Although San Francisco authorities haven't enforced it, the local government does have tax provision that requires companies to pay a payroll tax on gains from employee stock options. However, with tax revenues down, many are wondering if the city will take action to collect these funds. Desperate times, right?
Recently, I heard San Francisco Mayor Ed Lee on our local NPR station talking about how important it was to keep Twitter’s headquarters in San Francisco. To those worried that the recent talks between Twitter and the City were stalling, his words must have been reassuring. But if Lee really wants to keep Twitter– and thousands more tech jobs– in San Francisco he needs to defuse this much bigger ticking tax time-bomb now. This isn’t just about keeping Twitter in San Francisco– this has ramifications for San Francisco’s entire startup ecosystem.
To be clear, this is not a trend. Even the federal government considers taxing these options off the table, and we haven’t been able to find a single city in the United States with such a far-reaching tax policy. This would create potentially huge costs for startups that they can sidestep simply by moving a few miles to the North, East or South. If enforced, expect an exodus of San Francisco jobs to surrounding areas.
The provision: Section 902.1 of the San Francisco Business and Tax Code. It was amended in 2004 to include stock options. Here’s the relevant text of the provision (bolding added):
SEC. 902.1. – PAYROLL EXPENSE.
(a) The term “Payroll Expense” means the compensation paid to, on behalf of, or for the benefit of an individual, including shareholders of a professional corporation or a Limited Liability Company (“LLC”), including salaries, wages, bonuses, commissions, property issued or transferred in exchange for the performance of services (including but not limited to stock options), compensation for services to owners of pass-through entities, and any other form of compensation, who during any tax year, perform work or render services, in whole or in part in the City; and if more than one individual or shareholders of a professional corporation or members of an LLC, during any tax year performs work or renders services in whole or in part in the City, the term “Payroll Expense” means the total compensation paid including salaries, wages, bonuses, commissions, property issued or transferred in exchange for the performance of services (including but not limited to stock options), in addition to any compensation for services to owners of pass-through entities, and any other form of compensation for services, to all such individuals and shareholders of a professional corporation or members of an LLC.