Overpaid Executive Gross Receipts Tax Approved in San Francisco

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The new tax takes effect on January 1, 2022, and will be imposed on businesses in which the highest-paid executive’s total compensation is more than 100 times the median San Francisco-based employee compensation.

San Francisco’s Overpaid Executive Gross Receipts Tax ("OEGRT") will impose an additional gross receipts tax on entities engaged in business in San Francisco in which the highest-paid executive’s compensation exceeds 100 times the median compensation of its San Francisco-based employees. Non-profit organizations and businesses with no more than $1,000,000 in annual San Francisco gross receipts (so-called "small businesses") will be exempt from the OEGRT; however, small businesses will be subject to OEGRT’s administrative office tax, detailed below.

An entity’s highest-paid executive is the employee or officer of the entity, or its combined group, with managerial responsibility, whether or not that individual is based in San Francisco. Compensation includes all wages, commissions, bonuses, stock options, and property issued or transferred in exchange for services.

The median employee compensation of San Francisco-based employees will be calculated by converting an employee’s part-time compensation to its full-time equivalency. Employees are based in San Francisco if their total working hours in San Francisco exceed their total working hours elsewhere. The ratio of the highest-paid executive’s compensation to the median employee compensation is the Executive Pay Ratio ("EPR").

The OEGRT is imposed on the combined group’s taxable gross receipts attributable to San Francisco for the given tax year—i.e., the amount calculated pursuant to the general San Francisco Gross Receipts Tax rules. The exact rate is determined by the EPR value and ranges from 0.1% for EPR of 100:1 to 200:1, to 0.6% for EPR of over 600:1.

The approved ordinance also created the overpaid executive administrative office tax ("OEAOT") to be imposed on San Francisco-based businesses, including businesses with under $1 million in annual San Francisco gross receipts, having over 1,000 employees and over $1 billion in gross receipts. The OEAOT is imposed on the combined group’s total payroll expenses attributable to San Francisco, and the rate is four times the OEGRT rate. This tax supplements the existing San Francisco administrative office and homelessness administrative office taxes.

All entities doing business in San Francisco should evaluate a possible increase in tax liabilities under the OEGRT or OEAOT, especially if their EPR is near 100:1.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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