Business Taxes

There are a number of cost factors that corporations evaluate when considering one business location over another. The cost of the workforce varies region to region. The buying power might vary significantly, as in the case of a clerical worker in San Francisco as compared with Grass Valley or Modesto. Also, rental rates can vary city by city, by classification (Class A versus B), and even within the same building, as in the case of a third floor space looking directly at another building as compared with the 35th floor with a view of the Bay.

Business tax structures can also vary significantly between municipalities. There are many reasons behind this. An urban city, such as San Francisco, might have a great deal of city/county-provided services which require a revenue source such as business taxes. Subsidized transit such as Muni, subsidized housing, health, education and other government-mandated programs in San Francisco might be many times higher than neighboring communities such as Emeryville or Concord. The City and County of San Francisco has 34,000 employees, or approximately one employee per 22 residents. How does this ratio compare with Daly City, Tiburon or San Ramon? Unionism and entrenched wage policies may also boost one city’s overhead as compared with another city in a less expensive employment structure. One municipality may wish to have an economic competitive advantage to attract new business by maintaining a relatively lower business tax structure.

Most municipalities tax businesses on one of two formulas. The first method taxes a percentage of the annual gross receipts. The second method taxes a percentage of the annual employee payroll. Within each method lies a host of variables. For instance, some municipalities use gross receipts for sales within the State of California while others use the total sales regardless of geographical parameters. In some cases, in addition to taxing the annual payroll the total occupancy cost is taxed, included annual rent, utilities and telephone expenses. There are also a host of varying formulas depending on the nature of the business, whether it is back-office or headquarters, and depending on the magnitude of sales or receipts or payroll.

A comprehensive analysis might require detailed specific information including corporate gross receipts, utility and telephone expenses, and gross payroll data. For the sake of simplicity, the following financial model might shed light on differences between Bay Area municipalities: This example is based on an engineering company with 200 employees. Each employee occupies an average of 200 square feet, and based on a survey of a number of Bay Area engineering companies, an average salary is $75,000, and would have an average annual gross receipts of $35,000,000.

CITY ANNUAL 5 YEAR
10 YEAR
San Ramon $300.00 $1,500.00 $3,000.00
Walnut Creek $2,519.00 $12,595.00 $25,190.00
Concord $5,276.00 $26,380.00 $52,760.00
Pleasanton $10,500.00 $52,500.00 $105,000.00
Alameda $14,000.00 $70,000.00 $140,000.00
San Mateo $25,271.50 $126,357.50 $252,715.00
Emeryville $28,000.00 $140,000.00 $280,000.00
Oakland $126,000.00 $630,000.00 $1,260,000.00
San Francisco $225,500.00 $1,127,500 $2,255,000.00

Again, to properly evaluate one city over another would require more extensive company information and a detailed analysis of each city’s business tax policies*. These can become quite complicated and there may be gray areas in how the tax codes are interpreted. This summary, however, illustrates one aspect of the cost of doing business that decision-makers face. How many more widgets must a company produce or how many engineering assignments have to be secured just to pay the business tax differential? This must be viewed within the big picture, but as businesses strive to maintain the lean and mean corporate mentality of this decade, close scrutiny will be placed on all expense aspects of business operations.

Jeff Weil

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