What makes a business engaged in business in San Francisco, and what changes when an affiliate leaves the combined group?

Where the tests live and what they are

Article 12-A-1 imposes the gross receipts tax on every person "engaging in business within the City" as "a privilege tax" (section 953(a), (b)) but does not define the phrase. Section 6.2-12 does, for the gross receipts tax, the homelessness and overpaid executive gross receipts taxes, the commercial rents and traffic congestion taxes, and the registration fee, so one finding of nexus opens several accounts. A "person" includes a partnership, a limited liability company, a trust and "any other group or combination acting as a unit" (section 6.2-15); a single-member entity disregarded for federal income tax purposes is not a separate person, and its owner is "the registrant and taxpayer" (Tax Collector Regulation 2014-2(d)). No Tax Collector regulation addresses engaging in business or part-year membership in a group. The lettered conditions are unchanged since 2021, including through the 2026 amendment (Ordinance 261-25).

Any one condition suffices. They fall into three groups.

• Presence (conditions (a) to (e), (i) and (j)): a fixed place of business kept by the person, or by an employee, representative or agent for its benefit; property owned, rented, leased or hired for business; goods regularly held for sale; capital employed or loaned on City property; corporate or franchise powers exercised in the City; or a liquidation in which the liquidators hold themselves out as conducting the business.
• Activity on seven days (conditions (f) to (h)): the person, or its employees, representatives or agents, solicits business or performs work or services in the City, or the person uses City streets for business vehicles, on "all or part of any seven days during a tax year." The days need not be consecutive, and part of a day counts. The tax year is the calendar year (section 6.2-20).
• Receipts alone (condition (k), added by Proposition D and operative in 2019): more than $500,000 of gross receipts "in the City during the tax year, using the rules for assigning gross receipts under Section 956.1." Section 956.1 is customer-based, and Regulation 2025-1 (tax years from 2025) places receipts from services in the City "to the extent the purchaser of the services received the benefit" there, with the customer's billing address as the last fallback. A provider with no people or property in the City therefore crosses the line at $500,000. The figure is not indexed, unlike the small business ceiling in section 954.1(b)(3).

Condition (k) tests a "person," which includes a group "acting as a unit." The Tax Collector's likely position is that a group selling into the City through a remote affiliate may be asked to show that neither the affiliate nor the group as a unit passes the line. Either way, section 956.3 puts every related entity's receipts on the combined return, so the practical question is whether the affiliate must register.

Engaging in business is not the same as owing tax. Registration is required "regardless of whether such person is subject to tax" and within 30 days of starting (sections 853(a), 856(b)). The small business exemption removes the tax, and the return unless the filer takes the section 960 credit or owes the administrative office tax, for a person or combined group whose gross receipts within the City do not exceed $5,000,000 for 2025, indexed from 2026, but not the registration fee (sections 954.1(a), (b)(3), 6.9-1(c)(2)). The indexed 2026 amount is not given here because the published pages do not state it. This article covers tax years 2025 and later.

Registration inside a combined group

Each person in a combined group that is itself engaged in business in the City needs its own certificate, but the group computes one fee on combined receipts and files one renewal (section 856(a)). An affiliate that meets none of the tests needs no certificate, though its receipts and payroll enter the combined return; one over $500,000 of City-assigned receipts meets condition (k) and must register. For registration years beginning April 1, 2026, the fee comes from the table in section 855(d), keyed to San Francisco Gross Receipts for the preceding tax year, plus a $4 state fee. It is due by the last day of February, or November 30 for a group that extended its gross receipts return (sections 6.9-1(g)(2), 6.17-1.1(e)).

Who is in the combined group

One filer files for the taxpayer and all its related entities as a single combined group, holding a power of attorney from each member engaged in business in the City (section 956.3). A related entity is one "permitted or required by the California Franchise Tax Board" to have its income on the same combined report (section 952.5). That report covers "two or more corporations" under common control, meaning more than 50 percent of the voting power (Rev. and Tax. Code section 25105). The City group therefore follows the California combined report as filed: worldwide or, under an election in Rev. and Tax. Code section 25110, water's edge, with exempt banks and financial corporations taken out (Cal. Const. art. XIII, section 27; Rev. and Tax. Code section 23182). A foreign affiliate outside a water's edge group never leaves the City group, and a change in the California group changes the City group. Regulation 2026-1 (promulgated August 3, 2026, for tax years from 2027) concerns dividends, interest and royalties from excluded foreign entities, not members joining or leaving. How a partnership fits is open: section 25105 limits the report to corporations, and no source read says whether a partnership, or an LLC taxed as a partnership, controlled by a group is a related entity. The Tax Collector may "establish or reallocate gross receipts among related entities" (section 957).

When an affiliate leaves mid-year

The ordinance has no part-year rule, and no regulation supplies one. The Tax Collector's published guidance does, and it goes beyond the ordinance's text: an entity that belonged to a group for part of the tax year is included in the group's return for the months it belonged, and files separately or with another group for the rest. Every San Francisco tax year is the calendar year, so a departure on any date but January 1 splits one year into two filings, whatever year the group or the buyer uses elsewhere. The consequences run in this order.

