San Francisco Passes Prop M Changes for Business Taxes

On the November 5, 2024 ballot, San Francisco voters passed Proposition M by a wide margin of 69% to 31%. Effective January 1, 2025, Proposition M adopts significant changes to the San Francisco gross receipts taxes, including the Gross Receipts Tax, Homelessness Gross Receipts Tax, and registration fee, which are collectively referred to as the San Francisco Gross Receipts Tax. Overall, these changes will increase business taxes for larger businesses.

Proposition M includes the following changes:

• Reduces the number of business classifications and corresponding tax rates from 14 to seven
• Changes the apportionment methodology for most industries (except real estate and accommodations) to a 75% market-based sales allocation and 25% payroll apportionment formula, as opposed to the current system of 100% payroll or 50/50 sales and payroll factors, depending on the business classification
• Generally increases the gross receipts and Homelessness Gross Receipts Tax rates (except for small businesses), with additional tax rate increases beginning in 2027 and 2028
• Increases the exemption from the Gross Receipts Tax from $2.25 million to $5 million and decreases the exemption from the Homelessness Gross Receipts Tax from $50 million to $25 million
• Requires the San Francisco Tax Collector to issue regulations for apportionment formula sourcing
• Reduces the tax rate for the Overpaid Executive Gross Receipts Tax for 2025, with subsequent tax rate increases and other changes to the tax calculation
• Increases the administrative office tax and business registration fee rates
• Requires the San Francisco Office of the Treasurer and Tax Collector to establish an advance determination process to provide written advice to taxpayers

Overall, these changes will decrease San Francisco business taxes on small businesses and increase taxes on larger taxpayers. In addition, the changes to the apportionment formula may increase taxes on taxpayers based outside of San Francisco relative to taxpayers headquartered in San Francisco.

While the business classifications have been condensed, taxpayers should carefully review their new business classifications. In addition, taxpayers should consider the impact of these changes on their San Francisco business taxes for 2025 and for the tax rate increases in 2027 and 2028.