On October 24, 2025, the San Francisco Tax Collector officially finalized Tax Collector Regulation 2025-1 (Final Regulations), which outlines how businesses should allocate gross receipts from services, intangible property and financial instruments under the Business and Tax Regulations Code Sections 956.1(e) and 956.1(f). The Final Regulations are effective for tax years beginning on or after January 1, 2025.

Background

On November 5, 2024, San Francisco voters approved Proposition M (Prop M), which effective January 1, 2025, drastically changes 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 to interpret whether the purchaser of services receives the benefit of the service, or whether intangible property is used, in the city.

Before the move to a part payroll, part market-based sourcing method, the City used a payroll-based apportionment method for certain taxpayers.

Services — general rule

Gross receipts from services are 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). The location of receipt of the benefit for any service is substantiated by the taxpayer's contracts or books and records.

Under the Final Regulations, 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 when the service is received
• Services performed on tangible personal property outside of the city but delivered to a San Francisco customer are sourced to the city
• Intangible property used in the city
• Sales of financial instruments to customers located in the city
• Individuals present in the city when the service is received

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

Services are 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 the taxpayer's contracts or books and records do not substantiate the location of the benefit, the location of the benefit is determined using all other sources of information.
• If the location of where the benefit of the service was received cannot be determined using the previously mentioned presumptions, the location of the benefit of the service is determined using reasonable approximation.
• If the previously mentioned presumptions and the reasonable approximation method do not work, the benefit of the service is presumed to be received in the city if the customer's billing address, as indicated in the taxpayer's books and records, is in the city.

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

Asset management services

Specific sourcing rules are provided for gross receipts from asset management services. The benefit of asset management services is received at the domiciles of the assets' investors, unless the investors are holding title to the assets for beneficial owners. In that instance, the benefit of the asset management services is received at the domicile of the beneficial owners of the assets. The domicile of the investor and the beneficial owner of assets managed by an asset manager is presumed to be the investor's and the beneficial owner's billing address in the asset manager's records. There is no presumption if the asset manager knows that the investor's principal place of business is different from its billing address, while the presumption will 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 are allocated 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 average value of the interest is unknown, the asset manager may use a reasonable estimation to allocate receipts to the city.

Large volume professional services

Taxpayers that provide any single professional service to more than 250 customers (i.e., a large volume professional service) must allocate gross receipts from such services to the customer's billing address. The rule does not apply to the receipts of a customer whose receipts are more than 5% of the taxpayer's receipts.

Intangible property

The Final Regulations include extensive guidance on sourcing gross receipts from intangible property. Generally, gross receipts from intangible property, other than from sales of financial instruments, are sourced to the city to the extent the intangible property is used in the city. The Final Regulations set forth how to determine the location of the use of the intangible property for the following situations:

• 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 (a) derived from dividends or goodwill, or (b) interest from investments or loans.
• When intangible property is licensed, leased, rented or otherwise used, with specific rules for marketing intangibles, non-marketing and manufacturing intangibles, and mixed intangibles

To the extent the use of intangible property cannot be determined, then gross receipts 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 is separately allocated using the applicable values. The principal purpose for entering into the contract, however, determines the allocation of the gross receipts when each portion's value is not readily ascertainable.

Financial instruments

The Final Regulations allocate gross receipts from sales of financial instruments to the customer's location. For purposes of this provision, "the customer is 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 are allocated 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 are allocated to the city if the business's commercial domicile is in the city. The business's commercial domicile is presumed to be in the city as determined at the end of the tax year in the taxpayer's books and records. The taxpayer may be able to rebut the presumption by providing documentation that shows that its 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 allocate sales to the city, the tax collector may have to accept this allocation method.

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

Special rules

The Final Regulations create several special rules, including rules that may apply in determining the method of reasonable approximation of the location of the receipt of the benefit of the services, the location of the use of intangible property or the location of the customer in regard to the sale of financial instruments.

Industry specific special rules 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 Final Regulations also define several terms.

Implications

San Francisco gross receipts taxpayers in all industries should review the city's final sourcing regulations. Taxpayers should keep in mind differences between the city's new sourcing regulation and the State's market-based sourcing regulation. (See Tax Alert 2025-1848 for a discussion of the State's regulation.) Taxpayers should evaluate whether Prop M has an impact on their filing position due to the consolidation of fund classifications and changes to apportionment. Furthermore, taxpayers impacted by Prop M should evaluate whether the shift from payroll-based apportionment to part payroll, part market-based sourcing, results in taxpayers with no San Francisco payroll becoming subject to tax pursuant to San Francisco's economic nexus provisions ($500,000 in San Francisco-sourced receipts).