Did City's Goof Cause Tax Collectors to Overcharge San Francisco's Small Businesses?

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UPDATE: City admits it made a mistake, see here.

A ballot proposition that raised the amount of money San Francisco businesses need to pay their employees before being subjected to city payroll taxes seems to have gone unnoticed by the very people charged with enforcing it -- San Francisco's tax collectors.

Last year, voters overwhelmingly approved Proposition Q, which, essentially, did two things: It broadened the number of businesses subject to payroll taxes (notably including partnerships such as law or architectural firms) but also raised the minimum amount businesses need to pay their employees before being dinged with those payroll taxes from $167,000 to $250,000.

Nevertheless, tax forms obtained by SF Weekly indicate the city is still asking San Francisco's small businesses to pony up their estimated payroll taxes based upon the old, $167,000 total -- meaning some businesses with payrolls below the city's minimum threshold are still getting wheedled by the tax man.

The form clearly states that businesses should pay their estimated 2009 payroll tax based upon their tax payments from 2008 -- with no regard paid to the change in law that kicked in on Jan. 1, 2009. Since payroll taxes are around 1.5 percent -- and 1.5 percent of $250,000 is $3,750 -- only businesses that paid $3,750 or more in payroll tax  last year figure to now be on the hook. Yet, on the San Francisco form, it still states that businesses that paid $2,500 in payroll taxes last year must pay estimated payroll taxes this year ($2,500 is 1.5 percent of $167,000, as you probably guessed).

You can see the form here:

Scott Hauge is the president of Small Business California, which is located in San Francisco. He recently wrote an e-mail complaining of this situation that rapidly spread around the city's business community -- and, according to city tax collector spokesman David Augustine, led to more than a few phone calls to the treasurer's office.

"The city charges on anticipated income. The problem is, the city never reprogrammed its computer -- so the form they sent out is the one they used before the new rules came into place," said Hauge.

Frustratingly, Hauge reports, several small business owners were told to simply pay the money anyway and get reimbursed later, despite the fact that Prop. Q's passage meant they no longer were subject to this tax.

"Why pre-pay tax now you know you're not going to owe?" queried Jim Lazarus, the San Francisco Chamber of Commerce's vice president of public policy. "It's a tough economy."

Augustine told SF Weekly he'd look into what was going on and get back to us either late today or early tomorrow. He hasn't gotten back to us yet (in his defense, we called him late in the afternoon). He did, however, note that tax "pre-payments are based on 2008 information" -- which would mean that estimated taxes for 2009 are still being calculated using the archaic rules.

Lazarus, meanwhile, said he'd been on the phone with higher-ups in the treasurer's office throughout the day and "my understanding is that they're gearing up their computers to handle this -- but the billing went out to existing small businesses based on last year's obligation prior to factoring in the higher exemption."

In other words, the city goofed.

"This thing will get rectified in the next couple of days," continued Lazarus. "I expect we'll have a favorable resolution."

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