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San Francisco’s switch to gross receipts tax will be costly

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San Francisco is upgrading its data systems before the switch, including a $3 million contract to 21Tech. - COURTESY PHOTO
  • Courtesy Photo
  • San Francisco is upgrading its data systems before the switch, including a $3 million contract to 21Tech.

San Francisco’s payroll tax was kicked to the curb in the November election and replaced with a levy on businesses’ gross receipts. Now comes the hard and costly part: implementing the new and complex tax structure.

To that end, The City plans to spend $2.57 million this fiscal year alone on increased staff and technology services to plan for phasing out the payroll tax and setting up the gross receipts system.

The tax collector is asking for five new employees at a total annual cost of $836,371. That includes a new director, or architect, of gross receipts, who will make $246,400 a year. The other four jobs come with salaries between $140,000 and $155,000 annually.

The process of phasing out the payroll tax is expected to begin in 2014 and conclude in 2018, and the gross-receipts tax is “complicated” due to eight different tax schedules and up to four progressive rates, said Treasurer and Tax Collector’s Office spokesman Greg Kato.

“Our existing staff are collecting our existing taxes,” Kato said. “None of our existing taxes are going away.”

The office was already in the process of working with tech consultant 21Tech and software company Manatron to overhaul its IBM data system, which dates to the 1990s, when Proposition E passed in November. The office plans to increase those contracts for the gross receipts system, costing The City $12 million, with a five-year $3 million contract with 21Tech and a six-year $9 million contract with Manatron, according to San Francisco budget analyst Harvey Rose.

On Wednesday, the Board of Supervisors Budget and Finance Committee is expected to approve the proposal. The initial $2.57 million would come out of The City’s budget reserve fund, which currently sits at $32.2 million, according to Rose. Future implementation costs would come out of the increased revenue the new tax model is expected to yield.

Under the new tax model, businesses with at least $1 million in gross receipts will pay rates, adjusted annually for inflation, of 0.075 percent to 0.65 percent.

The City used to tax businesses using both a gross-receipts tax and a payroll tax, whichever was higher. But when a similar tax system in Los Angeles was ruled unconstitutional, The City dropped the gross-receipts levy and simply relied on the payroll tax.

Over the years, that tax — the only one of its kind in California — was maligned as a job killer. However, it took the push of angel investor Ron Conway, Mayor Ed Lee’s prominent backer, to force a change, as the payroll tax is particularly burdensome for tech companies because of their more labor-intensive business models.

jsabatini@sfexaminer.com