The San Francisco tax collector has released for public comment Proposed Regulation 2025-1 (Proposed Regulations), which would provide guidance on allocating gross receipts from services, intangible property and sales of financial instruments to the city for gross receipts tax (GRT) purposes. The Proposed Regulations would apply to the allocation of gross receipts effective for tax years beginning on or after January 1, 2025. A public hearing is scheduled for April 8, 2025. As noted previously, written comments on the Proposed Regulations are due by April 18, 2025.

Background

On November 5, 2024, San Francisco voters approved Proposition M (Prop M), which effective January 1, 2025, made numerous changes to San Francisco'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 2024-1825.) Among other changes, Prop M authorizes the tax collector to promulgate market-based sourcing regulations for determining whether the purchaser of services receives the benefit of the service, or whether intangible property is used, in the city.

Services — general rule

Gross receipts from services would be sourced to San Francisco to the extent the purchaser "received the benefit of the service in the city" (i.e., the customer's direct or indirect receipt of value from the service being delivered in the city). In determining the location of the receipt of the benefit, the Proposed Regulations would presume that gross receipts from services are in San Francisco to the extent indicated as such in the taxpayer's contracts or books and records.

The Proposed Regulations would provide that the benefit of the service is received in the city when the service predominantly relates to:

• Real property located in the city
• Tangible personal property located in the city
• Services performed on tangible personal property outside of the city but delivered to a San Francisco customer would be sourced to the city.
• Intangible property used in the city
• Financial instruments of customers located in the city
• Individuals present in the city when the service is received

Taxpayers would be able to rebut these presumptions if they can show that the benefit of the service is received at a different location.

Services would be sourced using the following methods:

• If the service in question falls within one of the previously mentioned presumptions, or the presumption has been overcome, but a taxpayer's contracts or books and records do not substantiate the location of the benefit, the location of the benefit would be determined using all other sources of information.
• If the location of the benefit of the service cannot be determined using all other sources of information, it would be determined using a reasonable approximation.
• If the reasonable approximation method does not work, the benefit of the service would be presumed to be received in the city if the customer's billing address is in the city.

Specific rules would be provided for sourcing receipts from a US or California government contract.

Asset management services

Specific sourcing rules would be provided for gross receipts from asset management services. The benefit of asset management services would be received at the domiciles of the assets' investors, unless the investor is holding title to the asset for a beneficial owner. In that instance, the benefit of the asset management services would be received at the domicile of the beneficial owner of the asset. The domicile of the investor and the beneficial owner of assets managed by an asset manager would be presumed to be the investor's and the beneficial owner's billing address in the asset manager's records. There would be no presumption if the asset manager knows that the investor's principal place of business is different from its billing address, while the presumption would not control if the asset manager knows that the beneficial owner's primary residence or principal place of business is different from its billing address.

Receipts from asset management services would be assigned to San Francisco in proportion to the average value of interest in the assets held by the asset's investors or beneficial owners domiciled in the city. If the asset manager does not know the average value of such interest, a reasonable estimation would be used to assign receipts to the city.

Large volume professional services

Taxpayers providing large volume professional services to more than 250 customers in any single professional service would assign gross receipts from such services to the customer's billing address. The rule would not apply to receipts derived from a customer whose receipts account for more than 5% of a taxpayer's receipts.

Intangible property

The Proposed Regulations would provide extensive guidance on sourcing gross receipts from intangible property, presuming the location of use to be in the city in certain situations. Generally, intangible property, other than from sales of financial instruments, is received in the city to the extent it is used in the city. In determining the location of the intangible property's use, the Proposed Regulations would provide guidance on the following scenarios:

• When there is a complete transfer of all property rights in intangible property other than financial instruments, with specific rules for when the gross receipts from intangible property are (1) derived from dividends or goodwill, or (2) interest from investments or loans
• When intangible property is licensed, leased, rented or otherwise used, with individual rules for marketing intangibles, non-marketing and manufacturing intangibles, and mixed intangibles

To the extent the use of intangible property cannot be determined, the intangible will be sourced using the purchaser's billing address.

Mixed transactions

When there is a mixed transaction (i.e., the sale is from the provision of service and tangible or intangible property or from the provision of tangible and intangible property) and the value of each portion of the sale is readily ascertainable, then each portion would be separately assigned using the relevant values. The principal purposes for entering into the contract, however, would determine the assignment of the gross receipts when each portion's value is not readily ascertainable.

Financial instruments

The Proposed Regulations would assign gross receipts from sales of financial instruments to the customer's location. For purposes of this provision, the customer would be "the person, without regard to intermediaries, who gains the greatest possession of economic rights in the financial instruments." If the customer is an individual, receipts would be assigned to the city if the customer's billing address, at the end of the tax year, is in the city.

If the customer is a corporation or business entity (collectively, "business"), receipts would be assigned to the city if the business's commercial domicile is in the city. A business's commercial domicile would be presumed to be in the city if, at the end of the tax year, it is reflected as such in the taxpayer's books and records. The taxpayer would be able to rebut the presumption by providing documentation showing the business's commercial domicile is outside the city. If the taxpayer uses the commercial domicile of the business, as provided in its books and records kept in the normal course of business, to assign sales to the city, the tax collector would have to accept this assignment method.

Reasonable approximation would be used to determine the location of the customer when the customer's billing address/commercial domicile cannot be determined.

Special rules

The Proposed Regulations would create several special rules, including rules that would apply in determining the reasonable approximation method for the location where the benefit of the services is received, the location where the intangible property is used or the location where the customer is located in regard to the sale of financial instruments.

Industry specific special rules would apply to:

• Franchisors
• Motion picture and television film producers, distributors and television networks
• Print media
• Mutual fund service providers and asset management service providers

The Proposed Regulations also would define several terms throughout the regulation.

Implications

San Francisco gross receipts taxpayers in all industries should review San Francisco's proposed sourcing regulations and consider submitting comments by the April 18, 2025 due date.

The Office of the Treasurer & Tax Collector has scheduled a hearing on the proposed sourcing regulations on April 8, 2025 at 2:00 pm pacific time.