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Seattle and San Francisco Look to Recoup Revenues Lost During COVID-19

by Alex Thacher

Seattle and San Francisco are proposing new taxes to make up for lost revenue due to COVID-19.

The Seattle City Council currently has two bills on the table as the city looks for alternative ways to make up the estimated $110 million of lost tax revenue this year alone. The most recent bill, JumpStart Seattle, would target companies with total annual payroll expenses of $7 million or more (think Amazon and Expedia). JumpStart Seattle would impose a tax ranging from 0.7% to 2.1% on total annual employee compensation, with the highest rate being applicable only to companies with total business payrolls of $1 billion or more. However, the other bill, Tax Amazon, would impose a flat 1.3% tax on companies with total annual payroll expenses of $7 million or more.

Both taxes come on the heels of the 2018 Seattle “head tax” which was originally passed with a vote of 9-0 but then ultimately repealed by a vote of 7-2 after key business leaders mounted a referendum campaign and Amazon threatened not to move into Rainier Square, a 30-floor business tower still under construction. However, after the repeal of the head tax, voters ultimately sided against Amazon and Seattle Chamber-backed candidates and put in place council members that favor taxing big businesses based in the city.

San Francisco is looking for ways to make up the estimated $2 billion of lost tax revenue due to COVID-19 as well. Mayor London Breed and the San Francisco Board of Supervisors are looking at numerous tax options, including increasing the San Francisco Gross Receipts Tax rates for all classifications/industries, a revamped “CEO” gross receipts tax and a revamped stock-based compensation tax. Furthermore, if Proposition C is deemed unlawful (Commercial Rents Tax & Homelessness Gross Receipts Tax), then the city is planning workaround taxes that would create a new top-tier gross receipts tax and a new Commercial Rents Tax.

Seattle and San Francisco are just two of the numerous jurisdictions asking how they are going to offset a deficit of millions, or even billions, stemming from lost tax revenue because of COVID-19. Most city councils and/or mayors are looking to businesses that are profiting during these trying times to pay much of the tax burden. Seattle and San Francisco are especially targeting large businesses they consider responsible for causing sudden increases in housing prices and homelessness as a result of these big businesses quickly adding tens of thousands of highly paid workers within their respective headquartered city.

Seattle: A Tale of Two Taxes

During the continuing pandemic and increasing issues with homelessness, Seattle City Council members have proposed two bills directed explicitly at Amazon. However, both are expected to have a tax base of 800+ taxpayers and generate between $200 million and $500 million in tax revenue annually. Both taxes have garnered support from the council, with at least seven of the nine-member council (a veto-proof majority) in favor of them. The JumpStart Seattle bill is more likely to gain the mayor’s support than the Tax Amazon bill, but only time will tell which way the city goes...

JumpStart Seattle
If passed, JumpStart Seattle would be effective January 1, 2021, through December 31, 2030 (10-year sunset provision). This bill is more likely to pass.
  • For businesses with total Seattle payroll expenses of $7 million to $1 billion:
    • 0.7% tax on employee compensation between $150,000-$499,999
    • 1.4% tax on employee compensation of $500,000 or more
  • For businesses with total Seattle payroll expenses of $1 billion or more:
    • 1.4% tax on employee compensation between $150,000-$499,999
    • 2.1% tax on employee compensation of $500,000 or more
  • Exemptions:
    • Grocery stores
    • Federal, state and local governments
    • Businesses that only sell, manufacture or distribute motor vehicle fuel
    • Businesses that only sell or distribute liquor

Tax Amazon

If passed, Tax Amazon would be retroactively effective June 1, 2020, but no tax payments would be collected until February 2022 and the bill does not have any sunset provisions.
  • For businesses with total Seattle payroll expense of $7 million or more:
    • Flat 1.3% tax on total employee compensation
    • Exemptions:
    • Grocery stores
    • Federal, state and local governments
    • Nonprofit organizations

San Francisco: A Tale of Too Many Taxes

San Francisco continues to look for ways to increase tax revenue in a city that continues to struggle in addressing its growing homeless population. Currently, Mayor London Breed (Mayor’s Proposal) and the San Francisco Board of Supervisors ( BOS proposal) are discussing how best to generate new tax revenue from the business community, with many expecting some hybrid of the two proposals to be on the November 3, 2020, San Francisco ballot for taxpayers' consideration.

Business Registration Fee
Every person engaging in business within the city must register with the city and pay an annual fee for doing business during the city’s fiscal year beginning July 1 and ending June 30. The fee is a tiered fee table based on the taxpayer’s San Francisco gross receipts from their applicable San Francisco Gross Receipts Tax (SFGRT) return.

