Choose Site

BLOG POST

ML BeneBits

San Francisco voters on November 3 approved Proposition L, which imposes an additional tax on businesses whose highest paid executive makes 100 times or more than the median salary of the business’s employees based in San Francisco.

Proposition L. Proposition L amends the San Francisco Business and Tax Regulations Code by adding a new Article 33 (titled Overpaid Executive Gross Receipts Tax). Article 33 imposes a tax on any business engaged in business in San Francisco if the business’s highest paid managerial employee’s annual compensation for a tax year, as compared to the median compensation paid to the company’s full-time and part-time employees based in San Francisco for that tax year, exceeds a ratio of 100:1.

Application to San Francisco Businesses. It is noteworthy that the tax applies to any company doing business in San Francisco, not just businesses headquartered in San Francisco. In addition, the tax applies to both public and private companies, as compared to the Securities and Exchange Commission’s chief executive officer pay ratio disclosure rules, which require a public company to disclose the compensation of the company’s CEO as compared to the median compensation of the company’s employees. However, certain nonprofits and small businesses otherwise exempt from the gross receipts tax in San Francisco are exempt from this new tax.

Calculating the Ratio. For purposes of calculating the ratio, all compensation is included, including wages, salaries, commissions, bonuses, property issued or transferred in exchange for the performance of services (including stock options), compensation for services to owners of pass-through entities, and any other forms of pay to employees for services. However, Article 33 does not include any guidance regarding how compensation is calculated. For example, would a stock option grant be included as “compensation” for purposes of these rules on the date of grant or when the option is exercised?

An employee is considered to be based in San Francisco for a tax year if the employee’s total working hours in San Francisco for the business during the tax year exceeds the employee’s total working hours in any other local jurisdiction for that business during the tax year. Compensation paid to a part-time employee for the tax year is converted to a “full-time equivalency” and compensation for a new hire is annualized.

Tax Amount. The amount of the tax depends on the executive pay ratio and whether the business is taxed by San Francisco based on gross receipts or payroll expenses (as determined under the San Francisco tax rules).[1]

  • For a business, other than a business operating as an administrative office, the tax rate is a percentage of the business’s taxable gross receipts attributable to San Francisco for the tax year, ranging from 0.1% to 0.6%, depending on the executive pay ratio. (e.g., The tax rate is 0.1% if the ratio is greater than 100:1 but less than or equal to 200:1 and the tax rate is 0.6% if the ratio is greater than 600:1.) Article 33 specifies that the San Francisco tax collector has the discretion to determine a business’s gross receipts within San Francisco.
  • For a business engaged in business within San Francisco as an administrative office, the tax rate is a percentage of the business’s total payroll expense attributable to San Francisco for the tax year, ranging from 0.4% to 2.4%, depending on the executive pay ratio. (e.g., the tax rate is 0.4% if the ratio is greater than 100:1 but less than or equal to 200:1 and the tax rate is 2.4% if the ratio is greater than 600:1.)

Estimated Additional Revenue Amount. The San Francisco Office of the Controller estimated that the tax will result in additional revenue of between $60 million to $140 million annually, although such amounts may vary from year to year due to economic conditions and the volatility of the tax. Proceeds from the tax will be deposited in San Francisco’s general fund and can be used for any city purposes.

Effective Date. Proposition L is effective for tax years beginning on or after January 1, 2022.



[1] San Francisco collects a tax on gross receipts on some businesses in San Francisco. However, certain businesses that provide administrative services in San Francisco must pay a tax based on their payroll expense instead of a gross receipts tax, as determined under the applicable tax code.