Update: On November 5, 2024, San Francisco voters approved Proposition M, which effective January 1, 2025, drastically changes the City's business taxes, including the gross receipts tax, the homelessness gross receipts tax, the overpaid executive gross receipts tax and the administrative office tax. (See Tax Alert 2024-2072).

On November 5, 2024, San Francisco (City) residents will vote on Proposition M (Prop M), which, if approved, would drastically change the City's business taxes, including the gross receipts tax, the homelessness gross receipts tax, the overpaid executive gross receipts tax and the administrative office tax. Prop M would change rates for various taxes, consolidate and reduce the number of business activity classifications for the gross receipts and homelessness gross receipts taxes and modify the calculations of the gross receipts and overpaid executive gross receipts taxes.

Prop M would make the following changes to the City's business taxes:

• Reduce the number of business activity classifications from 14 to seven for the gross receipts and homelessness gross receipts taxes, each with their own rate schedules.
• Change the gross receipts tax rates applicable to the new categories of business activities, with rate increases scheduled in 2027 and 2028. Similar to current law, each business activity category would have a range of rates that apply depending on the amount of the business's gross receipts.
• Shift the calculation of San Francisco gross receipts to be based more on sales and less on payroll expenses, depending on the type of business. (Exceptions apply to business activities whose gross receipts already are based only on sales.)
• Increase the small business exemption to the gross receipts tax to exempt a person or combined group with gross receipts within the City that do not exceed $5 million (adjusted annually in accordance with an increase in inflation).
• Establish a small business exemption from the homelessness gross receipts tax (an exemption is currently provided for the gross receipts tax, the overpaid executive gross receipts tax and the early care and education commercial rents tax).
• Prop M would specify that the exemption provisions do not apply to taxpayers subject to taxes on administrative office business activities.
• Authorize the Tax Collector to promulgate market-based sourcing regulations to interpret whether the purchaser of services receives the benefit of the service, or whether intangible property is used, in the City.
• Apply the homelessness gross receipts tax to business activities — the same business activity categories that apply to the gross receipts tax — with San Francisco gross receipts over $25 million. Similar to current law, each business activity category would have a range of rates that apply depending on the amount of the business's taxable gross receipts.
• Modify the calculation of the overpaid executive gross receipts tax and who pays that tax, and provide for rate changes in 2025, 2027 and 2028. Similar to current law, the applicable tax rate would apply based on the business's taxable gross receipts.
• Adjust business registration fees to range from $41 up to $45,000 for the 2025–2026 registration year and from $55 up to $60,000 for registration years beginning on or after April 1, 2026 (adjusted annually in accordance with an increase in inflation).
• Adjust the administrative office tax rates for certain large businesses to range from 2.97% to 3.694% and adjust the business registration fees for these businesses to range from $375 up to $26,250 for the 2025–2026 registration year and from $500 up to $35,000 for registration years beginning on or after April 1, 2026 (adjusted annually in accordance with an increase in inflation).
• Establish tax credits for stadium operator admission taxes paid, supermarkets and other grocery retailers, and first lessees in qualified buildings.
• Establish certain exemptions and exclusions from gross receipts.
• Require the Office of the Treasurer and Tax Collector to develop an advance determination process for providing guidance to taxpayers on various business taxes.
• Make administrative changes to the City's business taxes, including provisions related to estimated tax payments, refund claims and requests, business registration, filing extensions, and notice of deficiency determinations.

An in-depth analysis of the measure (along with supporting documentation) is available here.

Implications

Prop M only requires a 50% plus 1 of yes votes to pass. If approved, many of these changes would apply starting in 2025. Accordingly, businesses currently subject to San Francisco's gross receipts tax, homelessness gross receipts tax, overpaid executive gross receipts tax or administrative office tax should review the proposed changes in Prop M and monitor the election results.