On November 6, San Francisco voters approved “Proposition E,” a measure that introduces a new gross receipts tax on all taxable business activities attributable to the city of San Francisco. The measure is intended to replace, over time, the city’s 1.5% payroll expense tax. The gross receipts tax will be phased in, and the payroll expense tax will be phased out, over a five year period, beginning in tax year 2014. The phase-in factor will be 10% in 2014 and will reach 100% in 2018. The new tax will be imposed at graduated rates, which will vary based on the taxpayer’s industry. For businesses in the financial services industry, the tax, once fully phased in, is expected to be imposed at rates between 0.40% (for gross receipts up to $1 million) and 0.56% (for gross receipts in excess of $25 million). Taxpayers deriving gross receipts from business activities both from within the city of San Francisco and outside the city are required to allocate or apportion their taxable gross receipts in accordance with the new rules.

The new tax will likely be welcomed by many start-ups and other businesses that have a material payroll but that generate little in revenues. However, investment managers and certain private equity and venture sponsors that have a relatively higher ratio of “revenues” to payroll expense are generally more likely to be hurt by the new tax.

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