California - Voters approve San Francisco business tax reform 

November 13:  San Francisco voters on November 6, 2012, approved a local ballot measure—Proposition E—replacing the current payroll expense tax with a gross receipts tax (GRT) and making significant changes to the annual business registration fee structure.

San Francisco currently imposes a 1.5% tax on the payroll expense of entities doing business in the city with an exemption for small businesses with less than $250,000 in payroll expense.


The newly approved measure [PDF 2.67 MB] consists of three significant changes:


  • Phasing out the payroll tax
  • Phasing in the GRT
  • Altering the business registration fee structure

Proposition E is effective January 1, 2014.


The phase out of the payroll tax and the phase in of the GRT will occur over multiple years at varying rates depending on actual revenue collected over that period, with the final phase-in / phase-out rates effective by 2019.


The basic rationale underlying the phase-in and phase-out rates is that the combined revenues received from the GRT and the payroll tax would remain relatively revenue neutral (based on what the city would have collected under the former payroll tax regime). The tax achieves this purpose using two checks.


  • First, if less than the expected revenue is collected, the payroll tax will be phased out at a slower pace, but if excess revenue is collected, the payroll tax rate will be reduced to zero faster.
  • Second, the only potential adjustment to the GRT phase-in rate will occur in the year after any year in which the payroll tax rate is reduced to zero (which may never occur). The actual GRT and payroll tax rates to be applied during the phase-out/phase-in period will be computed by the City Controller and published annually by September 1 in the year preceding the tax year.

Read a November 2012 report [PDF 99 KB] prepared by KPMG LLP: California - Voters approve San Francisco business tax reform



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©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.


The KPMG logo and name are trademarks of KPMG International.


KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.


The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Direct comments, including requests for subscriptions, to us-kpmgwnt@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

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