On Nov. 5, 2024, voters in San Francisco approved Proposition M with broad implications for the tax liabilities of businesses operating in the city. Perhaps most notably, the changes introduce city tax liability for businesses with no physical nexus in San Francisco as a result of new apportionment weighting changes and sales sourcing rules interacting with the city’s $500,000 economic factor presence standard.

Outside of broadening the city’s tax base, Proposition M features a number of significant changes requiring the reassessment of established strategies for San Francisco’s taxpaying businesses. Among the changes Proposition M introduces are rate increases on gross receipts tax (GRT) and Homelessness Gross Receipts Tax (HGRT); rate reductions for the Overpaid Executive Tax; a streamlined approach to business classification; and adjustments to registration fees and administrative office tax rates, among others.

Some of the most significant changes introduced by Proposition M include: 

1. Increased Tax Rates:
   • GRT and HGRT rates have been increased. This could mean higher tax liabilities for businesses operating within San Francisco.
2. Reduced Overpaid Executive Tax Rates:
   • Overpaid Executive Tax rates have been greatly reduced, which might provide some relief to businesses.
3. Fewer Business Categories:
   • The business categories have been reduced from 14 to seven. Reclassification may impact a business’s tax liabilities depending on the category it falls into.
4. Updated Apportionment Weighting:
   • The weighting used for apportioning tax liabilities has shifted from 100% payroll or 50% payroll/50% sales to 75% sales/25% payroll weighting. This emphasizes the sales factor significantly more than before.
5. Potential Sales Factor Sourcing Changes:
   • There might be changes in how the sales factor is sourced, which could influence how businesses calculate their taxable gross receipts.

The full text of Proposition M is available at SF.gov. While tax professionals continue digesting its implications, one thing is immediately clear. Businesses active in the city will need to take a fresh look at overall tax strategies to adapt to the new rules and renew effects to identify liabilities and opportunities alike accurately. Consider the following implications and how your business can prepare:

• Businesses need to reassess their projected tax liabilities for 2025, given the potential for significant cash tax impacts, whether positive or negative.
• The increased emphasis on the sales factor in apportionment calculations means businesses should review their sales sourcing methods for San Francisco and possibly California.
• Businesses must evaluate their new business categories and model their 2025 tax liabilities based on these new classifications, the updated apportionment rules, and the new tax rates.
• Companies without a physical presence in San Francisco might now face a material tax liability due to the $500,000 economic presence standard and the changes in apportionment weighting and sales sourcing rules.

Proposition M’s passage requires that businesses thoroughly review and possibly adapt their tax strategies to comply with new regulations and optimize their tax positions. If you have any questions about Proposition M's implications on your business, connect with a member of CBIZ’s financial services team today.