On May 6, 2024, a new San Francisco business tax initiative was filed in order to qualify for the November 2024 ballot. The purpose of the initiative is to remedy Covid-19’s major impact on the San Francisco economy, including remote work. According to the San Francisco Tax Collector’s website, the initiative was proposed by Controller Greg Wagner, former Controller Ben Rosenfield, Chief Economist Ted Egan, and San Francisco Treasurer Jose Cisneros. San Francisco Leaders Support Business Tax Reform Proposal to Strengthen City Economy | San Francisco (sf.gov). The San Francisco Chronicle states the proposal was filed by two “business leaders” but is supported by Mayor Breed and Board of Supervisors President Aaron Peskin. https://www.sfchronicle.com/sf/article/s-f-economy-tax-plan-19444049.php.
According to the Tax Collector, the key elements of the proposal are:
- Exempting more than 2,500 small businesses from the tax by expanding the Small Business Exemption to $5 million dollars
- Lowering taxes for hotels, arts, entertainment, and recreation
- Reducing volatility by ensuring taxes are not overconcentrated
- Reducing disincentives for bringing workers back or locating in San Francisco
- Simplifying the overall tax structure to be more predictable
According to the San Francisco Chronicle, post-pandemic, the five largest taxpayers in the City accounted for 24% of all business taxes, and remote work reduced the City’s business tax revenue by $484 million in 2021. https://www.sfchronicle.com/sf/article/remote-work-reduced-s-f-s-taxes-484-million-18193946.php The loss of tourists and workers in the City has devastated the retail, restaurant and hotel industries. For some businesses, the proposed tax initiative would be a welcome shift from the ever increasing taxes and fees imposed by the City. However, the decreased income would be made up by increase on other types of commercial activities.
The measure keys on some of the businesses most impacted by the loss of workers in San Francisco, including retail, restaurants, and hospitality. Unfortunately for the owners of empty office buildings, there would be no reduction in the commercial rents tax. If passed by the voters, the 2024 tax ordinance would result in a significant change in the business tax structure, including revised gross receipts tax rates, short term decreases in the Homelessness Gross Receipts Tax and Overpaid Executive Tax, and a temporary reduction in business registration fees. The measure would also provide key incentives for small businesses, certain new office building occupants, and grocery stores. Finally, the new tax plan would shift the calculation of business taxes away from the partial reliance on San Francisco based payroll (i.e., lower because of remote work), and focus more on gross receipts, in an effort to more evenly allocate the tax burden and lure workers back to San Francisco.
The proposal is quite detailed and technical in nature. The Tax Collector’s office has issued a summary of the key changes and expected impacts of the ordinance, and a link to that summary is attached here. PowerPoint Presentation (sf.gov)
The following are a few additional components of the proposal (some of which are from the Tax Collector’s analysis):
- Enacts a new small business exemption from the Gross Receipts Tax for businesses that make less than $5 million per year (with annual CPI adjustments). Importantly, residential landlords do not qualify for this exemption.
- Tax credits of up to $1M for those that open a new business in the City (that person or combined group cannot have operated in the City for the past three years) in certain “Designated Areas”
- Tax credits for companies that lease all or a portion of a “Qualified Building” for office purposes (“Qualified Building” means that construction must have started between Nov. 4, 2024 and Nov. 4, 2029 and be at least 450,000 square feet, among other requirements), and house at least 100 employees in such building.
- Gross Receipts tax rates would be reduced for certain industries, including retail, recreation, food service, and hotels.
- Gross Receipts tax rates would increase significantly (almost double for firms making over $5M per year) for financial and legal services (i.e., attorneys and accountants), and these businesses would lose the ability to reduce the tax due to non-San Francisco employees.
- The construction industry would be hit with increased tax rates for income above $2.5 million.
- No significant change in gross receipts tax rates for real estate leasing activities.
- Tax credits for supermarkets and other grocery retailers (excluding convenience stores) of 0.5% of these company’s taxable gross receipts, up to a maximum credit of $4 million.
- Reduces the tax rate on Administrative offices based on payroll expenses in San Francisco from 1.54% in 2024 to 1.47% in 2025 and 2026.
- Reduce the Overpaid Executive Tax by 80%.
- The Homelessness Gross Receipts Tax, previously charged only to companies making $50 million annually, would be modified to reduce the income threshold to $25 million starting in 2025 (except for the real estate category, where the threshold remains at $50 million).
If the proposed tax plan qualifies for the ballot and passes, it would be a strong signal that San Francisco has turned away from the theory that higher taxes do not impact San Francisco businesses, and recognition that a reasonable tax structure is necessary to attract at least certain types of companies. However, some industries would still be subject to the more aggressive tax structure, and taxes would still increase in later years. It will be interesting to see if this plan is enough to attract more business to San Francisco.
Authored by Reuben, Junius & Rose, LLP Partner Kevin Rose.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.
