Clarification on Reporting Requirements and Computation for San Francisco’s Gross Receipts Tax

While San Francisco’s gross receipts tax went into effect beginning January 1, 2014, confusion continues to linger regarding two aspects of the tax: reporting requirements and computation of the tax. To help clarify these areas of uncertainty, we’ll break down how to define nexus, how a taxpayer’s North American Industry Classification System (NAICS) code impacts the tax, and which reporting deadlines must be met.

Nexus in Seven Days

The term nexus describes the level of activity necessary for a jurisdiction to impose its tax on a taxpayer. For San Francisco business tax purposes, a taxpayer “doing business” in San Francisco is subject to the tax. One nuance is that some taxpayers who don’t have any physical locations in San Francisco can still be considered to be “doing business” in the city.

Any taxpayer, with or without a permanent location in San Francisco, is subject to San Francisco business tax if the taxpayer collectively has one or more employees working in San Francisco for seven days or more during the tax year. Those days don’t need to be consecutive.

For example: A taxpayer has three employees who each spend three days during the tax year working in San Francisco. That taxpayer then has nine employee work days in the city, which means the taxpayer qualifies for nexus and a registration requirement in San Francisco. That registration is due within 15 days after meeting the seven-day threshold.

NAICS Code

Another important item impacting San Francisco business tax is a taxpayer’s NAICS code. Taxpayers must report their principal business activity (PBA) code on their federal tax returns—and these codes are largely based on the NAICS code—but they often don’t carefully choose an appropriate code because the federal PBA code disclosure doesn’t impact the computation of federal tax. The NAICS code, however, may have a significant impact on a taxpayer’s computation of San Francisco tax.

The NAICS code controls which apportionment methods and tax rates apply to a taxpayer when computing San Francisco tax. The code impacts a taxpayer’s gross receipts tax every year that the taxpayer is subject to the tax—making it all the more important to use the correct code. If a company uses an inappropriate NAICS code for San Francisco tax purposes, it could be exposed to additional San Francisco taxes upon an audit of its tax return. An inappropriate code can also result in overpaying tax.

An example: A company that processes financial transactions using advanced technology has all of its employees located in San Francisco. It determines for San Francisco tax purposes that a “technology” NAICS code is most appropriate.

Businesses that use the “technology” code must apportion receipts to San Francisco based on the location of the business’s customers, which often results in apportionment of less than 100 percent. While an argument can be made that “technology” is the proper code, a “financial” code may be a better fit. In this case, the correct apportionment percentage is based on the company’s payroll in San Francisco, which for this business would be 100 percent.  The “technology” NAICS code could therefore result in understated tax and a San Francisco tax assessment.

Here’s another example: A company that develops games for use by an affiliated company has all its employees in San Francisco. It incorrectly uses a “holding company” NAICS code rather than an “entertainment company” NAICS code. The holding company classification requires payroll apportionment (100 percent of receipts apportioned to San Francisco because 100 percent of the payroll is in the city). If the company correctly classified itself as an entertainment company, however, the taxpayer may have been able to apportion its receipts outside of San Francisco in computing its tax, which would mean that less than 100 percent of receipts would be subject to tax.

Deadlines

Deadlines have generated some confusion as well. First, San Francisco requires two separate filings: the gross receipts tax return and the annual business registration. Second, San Francisco applies separate reporting years to each filing regardless of whether the business operates on a calendar or fiscal year.

Gross receipts tax must be computed and paid on a calendar-year basis.  Business registrations, however, must be filed for the San Francisco fiscal year, which is July 1 through June 30.

Here are the 2016–2017 fiscal year San Francisco tax deadlines by quarter, annually, and for the annual registration renewal:

  • First quarter 2016 estimated gross receipts tax installment
    Due May 2, 2016
  • Business registration renewal for the period July 1, 2016 through June 30, 2017
    Due May 31, 2016
  • Second quarter 2016 estimated gross receipts tax installment
    Due August 1, 2016
  • Third quarter 2016 estimated gross receipts tax installment
    Due October 31, 2016
  • Fourth quarter 2016 estimated tax installment and annual gross receipts tax return for the 2016 calendar year
    Due February 28, 2017

The statutory due dates are April 30, July 31, and October 31. The May 2 and August 1 dates incorporate the rule that if a deadline falls on a Saturday or Sunday, the return or payment will be considered timely if it’s postmarked the next business day (Monday). Otherwise, the due dates don’t change.

We're Here to Help

For more information about the San Francisco gross receipts tax or for assistance complying with and navigating its registration, filing, and payment requirements, contact your Moss Adams professional or email statetax@mossadams.com.