipts are exempt from these quarterly payments. 

San Francisco Homelessness Gross Receipts Tax 

Effective January 1, 2019, this tax imposes an additional charge on businesses with over $50 million in combined taxable gross receipts. The tax rates range from 0.175% to 0.69%, depending on the business activity. Businesses that are subject to the administrative office tax will also pay an extra 1.5% on their payroll expense in San Francisco. 

The Homelessness Gross Receipts Tax does not apply to certain nonprofit organizations and businesses exempt from local taxation, such as banks and insurance companies; receipts that are already exempt from the gross receipts tax; and receipts subject to the City’s Early Care and Education Commercial Rents Tax. 

Estimated business tax payments are due on April 30, July 31, and October 31. Residential landlords with less than $2.25 million in gross receipts are exempt from these quarterly payments. 

San Francisco Overpaid Executive Gross Receipts Tax 

Approved by voters on November 3, 2020, and effective from January 1, 2022, this tax imposes an additional charge on businesses where the highest-paid managerial employee earns more than 100 times the median compensation of employees based in San Francisco. 

If the highest-paid managerial employee earns more than 100 times the median compensation of a business’s San Francisco-based employees, the business will be subject to this tax. The tax rate ranges from 0.1% to 0.6% depending on the executive pay ratio. Taxpayers subject to the Administrative Office Tax will face an additional tax rate ranging from 0.4% to 2.4%. 

Estimated business tax payments are due on April 30, July 31, and October 31. Residential landlords with less than $2.25 million in gross receipts are exempt from these quarterly payments. 

San Francisco Commercial Rent Tax  

San Francisco’s Commercial Rents Tax, also known as the Early Care and Education Commercial Rents Tax, is an important measure for businesses leasing commercial space in the city. This tax applies to businesses leasing commercial space in San Francisco and is in addition to the existing Gross Receipts Tax. It imposes a new gross receipts tax on the amounts received from leasing or subleasing commercial spaces. 

Commercial space includes any building or structure, or part of a building or structure, that is not residential real estate. However, it does not include spaces used for industrial use, arts activities, or retail activities.  

The city imposes a 1% tax rate on amounts received from leasing or subleasing warehouse space and a 3.5% tax rate on amounts received from leasing or subleasing other commercial spaces. Estimated business tax payments are due on April 30, July 31, and October 31. Residential landlords with less than $2.25 million in gross receipts are exempt from these quarterly payments and will not receive an estimated business tax payment notice. 

San Francisco Business Tax Updates 

Proposition M increases the Gross Receipts Tax filing threshold to $5 million, decreases the number of businesses required to file and, generally, increases tax rates for Gross Receipts Tax and Homelessness Gross Receipts Tax. Conversely, Proposition M decreases the Overpaid Executive Gross Receipts Tax rate for 2025.  

Additionally, the way the Gross Receipts Tax is calculated will shift on the weighting of the apportionment formula used to compute receipts, to attribute more weighting to sales and less weighting to a businesses’ payroll expenses. This change will benefit may businesses with payroll concentrated in San Francisco.  Most businesses’ tax calculation will be based on 75% sales allocation and 25% payroll apportionment as opposed to 100% payroll or 50% sales allocation and 50% payroll apportionment. Further, the San Francisco Tax Collector will be required to issue regulations around apportionment formula sourcing. This adjustment aims to simplify the tax process and make it more straightforward.  

Proposition M also reduces the number of business activity categories from 14 to 7, making compliance and tax calculations easier for both the Gross Receipts Tax and the Homelessness Gross Receipts Tax. 

Further, Proposition M requires the San Francisco Office of the Treasurer and Tax Collector to create an advance-determination process, and a new formalized voluntary disclosure program. The advance determination program will provide written guidance to taxpayers, helping them understand and comply with the new tax rules, while the voluntary disclosure program will provide some relief to taxpayers who voluntarily approach the City to become compliant with their taxes, in some situations.