The San Francisco Office of the Treasurer and Tax Collector recently issued Gross Receipts Tax regulations, tax return filing instructions and other guidance addressing major changes to how owners of disregarded entities are taxed, combined reporting, and procedures for requesting a two-month extension of time to file returns that are otherwise due today.
Introduction
Beginning in 2014, every person engaging in business within San Francisco is subject to an annual Gross Receipts Tax (“GRT”) measured by the person’s gross receipts from all taxable business activities attributable to San Francisco.1 The GRT will be phased in and the existing Payroll Expense Tax phased out over a 5-year period.2 During this phase-out period, taxpayers must report their GRT and Payroll Expense Tax liabilities on a single tax return, the first of which is due March 2, 2015. A person engaging in business within San Francisco must file a single GRT and Payroll Expense Tax return on a combined basis with all of that person’s related entities.3
Extensions to May 1, 2015
The San Francisco Office of the Treasurer and Tax Collector (“Tax Collector”) has released a form for taxpayers to request a two-month extension of time to file their Gross Receipts Tax (“GRT”) and Payroll Expense Tax returns.4 While returns are due by March 2, 2015, they may be filed by May 1, 2015, without the imposition of additional interest, penalties, and fees if an extension request is postmarked or received by the Treasurer on or before March 2, 2015. To be eligible for the extension, taxpayers must have paid at least 90 percent of their estimated tax liability by March 2, 2015, and file the return on or before the extended due date of May 1, 2015. Instructions to the extension request form state that taxpayers will be notified in writing by the Tax Collector if an extension request is denied.
Penalty Waiver Requests
The Tax Collector has also released a form for taxpayers to request a waiver of penalties for delinquent tax return filing and tax payments.5 These penalties include a 5 percent per month delinquency penalty up to 20 percent in the aggregate for late payment of tax and a $500 penalty for failure to timely file returns.6 According to the form, the tax must be paid in full before the Tax Collector will consider waiving any penalties.
GRT Tax Collector Regulations
Tax Collector Regulation 2014-1: Interpretations of the former San Francisco Gross Receipts Tax that was repealed in 2001 shall not apply to the current GRT.
Tax Collector Regulation 2014-2: Single-member entities (including single-member limited liability companies) that are disregarded for federal income tax purposes (“DRE”) will be disregarded for purposes of the GRT, the Payroll Expense Tax, and any business registration requirements.
The Tax Collector has released a form for sole owners to declare ownership of DREs. By submitting the form, the Treasurer will transfer all account information, including tax and fee payments and liabilities from the DRE to its sole owner, and will close the account of the DRE. 7 The form states that the owner of the DRE will need to submit a business registration application if not already registered, and that such owner will need to update the new business registration number with any relevant San Francisco department to reflect the business account number of the owner.8 The Treasurer’s website states that any interest and penalties resulting from late registration by the DRE owner will be waived if the DRE itself was timely registered.9
Tax Collector Regulation 2014-3: Clarifies the definition of gross receipts subject to tax as applied to a person acting as an agent on behalf of a principal. Gross receipts are presumed to be received on a person’s own behalf, and not as an agent.10 However, gross receipts shall not include amounts received by a person acting as an agent or broker on behalf of a principal where the amounts received are (1) to be transferred to the principal, (2) to pay for the principal’s legal obligations to third parties, (3) to reimburse sums advanced by the agent for the principal’s legal obligations to third parties, or (4) to invest on behalf of the principal.11
Regulation 2014-3 provides two examples. In Example 1, a client advances $500 to his attorney to pay for court costs pursuant to a written agreement between the client and attorney requiring the client to advance such amounts to the attorney separately from any attorney fees. Example 1 concludes that because the attorney received the $500 solely as an agent of the client to pay the client’s legal obligation to the court, the $500 is not a gross receipt of the attorney. In Example 2, Business A agrees to complete a project for Business B for a fee based on Business A’s costs, plus 10 percent. Business A purchases all the goods and services necessary for it to complete the project in its own name. Example 2 concludes that Business A is using the amounts received from Business B to pay for its own obligations, and therefore all amounts received by Business A from Business B are gross receipts upon which Business A is subject to tax.
GRT and Payroll Expense Tax Instructions12
Eligibility for Online Filing
The Tax Collector will generally require taxpayers to file GRT and Payroll Expense Tax returns electronically. However, certain taxpayers are not permitted to do so and must file paper returns.13 Such taxpayers include:14
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Those claiming the Biotechnology Exclusion, Clean Technology Business Exclusion, the Central Market Street and Tenderloin Area Payroll Expense Tax Exclusion, the Central Market Street Limit, and the Stock-Based Compensation Exclusion
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Combined groups claiming the Enterprise Zone Tax Credit or Payroll Expense Tax Exclusion resulting from qualification for the Enterprise Zone Tax Credit
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Those who were members of multiple combined groups during the tax year, or who were members of a combined group for only part of the year
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Combined groups with one or more part-year group members
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Combined groups that include only a portion of an entity. The instructions provide the following example:
Corporation A and Corporation B each own 30 percent of Partnership C. Under California franchise tax rules, Partnership C would be included in Corporation A and B’s unitary group to the extent of their combined 60 percent ownership. In this scenario, the combined group with Corporation A, Corporation B, and 60 percent of Partnership C must file a paper return.15
1. San Francisco Business Tax Regulations Code (“Code”) section 953(a). Our Client Alert of April 29, 2014, provides a detailed discussion of the GRT and other related provisions of the Code, and may be accessed at this link.
2. Code section 959.
3. Code sections 956.3 and 907(b). A person is a “related entity” to the taxpayer if that person and the taxpayer are permitted or required by the California Franchise Tax Board under Cal. Rev. & Tax Code section 25102 et seq., to have their income reflected on the same combined report. (Code section 952.5).
4. The form can be accessed at this link. Taxpayers must report 2014 GRT and Payroll Expense Tax together electronically, or on Form BTAX-2014 if ineligible for electronic filing. The electronic filing system may be accessed at this link. Electronic filing eligibility criteria are discussed, below.
5. The form can be accessed at this link.
6. Code sections 6.17-1(a) and 6.17-3(b).
7. This form can be accessed at this link.
8. This includes any accounts for San Francisco’s transient occupancy tax, tourism improvement district fee, Moscone expansion district fee, parking tax, access line tax, utility users tax, stadium operator admission tax, and cigarette litter abatement fee.
9. See this link. Page 7 of Online Filing Instructions released by the Tax Collector state that DRE owners will be the taxpayer for purposes of the GRT, Payroll Expense Tax, and business registration requirements.
10. Regulation 2014-3(e).
11. Regulation 2014-3(d).
12. The GRT and Payroll Expense Tax Online Filing Instructions (“Instructions”) are revised as of February 19, 2015, and may be accessed at this link. As of the date of this publication, the Tax Collector has not released filing instructions for taxpayers required to file paper returns.
13. The Tax Collector has not posted paper copies of the GRT and Payroll Expense Tax returns online because “paper returns must be generated for each taxpayer.” Taxpayers wishing to obtain paper tax returns are instructed to call (415) 701-2311 to request a paper copy. (Instructions, p. 4).
14. Instructions, p. 4.
15. Presumably, Corporations A and B in this example are members of the same combined reporting group for California income and franchise tax purposes.
