How does a financial services business apportion its San Francisco gross receipts: customer location or payroll?

Two rules, divided at January 1, 2025

The gross receipts tax took effect with Proposition E, approved November 6, 2012 and operative January 1, 2014. From the start, the ordinance assigned each business activity to a group by NAICS code and gave each group its own measure. Financial services, defined as "engaging in or facilitating financial transactions" and covering NAICS 521, 522 and 523, shared a section with insurance and professional, scientific and technical services, and the measure for all three was payroll apportionment alone (section 953.6(b), (e)). NAICS 525 was not named in section 953.6, and the catch-all for activities not assigned elsewhere, section 953.4, also used section 956.2 (section 953.4(d)). Customer location played no part in the measure for any of them.

Two later measures changed the surrounding structure without changing that rule. Proposition C (November 2018) added the homelessness gross receipts tax in Article 28, operative January 1, 2019, and directed that receipts attributable to the City be determined in the same manner as in Article 12-A-1 (section 2804(e)), so financial services receipts were measured by payroll for that tax as well, for tax years ending on or before December 31, 2024 (section 2804(f)). Proposition F (November 2020) repealed the payroll expense tax in Article 12-A, operative January 1, 2021, and raised most gross receipts tax rates, leaving the gross receipts tax as the City's main business tax.

Proposition M rewrote the measure. Section 956 now provides two regimes: for taxable years ending on or before December 31, 2024, the rules of sections 956.1 and 956.2 in the manner directed in sections 953.1 through 953.7; for taxable years beginning on or after January 1, 2025, in the manner directed in sections 953.20 through 953.26 (section 956(a), (b)). The fourteen older activity groups became seven categories. Categories 1, 4, 5 and 6 each use the same three-quarters and one-quarter formula; Categories 2, 3 and 7 use receipts tied to City real property (sections 953.20 to 953.26). Article 28 now applies the identical formula to Category 6 for the homelessness gross receipts tax (section 2804.7(c)).

The consequence is the reason the category question comes first. A business with most of its people in the City and most of its customers elsewhere reported most of its receipts under the payroll rule through 2024; since 2025 it reports a quarter of its payroll-apportioned receipts and only the share of the remaining three-quarters that its customers place in the City. A business with few City employees and many City customers moves the other way.

What Category 6 covers, and what sits elsewhere

"Category 6 Business Activities" means activities in NAICS 521 (central banks), 5221 (depository credit intermediation), 523 (securities, commodity contracts, and other financial investments and related activities) and 525 (funds, trusts and other financial vehicles) (section 953.25(b)), applying the NAICS definitions as of January 1, 2022 (section 952.4). In practice, broker-dealers, investment advisers and portfolio managers, and fund vehicles fall in NAICS 523 and 525.

Several financial businesses sit outside Category 6. Nondepository credit intermediation (NAICS 5222) and activities related to credit intermediation (NAICS 5223), such as nonbank lenders and loan brokers, are Category 5 (section 953.24(b)); insurance (NAICS 524) is Category 4, according to the Treasurer's published category list. All three categories use the same three-quarters and one-quarter formula (sections 953.24(c), 953.25(c); the Treasurer's Proposition M page for Category 4), so the apportionment answer is the same; the rates differ. Banks and financial corporations exempt from local taxation under article XIII, section 27 of the California Constitution and Revenue and Taxation Code section 23182, and insurers exempt under article XIII, section 28, are exempt from the City's tax for as long as the City is prohibited from imposing it (section 954(e)(1), (2)), and their payroll is left out of both sides of the payroll fraction (section 956.2(g)).

The base itself excludes much of what a financial business earns on its own capital. Gross receipts shall not include any investment receipts, defined as interest, dividends, capital gains, other amounts received on account of financial instruments, and distributions from business entities, where those items are directly derived exclusively from the investment of capital and not from services or from the sale of property other than financial instruments (section 952.3(d)). Allocations and distributions from a pass-through entity are excluded if derived exclusively from an investment in it, and gross receipts of a pass-through entity that is itself subject to the tax are not also gross receipts of its owner (section 952.3(d)). Receipts from sales of financial instruments are measured net of the cost to acquire them (section 952.3(e)). Receipts from related entities are excluded (section 952.3(d)).

