Author: Jessica Wilson
With support from nearly 70% of voters in the November 2024 election, Proposition M will substantially modify the San Francisco Business and Tax Regulations Code (the “SF Tax Code”), which imposes a number of taxes on entities engaging in business in the City.
The following is a summary of key existing provisions in the SF Tax Code and the changes outlined in Proposition M:
Gross Receipts Tax
Existing Law: The Gross Receipts Tax is a tax on the gross receipts of a business for all taxable business activities attributable to the City. The rates vary, depending on the category of business activity and amount of gross receipts. There are 14 categories of business activities, and the rates range from 0.053% to 1.008%. Most small businesses with gross receipts of up to $2.2 million are exempt from paying the Gross Receipts Tax.
Proposition M: Proposition M reduces the number of business activity classifications from 14 to 7. The rates of tax on gross receipts are modified for each category, with a new range of 0.1% to 3.716%. For tax years beginning on or after January 1, 2025, the small business gross receipts exemption threshold is increased to $5 million.
The changes to the Gross Receipts Tax will likely have the greatest impact on small businesses that will fall under the new $5 million threshold to qualify for the small business exemption. On the other hand, businesses that do not qualify for any exemption will face slightly higher rates of tax, with scheduled increases to rates through 2028.
Homelessness Gross Receipts Tax
Existing Law: The Homelessness Gross Receipts Tax imposes an annual tax on each person engaged in business in the City that receives or is a member of a combined group that receives more than $50 million in total taxable gross receipts. The tax is imposed at varying rates, based on seven different business categories, and ranging from 0.175% to 0.69%.
Proposition M: Proposition M lowers the threshold for a person or combined group’s taxable gross receipts to $25 million, with rates of tax ranging from 0.164% to 0.492%.
The changes to the Homelessness Gross Receipts Tax will primarily impact businesses with gross receipts in the City in excess of $25 million that were not previously subject to the tax. For businesses already subject to the Homelessness Gross Receipts Tax, the changes result in slightly lower rates of tax across business categories.
Overpaid Executive Gross Receipts Tax
Existing Law: The Overpaid Executive Gross Receipts Tax (“OEGRT”) imposes an additional gross receipts tax on a person or combined group’s taxable gross receipts in which the highest-paid managerial employee, within or outside of the City, earns more than 100 times the median compensation of employees based in the City, with rates ranging from 0.1% to 0.6%.
Proposition M: Proposition M modifies the method of calculating the OEGRT for tax years beginning on or after January 1, 2025, with rates ranging from 0.02% to 0.129%.
The changes to the OEGRT will impact the small number of businesses subject to the tax under the existing rules. The changes to the method of calculating the OEGRT make it less likely that the tax will apply. For those businesses to which it does apply, the rates will be lower.
Relationship to Proposition L
The November 2024 ballot included two propositions relating to business taxes: Proposition M, which modifies a number of provisions among various existing business tax ordinances in the City; and Proposition L, which would have created a new gross receipts tax on transportation network companies and autonomous vehicle businesses. Both measures required a simple majority to pass. While both measures achieved the required votes to pass, Proposition M contained a provision that would essentially negate Proposition L if both measures passed. Therefore, Proposition M is the only one of the two City business tax measures that will become effective.
