This Week in State Tax

A pair of tax measures—Proposition L, creating a new gross receipts tax on transportation network companies and autonomous vehicle businesses, and Proposition M, amending the city’s menagerie of other business gross receipts taxes—have qualified for the November ballot in San Francisco.

The new Ride-Hail Platform Gross Receipts Tax proposed in Proposition L would be imposed on San Francisco gross receipts from “ride-hail business activities.” Ride-hail business activities include “transportation network company services”—prearranged transportation of passengers by a driver using a personal vehicle who connects with passengers via an app or other platform—and “autonomous vehicle passenger services”—transportation of passengers using a vehicle driven without active physical control of a human operator offered to the public for compensation. The tax would begin at 1 percent on San Francisco gross receipts above $500,000 and rise to 4.5 percent on San Francisco gross receipts above $25,000,000. San Francisco gross receipts would be computed under the allocation and apportionment provisions of the Gross Receipts Tax. The tax is estimated to generate $25 million annually, which would be dedicated to improving Muni, the city’s public transit service. The measure would be in addition to existing gross receipts taxes on such businesses.

Currently, businesses operating in San Francisco are subject to several different gross receipts-based taxes, including a general business tax, a homelessness tax, an overpaid executive tax, and an administrative office tax as well as a business registration fee. The tax rate varies with each tax, is generally graduated according to the volume of receipts, and varies among business categories. Proposition M would make numerous changes to the existing gross receipts taxes. The proposed structure would substantially revise the tax rates and brackets of receipts applicable to all business categories, increase the small business exemption threshold from $2.25 million to $5 million (indexed to inflation), halve the number of business types (from fourteen to seven), base the business categories on North American Industrial Classification System (NAICS) codes, and authorize the Tax Collector to implement regulations allocating sales of services and intangible property (reducing the amount of receipts subject to the payroll-based apportionment factor). Proposition M would also reduce the threshold for the homelessness gross receipts from $50 million to $25 million and change the rates and brackets as well as making changes and rate adjustments to the overpaid executive tax, administrative office tax and the business registration fees. The City Comptroller estimates that the measure would reduce city revenues by about $40 million per year from FY 2025-FY2027, and then with scheduled rate increases, increase receipts about $50 million per year. For questions about San Francisco Propositions L and M, please contact Jodie Scott.

The California Office of Tax Appeals (OTA) recently addressed whether an individual taxpayer was eligible for the California credit for taxes paid to another state (OSTC) for taxes paid under the New York City Unincorporated Business Tax (NYC UBT) and the New York Metropolitan Commuter Transportation Mobility Tax (NY MCTMT). Under California law, residents may claim a credit for taxes based on net income paid to another state on income derived from that state subject to certain limitations.

Although California generally treats taxes paid to another state by a partnership as if paid by the partners, the OTA first determined that the taxpayer was not eligible for a credit for taxes paid under the NYC UBT (which is imposed on certain partnerships) because that tax was a local tax imposed by New York City rather than a tax imposed by a state. The OTA noted that although the tax was authorized by state, it was imposed and administered by the City. In contrast, the OTA determined that the NY MCTMT (also imposed on certain partnerships) was imposed and administered by New York State. It also held it was a tax on net income and not a fee, finding that California broadly defines “tax” to encompass “any levy, charge or, or exaction of any kind imposed by the State.” As a result, the OTA concluded that amounts paid under the NY MCTMT on New York-source income are eligible for the tax credit.

While a tax may be eligible for the OSTC, California permits a taxpayer to take a credit only for the portion of the otherwise eligible tax that relates to income California would have sourced to the other state using California’s rules for sourcing the income of a nonresident. The OTA ultimately denied the taxpayers involved  the credit for the NY MCTMT because the taxpayer had not provided sufficient information to calculate their NY MCTMT-source income under California rules.  For questions about In re Mather, please contact Oksana Jaffe.

The Washington Department of Revenue Administrative Review and Hearings Division (Department) recently released a ruling that found a taxpayer operating a digital advertising exchange was subject to the state business and occupation (B&O) tax on the entirety of its gross income received from advertisers for sales of advertising space. The taxpayer used proprietary software to auction advertising space of publishers (e.g., app developers and websites) to advertisers and businesses. The taxpayer reported only the commissions it received from publishers as gross income on its B&O returns. On audit, the Department included all income of the taxpayer (including amounts paid for the purchase of the advertising and not just the amount it retained when it forwarded receipts to the publishers) on the basis that the definition of gross income did not allow for deductions for the cost of doing business.

In its petition for review, the taxpayer argued, among other things, that it was a marketplace facilitator when it sold the advertising space because it contracted with sellers to facilitate for consideration the sale of their products. As a marketplace facilitator, the taxpayer had an agency relationship with publishers, meaning that only its commissions were subject to the B&O tax.

In the ruling, the Department found that the taxpayer’s business involved providing advertising services because it disseminated targeted digital advertisements to the most receptive audiences. As a provider of advertising services, the taxpayer would be subject to the B&O tax on its gross income, including amounts received to pay media outlets. It also found that the taxpayer did not meet the definition of a marketplace facilitator. A marketplace facilitator must contract with sellers to facilitate the making of “retail sales.” The sale of advertising services and space are not considered retail sales. In addition, the taxpayer's agreements were with publishers, who were not classified as sellers of goods or services under the relevant statutes, meaning it could not be a marketplace facilitator. Based on these findings, the Department concluded that the taxpayer was required to report all gross income received from the sale of advertising space without deductions for business expenses. For information on Determination No. 22-0027 (released September 9, 2024), please contact Michele Baisler.