A business with receipts in more than one category computes each category separately, after folding any category with $10,000 or less of receipts into its largest category (section 953.27(a), (b)). The small business exemption is tested on the total of City receipts across all categories (section 953.27(b)(1)); for tax years beginning on or after January 1, 2025, it covers a person or combined group whose gross receipts within the City do not exceed $5,000,000 (section 954.1(b)(3)).

The three-quarters: where the customer is

Section 956.1 assigns receipts to the City by type. Receipts "from services are in the City to the extent the purchaser of the services received the benefit of the services in the City" (section 956.1(e)). Receipts from intangible property are in the City to the extent the property is used there, and in the case of financial instruments, sales are in the City if the customer is located in the City (section 956.1(f)). Both subsections direct the Tax Collector to adopt interpreting regulations after a public hearing and after considering California's sourcing rules and those of other jurisdictions.

Tax Collector Regulation 2025-1, Gross Receipts Tax: Allocation of Gross Receipts from Services, Intangible Property, and Sales of Financial Instruments, was promulgated October 24, 2025 and applies for tax years starting on or after January 1, 2025. It states that it does not change whether or how much of a business's receipts are allocated or apportioned under sections 953.20 to 953.26; it only clarifies how receipts are allocated under sections 956.1(e) and (f). Four rules in it matter most to a Category 6 business.

Services generally. The regulation uses a waterfall. The benefit location is taken first from contracts or books and records kept in the normal course of business; if those do not substantiate it, from all other sources of information; then by reasonable approximation; and, if the location still cannot be determined, by the customer's billing address in the taxpayer's books and records. A service that predominantly relates to City real property, property located in the City, or individuals physically present in the City is presumed to be received in the City, a presumption the taxpayer can overcome by a preponderance of the evidence.

Asset management. For receipts from asset management services, defined as the direct or indirect provision of management, distribution or administration services to funds, the regulation looks through the fund: the benefit is received "at the domiciles of the investors," or of the beneficial owners where an investor holds title for someone else. An investor's domicile is presumed to be its billing address in the taxpayer's records, and the City share is the average of the City-domiciled share of interests at the beginning and the end of the year. The regulation's first example puts City investors at 50 percent at the start of a year and 20 percent at the end and allocates 35 percent of the fee to the City. The look-through reaches fees from funds only; advisory fees from separately managed accounts are services under the general waterfall.

Large customer bases. Where a taxpayer provides a professional service to more than 250 customers, receipts from that service are allocated to each customer's billing address, except receipts from a single customer that supplies more than 5 percent of the receipts from that service. The regulation lists services related to brokering securities that generate commissions as a professional service for this purpose, and its broker-dealer example allocates both commissions and annual advisory fees by billing address.

Financial instruments. For sales of financial instruments, the customer is the person "without regard to intermediaries" who gains the greatest possession of economic rights. An individual customer's receipts go to the City if the billing address at year end is in the City; an entity customer's go to the City if its commercial domicile is in the City, determined at year end from the taxpayer's books and records and rebuttable with credible documentation. If neither can be determined, the location is set by reasonable approximation.

Two features match California's own market sourcing regulation (Cal. Code Regs., tit. 18, section 25136-2). First, nothing is thrown out: when a location cannot be found, the regulation falls to billing address or reasonable approximation rather than excluding the receipt, although for financial instruments the Treasurer's materials say the ordinance's customer-location rule cannot be changed by regulation, "which makes it impossible to mirror the State's rules." Second, method choice binds. The taxpayer's reasonable approximation stands unless the Tax Collector shows by a preponderance of the evidence that it is unreasonable, but a change to a different method of reasonable approximation may not be made without the Tax Collector's permission.

The one-quarter: payroll measured across the group

Section 956.2 multiplies all non-exempt combined gross receipts of the person by City payroll over combined payroll (section 956.2(a)). Combined gross receipts and combined payroll are worldwide and include "all related entities to the person," unless a California water's edge election under Revenue and Taxation Code section 25110 is in effect, in which case both are computed consistently with that election (section 956.2(b), (c)). A related entity is one permitted or required by the Franchise Tax Board to be included in the same California combined report (section 952.5), and a person and its related entities file a single combined return (section 956.3). The payroll quarter therefore reaches group receipts that never touched the City, at the City's share of group payroll.

