The Office of the Treasurer & Tax Collector has released proposed Sourcing Regulations, with a Tax Collector Hearing scheduled for April 8, 2025 at 2:00 PM to hear and/or provide verbal comments on the proposed regulations. Written comments are also welcome.
Background:
Proposition M (2024) changes how many businesses calculate their San Francisco Gross Receipts Tax.
For most businesses, San Francisco taxes their gross receipts that are “attributable” to the City. For a business that is only operating in San Francisco and sells only to San Francisco customers for use in the City, this is straightforward. However, for businesses with gross receipts within and outside of San Francisco, how they determine which receipts are attributable to the City for purposes of taxation depends on their business activity or activities. The formulas used to determine San Francisco receipts are generally based on allocation of gross receipts and/or apportionment of gross receipts based on the percentage of payroll of employees in the City. The formulas for when to allocate and/or apportion are codified in law.
Prior to Proposition M, unless the business activity was one of certain specified activities whose gross receipts were generally derived from or related to real property or certain rental and leasing activities, businesses either determined their San Francisco receipts using 100% payroll apportionment, or 50% allocation and 50% payroll apportionment.
Under Proposition M, unless the business activity is one of certain specified activities whose gross receipts are generally derived from or related to real property (Categories 2, 3 and 7), all business activities will determine San Francisco receipts by using 75% allocation and 25% payroll apportionment.
This change means that many businesses are using allocation for the first time, and nearly all businesses are relying on allocation for a bigger percentage of the calculation of San Francisco receipts.
Proposition M also requires the Tax Collector to promulgate regulations interpreting how businesses must determine where gross receipts are allocated, a process known as “sourcing.” Our Office spent several months reviewing sourcing regulations from the State of California’s Franchise Tax Board (CA FTB) and other jurisdictions and held Interested Party meetings in fall 2024 to gather input from the business community. These proposed regulations are the result of that work.
Overview of the proposed regulations:
The proposed regulations generally follow CA FTB draft sourcing regulations wherever possible, with few exceptions. Aligned with the State, and following the clear request from taxpayers, San Francisco is proposing a waterfall approach to sourcing gross receipts from most services and intangible property that generally allows the use of Reasonable Approximation to determine the tax sourcing location if a company is unable to use contracts, books and records, or other sources of information to determine the location of the benefit of a service or the location of the use of intangible property. Examples of reasonable approximation may include census and gross domestic product if those methods reasonably approximate the location of the benefit of a taxpayer’s services or the location of the use of an intangible.
The proposed regulations diverge from the State in a few places, including around the treatment of the sale of financial instruments. The San Francisco Business and Tax Regulations Code states that gross receipts from the sale of financial instruments are in the City for tax purposes if the customer is in the City. The Treasurer’s Office cannot change this via regulation, which makes it impossible to mirror the State’s rules about how different financial instruments are treated for sourcing purposes. Given this difference, our proposed regulations propose a waterfall approach to sourcing the sale of financial instruments that explicitly allows the use of Reasonable Approximation to determine the tax sourcing location if a taxpayer is unable to use contracts, books and records, or other sources of information to determine the customer’s billing address (in the case of an individual customer) or commercial domicile (in the case of a business entity customer). As with services and intangible property, examples of reasonable approximation may include census and gross domestic product if those methods reasonably approximate the location of the benefit of a taxpayer’s services or the location of the use of an intangible.
The proposed regulations incorporate many special sourcing rules for specific industries analogous to the rules in various FTB regulations, including special sourcing rules for Franchisors; Motion Picture and Television Film Producers, Distributors, and Television Networks; Print Media; and Mutual Fund Service Providers, and Asset Management Service Providers.
We have excluded a few special industry rules, including special rules for partnerships, contractors, banks and financial corporations, commercial fishing, air transportation companies, railroads, trucking companies, and space transportation companies. However, we welcome comments from any company or industry group who believe these special rules are necessary. Other differences between our proposed regulations and the FTB’s proposed regulations generally reflect differences between our local law and state law.
Our proposed regulations do not preclude the Tax Collector from applying an alternative apportionment methodology if the results of following the rules in Section 956.1, including the regulation, do not fairly reflect gross receipts within the City. Taxpayers may apply for an Advance Written Determination to propose such an alternative apportionment methodology once that program is available in Spring 2025.
Next Steps:
- View the proposed regulations.
- Register for the Tax Collector Hearing to be held on Tuesday, April 8, 2025 at 2:00 PM to hear and/or provide verbal comments on the proposed regulations.
- Send written public comments to taxreform2024@sfgov.org with a deadline of 5:00 PM on Tuesday, April 8. Written comments from or about specific taxpayers will be treated as confidential taxpayer information under Section 6.22-1 of the Business and Tax Regulations Code. Written comments from tax representatives that do not reference specific taxpayers are not considered confidential and may be shared publicly.