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BASF Opposes Proposed Payroll Tax on November Ballot

September 5, 2008 -- San Francisco
-- BASF’s Board of Directors voted at its August meeting to oppose Proposition Q, a new tax measure on the November ballot.

Proposition Q proposes to amend §902.1 of the San Francisco Business and Tax Regulations Code and to add §902.2. to extend the payroll expense tax to profits distributed to owners of pass-through entities, such as partnerships. Proposition Q raises several concerns:

The Tax is Not Honestly Presented
Proposition Q purports to “clarify” the Payroll Expense Tax, but profit distributions to a partner are not part of a “payroll” even if the partner performs services for clients through the partnership. Proposition Q purportedly closes a “loophole,” but non-taxation of a pass-through entity’s profits is a long established part of the State and federal taxing systems--only the Board of Supervisors sees a “loophole.”

Proposition Q conflicts with §903.1 of the Ordinance
Proposition Q does not amend §903.1, which imposes the payroll tax. §903.1 does not impose a tax on “. . . the distribution of ownership profit or loss . . .” Therefore, Proposition Q’s attempt to tax distributions to owners of pass-through entities who perform services conflicts with §903.1. Proposition Q’s effect is so uncertain that litigation is a likely result.

The Tax Unfairly Discriminates
Sole proprietors will not pay this tax. Two lawyers who share an office and have common employees are not subject to the tax, but if they form a partnership, suddenly they become subject to the tax even if nothing else changes. The discrimination is irrational and possibly unconstitutional.

Proposition Q Violates State Law
R&TC §17041.5 prohibits cities (including chartered cities) from levying an income tax on any person. This tax, although purporting to tax payroll “expenses,” is really a tax either on the pass-through entity’s income or on the income distributed to its owners.

The Bar Association of San Francisco (BASF) is a nonprofit voluntary membership organization of over 8,000 attorneys, law students and legal professionals in the Bay Area. Founded in 1872, BASF is one of the largest and most dynamic metropolitan bar associations in the U.S., with a long and distinguished record of community action, public service and service to the legal profession.

Questions about media relations, BASF issues currently in the news, San Francisco Attorney magazine, marketing and communications:

Ann Murphy, Director of Communications & Public Relations
(415) 782-9000 x8792

For general communications inquiries:

Sayre Happich, Assistant Director of Communications & Public Relations
(415) 782-9000 x8104