City payroll is compensation for work performed in the City. An employee who works wholly in the City counts in full; one who works partly in and partly outside the City counts by working hours, or by volume of business where pay depends on volume, with a facts-and-circumstances fallback under Tax Collector rulings (section 956.2(e)). Remote and hybrid schedules move the fraction directly. Where a person has no employees, compensation includes the federal taxable income of individual owners, who are then located by the same hours test, and a person with no combined payroll has no receipts under this section (section 956.2(c), (f)).

A worked example

An investment adviser organized as a limited liability company manages several private funds and a book of separately managed accounts from offices in San Francisco and in another state. It has no related entities. In 2025 its gross receipts are $40 million: $30 million of management fees from the funds and $10 million of advisory fees from 180 separately managed account clients. Work performed in the City accounts for 70 percent of its payroll. City-domiciled investors hold 8 percent of the fund interests at the start of the year and 12 percent at the end, and the adviser's client contracts place 25 percent of the separately managed account fees with clients in the City.

The section 956.1 amount is $3.0 million of fund fees (10 percent, the average of 8 and 12) plus $2.5 million of account fees, or $5.5 million; three-quarters is $4,125,000. The section 956.2 amount is $40 million times 70 percent, or $28 million; one-quarter is $7,000,000. Taxable City gross receipts for 2025 are $11,125,000. Under the rule in force through 2024, the same facts would have produced $28 million. Had the adviser no City customers at all, its 2025 figure would still be $7,000,000, because the payroll quarter does not depend on where customers are.

The smaller base meets higher rates. For 2025 and 2026, Category 6 rates are 1.5 percent on the first $2,500,000 of taxable gross receipts, 3 percent to $25,000,000, 2.352 percent to $50,000,000, 3.024 percent to $100,000,000 and 3.36 percent above that, with increases scheduled for 2027 and 2028 (section 953.25(a)); for 2024, financial services rates ran from 0.62 to 0.868 percent (section 953.6(a)(3)(C)). In the Treasurer's published table, the first-band rate for Category 6 is the highest of the seven categories. Above $25,000,000 of taxable receipts, the homelessness gross receipts tax adds Category 6 rates from 1.148 to 1.64 percent (section 2804.7(a)). Whether a given firm pays more or less than before turns on the ratio of its City customers to its City payroll, not on the formula alone.

Questions the ordinance and regulation leave open

The related-entity definition borrows the California combined report, which is a corporate concept. The ordinance does not say how commonly owned pass-through entities outside any combined report are to be grouped, and the Tax Collector's authority to establish or reallocate gross receipts runs "among related entities" (section 957). The ordinance gives such a group no grouping rule of its own, and the Tax Collector's published sourcing materials point to advance written determinations as the route for a request to use a different method.

The pass-through exclusion covers allocations derived exclusively from an investment in the entity and not from any other property sold to, or services provided to, such entity (section 952.3(d)). A profits allocation that a fund's general partner receives for managing the fund is not plainly within that exclusion, and neither the ordinance nor Regulation 2025-1 addresses it.

Practice notes

The first question for any financial business with City employees or City customers is its category: NAICS 523 and 525 activities are Category 6, nonbank lending is Category 5, and insurance is Category 4, and the three share a formula but not rates. The second is the year. Returns for 2024 and earlier use payroll alone; returns for 2025 and later use the three-quarters and one-quarter formula, and the Treasurer's Proposition M page gives November 30, 2026 as the extended due date for 2025 annual returns. The customer three-quarters is built from records the business already keeps: investor registers at the start and end of the year for fund fees, client billing addresses for books of more than 250 customers, and contracts for the rest, with any reasonable approximation documented as a method the business will keep in later years, since the regulation, promulgated in October 2025 for years that began in January 2025, bars a change without the Tax Collector's permission. The payroll quarter needs hours-based City payroll for every employee who works partly outside the City, and a decision, made consistently with the California return, on which entities are related. A return that applies one period's measure to the other period's year misstates the base by construction. G&G State Tax Group provides San Francisco business tax category and apportionment reviews, including amended returns and refund claims, alongside its state and local tax practice.