Based on both Mayor Breed's and the San Francisco BOS proposals, the changes would be effective with the 2021-2022 fiscal year (i.e. gross receipts reported on the 2020 SFGRT return).
  • Fee Decrease
    • Applicable to taxpayers with $1 million or less in San Francisco gross receipts
  • Fee Increase
    • Applicable to taxpayers with greater than $1 million but less than $1.5 million in San Francisco gross receipts
Payroll Expense Tax
Originally, this tax was expected to be phased out in 2018 but continues to exist at a tax rate of 0.38% as of today. However, with COVID-19 making working-from-home everyone’s new reality, both Mayor Breed and the San Francisco BOS don’t see much revenue coming from the San Francisco Payroll Expense Tax (SFPET) going forward and are now proposing the elimination of the SFPET beginning with the 2021 tax year.

IPO Tax – Version 2.0
Previously the San Francisco BOS put forward an “IPO Tax” but this bill never made it onto November 2019 ballots. The IPO tax was meant to separately tax stock-based compensation at a rate of 1.5% instead of the standard SFPET rate of 0.38%.

Even though Mayor Breed and the San Francisco BOS are proposing the elimination of the general SFPET, the San Francisco BOS is again putting forward the IPO Tax. However, this time bill language clarifies that only stock-based compensation from public companies would be subject to this new payroll tax. If this bill passes, it would be retroactive to January 1, 2020. It only requires a simple majority vote to pass.

Gross Receipts Tax
San Francisco continues to have one of the more complicated gross receipt taxes within California with 20 different classifications, three apportionment methodologies and seven different graduated tax rates. Effective with the 2021 tax year, Mayor Breed and the San Francisco BOS are proposing various changes to the SFGRT return.
  • Tax Rate Increases
    • Mayor Breed would prefer to uniformly increase rates 40% across industries with no future rate increases.
    • The San Francisco BOS would prefer to selectively increase rates for certain industries as the economy improves, granted the average monthly unemployment rate drops to the benchmark rates of 7% and 4%.
    • Under the San Francisco BOS proposal, it is important to note that the tiered tax rates for the business activity “Information” (most common classification for SaaS companies) is proposed to increase from the range 0.125%-0.475% to 0.600%-0.840%, an almost 500% increase for taxpayers in the lowest tier if the unemployment benchmark of 4% is reached!
    • Small Business Exemption
      • Both Mayor Breed and the San Francisco BOS agree that expanding the exemption for small businesses is necessary to alleviate financial pressure on the numerous businesses now struggling to financially operate within San Francisco.
      • Small Business Exemption increased from $1.17 million to $1.5 million of gross receipts attributable to the city.
    Homelessness Gross Receipts Tax – Version 2.0 & Commercial Rents Tax – Version 2.0
    The City previously implemented the Commercial Rents Tax (SFCRT) and Homelessness Gross Receipts Tax (SFHGRT) under Proposition C. Unfortunately, Proposition C did not receive a two-thirds majority vote of approval and the validity of the proposition is now in appeal to the CA First Circuit Court of Appeals. Until the validity of Proposition C is resolved the city is not able to spend the estimated $500 million in tax revenue collected from these provisions, which leaves the city searching for ways to make up the lost revenue if Proposition C is ultimately overturned.
    • Unlock homelessness and childcare funding with two NEW taxes:
      • Essentially a workaround if Proposition C is struck down. Both Mayor Breed and the San Francisco BOS intend on creating two “backstop” taxes that would mirror the rates and exemptions of Proposition C for a period of 15 years. These taxes would not go to the intended special funds, but rather all revenues collected would go into the General Fund.
      • These two backstop taxes would unlock about $300 million of the impounded Proposition C revenue already collected and provide additional future revenue if the city loses the pending litigation.
      • The SFHGRT is an additional gross receipts tax for taxpayers with more than $50 million in San Francisco gross receipts.
      • The SFCFT is an additional tax for taxpayers receiving commercial rental income. This is not a pass-through tax to lessees and is to be paid by the landlord. Tenants who sublease their commercial space are also subject to this tax. There are no small business exemptions.

    CEO Tax – Version 2.0
    Similarly to the San Francisco IPO Tax, the San Francisco BOS put forward for the November 2019 ballot the “CEO Tax”, which was a tax on high executive pay to fund Mental Health San Francisco, a proposed universal mental health program. However, this bill was ultimately removed from the November 2019 ballot and most voters never knew it existed.

    Now, the San Francisco BOS are introducing the “Overpaid Executive Tax” (SFOET) for the November 2020 ballot, which is simply a revised version of the CEO Tax. The SFOET is an additional 0.1% gross receipts tax if the taxpayer or combined group has an executive compensation ratio in excess of 100:1. The rate proportionally increases up to 2% for an executive compensation ratio of >1,000:1. This tax would be effective January 1, 2022, and only requires a simple majority vote to pass.

    Insights

    Taxpayers doing business within Seattle or San Francisco should review their business profile and determine with a state tax professional how these new taxes may impact their business. As things are quickly changing and more metropolitan cities are expected to follow Seattle and San Francisco’s leads, it is going to be imperative to follow the changes at your local level.

    Furthermore, with no end in sight for this global pandemic and many employees now working remotely, you could see your state and local nexus profile drastically increase for 2020 and beyond.

     

    July 02, 2020

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    Author
    Alex Thacher - Partner, Tax - San Jose, CA | Armanino
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