1. The seller group's return. It carries the departed entity's receipts and payroll through the departure date and none after, and its small business test runs on the smaller group. The split also moves the group against the homelessness gross receipts tax, which applies to a "person or combined group" and, from 2025, above $25,000,000 of City gross receipts (the Tax Collector's statement of Proposition M), and against the overpaid executive tax's filing exemption, which keys to the same small business line. Whether that tax's separate tests (1,000 or fewer U.S. employees and $1 billion or less of federal gross receipts) are measured on the combined group is not confirmed.
2. The departed entity's own filing. For the rest of the year it files alone, or inside the buyer's group if the buyer's California combined report takes it in. No source read says whether the $5,000,000 test is applied to its separate-period receipts or to its full calendar-year City receipts. The Tax Collector's likely position is the full year: section 954.1(b)(3) tests a "person ... whose gross receipts within the City did not exceed $5,000,000," the tax year is the calendar year, and the guidance splits the return, not the person's receipts. An entity under the line for its separate period but over it for the full year should expect the City to deny the exemption.
3. Registration. The departed entity already holds its own certificate if it was engaged in business in the City. The certificate is nontransferable and is surrendered "upon the sale or transfer of the business" (section 856(f)); the ordinance does not say whether a stock sale, which leaves the same legal person in place, is such a transfer, and the registration form has a "Change in Entity's Ownership" step. The renewal fee follows the preceding year's San Francisco Gross Receipts of the entity if it stands alone, or of the buyer's combined group if it joins one (sections 855(d), 856(a)); no rule says whether the months the old group reported count toward a departed entity's own base. A different person buying the assets registers within 30 days (section 856(b)).
4. Estimated payments. The "person or combined group" pays three estimates, due April 30, July 31 and October 31, each the lesser of 25 percent of the current-year liability shown on its return or 25 percent of the preceding year's (section 6.9-1(c)(3)). The seller group therefore pays on the smaller group through the current-year limb. The computation decides cash timing only: "[n]o penalties or interest imposed by this Section 6.17-1.1 shall apply to the failure to make any estimated tax payments" of the gross receipts tax (section 6.17-1.1(c)), a relief in place since 2021. The Tax Collector's likely position is that an unpaid estimate is still a delinquency on the account, which can surface on a section 6.21-1 clearance request or a good-standing check, but carries no penalty or interest. For the departed entity, section 6.9-1(c)(3)(B) says a person that filed no return for the preceding year and requested no extension "shall owe no estimated tax payments" for the current year; the Tax Collector's likely position is that the member did file, through its filer's power of attorney, though nothing turns on it. A seller group that extends its return pays 110 percent of its prior-year liability with the request (section 6.9-4(b)), and that payment stands in for the preceding-year liability in the next year's estimates while the return is unfiled.
5. The acquired entity's exposure, and the buyer. In a stock sale the taxpayer does not change: the acquired entity is the same person on which section 953(a) imposes the tax, that held the certificate, and that was in the group for its group years. Section 956.3 makes the filer the one who "shall pay the tax liability reflected on the return and any liability determined on audit"; as written, it does not release a member from the tax imposed on it or make members jointly liable. The Tax Collector's likely position is that it audits the group's return for the years of membership under section 957, and that a departed member cannot answer that its former filer "shall pay." That exposure, with the buyer's own, is what an indemnity and a clearance request have to cover. Anyone who acquires "an interest in a business" subject to City tax, other than publicly traded stock, must first obtain the Tax Collector's receipt showing the seller's taxes paid or a certificate that no amount is due, or withhold enough of the price; a buyer who does neither becomes personally liable (section 6.21-1(a) to (d)). The Tax Collector answers a written request within 30 days, and a stock purchase of a privately held subsidiary is an acquisition of an interest under the words of section 6.21-1(a). The request names both the departed entity (its own account and group years) and the seller group's filer, whose return carries the months before departure. Where the subsidiary owns City real property, a stock sale that is a "change in ownership" under Rev. and Tax. Code section 64 is "realty sold" for the transfer tax, and the seller excludes its receipts under section 954(e) only for the year that tax is paid (Tax Collector Regulation 2016-1, example 3).
6. If the departed entity stops City business. A return is due within 30 days of cessation (section 6.9-1(a)). The Tax Collector's guidance calls the final return a "Ceasing Business Return," requested through its Help Center, and says closing the account does not remove liability for amounts owed.

Late payment of tax shown or required to be shown on a return carries a penalty of 5 percent of the unpaid tax for the first month or fraction and 5 percent more for each following month or fraction, up to 25 percent, plus interest at 1 percent per month (section 6.17-1.1(a), (b)); missed estimates carry neither. For periods and events from January 1, 2021, waiver requires that the failure be "due to reasonable cause and circumstances beyond the taxpayer's control" and occur despite ordinary care without willful neglect (section 6.17-4.1), a harder standard than the one before.

