In our Client Alert, dated April 28, 2010, we described two proposals to change the payroll expense tax system in the City and County of San Francisco. The first proposal would replace the current payroll expense tax with a gross receipts tax (the “Gross Receipts Tax”). The second proposal would modify the existing payroll expense tax to separate the taxable payroll into two rate brackets based on the amounts earned by individual employees (the “Progressive Payroll Tax”). Both proposals would include a new gross receipts tax on real estate commercial rents which the City intends will be passed through to tenants.

On June 7, the City Controller’s Office published a report, “Improving San Francisco’s Business Tax: An Analysis of Two Alternatives” (the “Final Report”), analyzing the two alternatives and modifying certain terms of the proposals. We summarize the most significant changes to the proposals below. The Final Report is available on the City’s website. On June 8, Supervisor Chiu introduced a proposed ordinance to the Board of Supervisors setting out the details of a two-tiered progressive payroll expense tax that differs in certain respects from the proposal outlined in the Final Report. We summarize the terms of the proposed ordinance below. It is anticipated that a separate proposal will be introduced with the new gross receipts tax.