San Francisco Overpaid Executive Gross Receipts Tax
San Francisco imposes an additional tax on businesses with high executive pay, deemed the “Overpaid Executive Gross Receipts Tax.” The tax is triggered based on a taxpayer or combined group’s executive pay ratio. The ratio is the annual compensation of the highest-paid managerial employee of the company, wherever geographically located, as compared to the annualized median compensation paid to full-time and part-time employees based in San Francisco for the tax year.
Compensation is defined to include “wages, salaries, commissions, bonuses, property issued or transferred in exchange for the performance of services (including but not limited to stock options), compensation for services to owners of pass-through entities, and any other form of remuneration paid to employees for services.”
If the executive pay ratio exceeds 100:1, then an additional tax will be imposed on apportioned San Francisco gross receipts ranging from 0.1% to 0.6%, depending on the computed executive pay ratio. For example, an entity with an executive pay ratio of greater than 200:1, would pay a 0.2% overpaid executive tax rate; greater than 300:1, a 0.3% overpaid executive tax rate; and so forth up to a maximum of 0.6%. Entities currently paying a payroll tax under the alternative “administrative office” taxing regime also will be subject to an additional payroll tax of between 0.4% to 2.4%, again depending on the climbing executive pay ratio of over 100:1, 200:1, and so forth, up to a maximum additional rate of 2.4%, for executive pay ratios greater than 600:1.
Observation: Entities with irregular stock recognition events could have material increases in the San Francisco Overpaid Executive Gross Receipts Tax. Careful modeling of expected stock compensation milestones should be taken into account for provision modeling purposes.
Observation: In December 2023, General Motors filed suit in San Francisco Superior Court seeking a refund of more than $108 million in San Francisco city taxes and over $13 million in penalties on the basis that the Gross Receipts Tax, Homeless Gross Receipts Tax, and Overpaid Executive Gross Receipts Tax violated provisions of the California Government Code requiring fair apportionment, as well as the state and federal Constitutions. While the case is highly nuanced and contains multiple arguments, it raises several constitutional issues that, if taken to the extreme, could result in remedies that potentially invalidate the Overpaid Executive Gross Receipts Tax, the Gross Receipts Tax, and the Homeless Gross Receipts Tax, or potentially offer certain taxpayers the opportunity to shift to a payroll-based tax in lieu of the gross receipt tax paid. Given that San Francisco has a 12-month statute of limitations for refund claims, certain taxpayers may want to consider filing protective claims for 2022 by February 28, 2024, to preserve their right to potential refund claims after consulting with their legal and tax advisors.
Proposed legislative update
In 2023, the San Francisco Mayor and certain supervisors requested that city officials draft a tax reform plan that has several goals, the most notable of which was simplifying the existing taxing regime, as well as reducing tax burden on both small businesses and the largest taxpayers. In November, city officials released an outline of the proposed changes, which can be found here. Since the release of the proposed changes, the city has participated in several rounds of private meetings with San Francisco taxpayers to receive comments on the proposal. The city expects to have a ballot initiative drafted in the next two months, but at this time it is unknown whether a city-led initiative will be placed on the 2024 ballot. Due to the general uncertainty and potential for multiple proposals circulating, it will be imperative that taxpayers model out the various scenarios to avoid potential surprises and pitfalls