A worked example

All facts are invented. A privately held group provides engineering consulting. The parent and two subsidiaries file one California combined report (no water's edge election; all domestic) and one San Francisco combined return. Subsidiary A has a City office. Subsidiary B has no City office, owns no real property, and sends staff to do site work in the City on about 40 days a year. On July 1, 2025 the parent sells all of Subsidiary B's stock to a holding company owned by an individual; the holding company has no other business and is not unitary with Subsidiary B, so Subsidiary B files its own San Francisco returns afterward. Neither the group nor Subsidiary B extends its 2025 return.

• The group's 2024 San Francisco return showed gross receipts tax of $200,000.
• The group's 2025 liability, computed after year end without Subsidiary B's July to December receipts, is $180,000.
• Subsidiary B's San Francisco gross receipts are $1,500,000 from January to June (inside the group) and $1,800,000 from July to December (separate).

The steps:

• Is Subsidiary B engaged in business, and who reports what? Yes: its staff work in the City on all or part of more than seven days (section 6.2-12(g)); its City receipts would also pass the $500,000 test in condition (k), but one condition is enough. The group's 2025 return, due on or before the last day of February 2026 (section 6.9-1(c)(1)), includes Subsidiary B's receipts and payroll for January 1 to June 30. Subsidiary B files separately for July 1 to December 31.
• The group's estimates. Each payment is the lesser of 25 percent of $180,000 ($45,000) or 25 percent of $200,000 ($50,000), so $45,000 is due on each of the three dates, $135,000 in all. If the group paid $50,000 on each date ($150,000), the balance due with the return is $30,000; if it paid $45,000 on each, $45,000. A payment under $45,000 would be a delinquency on the account but would carry no penalty or interest, which attach only to tax unpaid after the return's due date.
• Subsidiary B's separate period. Its separate City receipts of $1,800,000 are under the $5,000,000 line if the test runs on the separate period alone; on the Tax Collector's likely reading its full-year receipts of $3,300,000 are tested, and it is still under. On either reading Subsidiary B owes no 2025 gross receipts tax for its separate period and files no return for it (section 6.9-1(c)(2)). With separate-period receipts of $4,000,000 and full-year receipts of $6,000,000 the readings would diverge, and on the Tax Collector's reading the exemption would be lost.
• Subsidiary B's registration fee for April 1, 2026 to March 31, 2027, due by the last day of February 2026. On its separate-period receipts ($1,800,000) the section 855(d) table gives $875; on its full-year receipts ($3,300,000) it gives $1,885; each is followed by the $4 state fee. The ordinance does not say which base applies to a part-year separate filer, and the difference is $1,010.
• Exposure and the buyer. Subsidiary B remains liable for the group years it was in, and the Tax Collector may reallocate the group's receipts among the related entities on audit (sections 953(a), 956.3, 957). Before closing, the holding company asks the Tax Collector for a receipt or no-amount-due certificate covering Subsidiary B's account and the group's returns for its membership years, or withholds enough of the price to cover Subsidiary B's unpaid City tax; otherwise it is personally liable (section 6.21-1). Its indemnity from the parent has to reach both the group-year exposure and any section 6.21-1 liability. Subsidiary B owns no real property, so Regulation 2016-1 does not reach the parent's receipts from the stock sale.

The example computes no tax from receipts and assumes the group is under $25,000,000 of City receipts, with no extended return, water's edge group or partnership group.

Practice notes

Test each group member against the eleven tests one at a time and keep the evidence: timesheets or calendars showing City work or solicitation days for each entity, since "all or part of any seven days" is a low line, and a Regulation 2025-1 sourcing schedule for any affiliate with City customers and no City presence, since $500,000 of benefit-received receipts is the other. Register each member engaged in business within 30 days, even when the group is under the small business exemption, and list disregarded single-member entities at the owner's 2026 renewal. When a member leaves mid-year, split its receipts and payroll at the departure date in the workpapers, put the first part in the old group's return, calendar a separate filing (or inclusion in the buyer's group) for the rest, and test the small business exemption on the departed entity's full-year City receipts as well as its separate period. Recompute the seller group's remaining estimates without the departed member, and if the group extends the change-year return, calendar the 110 percent payment and the November 30 registration fee.

On the buy side, request the Tax Collector's receipt or no-amount-due certificate in writing at least 30 days before closing, naming the target's account and the seller group's filer for the target's membership years, or hold back enough of the price, and write the indemnity to cover group-year exposure as well as any section 6.21-1 liability. Where classification or apportionment is uncertain, the Tax Collector's Advance Written Determination pilot (through 2027) is available, and an entity that never registered may consider the Voluntary Disclosure and Compliance Program (through December 31, 2027) before the City asks. G&G State Tax Group provides San Francisco registration, combined-group and change-of-ownership reviews alongside its state and local tax practice.