San Francisco Wants to Tax Your Stock Options, All of Them. - TechCrunch"

San Francisco Wants to Tax Your Stock Options– All of Them. - TechCrunch

Few people are aware the San Francisco has had a tax provision in its
municipal code since 2004 that requires companies to pay a payroll tax
on gains from employee stock options. No one pays it, and San Francisco
hasn’t enforced it to date, but companies are becoming increasingly
agitated that the city may change that policy at any time. The number of
high profile and high value startups based in San Francisco – like
Twitter and Zynga – may be too big of a temptation for the city to
ignore.

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.

(b) Any person that grants a service provider a right to acquire an
ownership interest in such person in exchange for the performance of
services shall include in its payroll expense for the tax year in
which such right is exercised an amount equal to the excess of (i) the
fair market value of such ownership interest on the date such right is
exercised over (ii) the price paid for such interest.

The tax rate? 1.5%. And remember that neither the federal government,
nor California, tax gains on most employee stock options at all.

This is a complex situation, and it’s mostly theoretical at this
point. We started hearing reports a few weeks ago that startups like
Zynga and Twitter were worrying about it, but neither company wanted to
comment. In fact, we got a lot of pressure not to write this article,
lest we wake the city up to how much more it could be taxing out of its
most over-performing corporate citizens. The Mayor’s office did not
return our calls for comment either. So, it took us a few weeks to
untangle exactly what the risk is.

Our main tour guide through the city’s tax law was John Duncan,
the former general counsel for Slide, who is now in Google’s legal
department. At first he, like most of the startup community, had never
heard of any pending startup tax penalties. But the more he dug, the
more he got to the bottom of it.

Here’s the run down:

• San Francisco has long had a 1.5% payroll tax on any local businesses. No other Bay Area city does. Move your headquarters just a few miles over the city border– no tax. This alone is a big reason Twitter is considering moving to Brisbane.

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