A unique San Francisco tax on employee stock options has tech companies threatening to leave The City, and now one supervisor is calling for a break on such taxes to keep those companies from fleeing.
A six-year tax break on a blighted section of mid-Market Street is likely to be approved next month, but that will only benefit companies that move there, which Twitter might do. But officials from other growing businesses, such as online gaming company Zynga, say they deserve to be excluded from a tax on stocks even though they have already committed to leases elsewhere in The City.
Mayor Ed Lee and Board of Supervisors President David Chiu met with Zynga officials earlier this month. The main point of contention was the specific tax on stock options, according to Jennifer Matz, the director of the Mayor’s Office of Economic and Workforce Development. Zynga has not returned calls for comment on the issue.
In an effort to keep these companies from moving their workforces out of San Francisco, Supervisor Ross Mirkarimi is scheduled today to introduce a two-year moratorium citywide, specifically on those stock-option taxes.
“One of my biggest concerns is that we are focused on one distinct part of San Francisco and not considering that companies located throughout The City are also looking to go public,” Mirkarimi said.
The City’s payroll tax is 1.5 percent on all compensation, including stock-option payouts, given to employees of businesses with a total payroll of more than $250,000. San Francisco is the only city in California that charges such a percentage-based tax.
Businesses have long criticized the tax as a job killer, yet it brings in a significant amount of money for San Francisco city government’s general fund. Last year, the treasurer collected $345 million in payroll taxes, which went to funding for police, fire and other government services.
Among the many ways an employee can be compensated is through stock options, which is common with startups. If a company manages to grow to a point where it will go public in the stock market, those early employees can then cash in on valuable stocks, which they obtained at a fraction of their sales price. This compensation would be subject to the payroll tax.
It’s unclear whether The City has ever collected on taxes of those options in the past. Companies are required to report such compensation to the Treasurer’s Office, according to spokesman David Augustine, but there is no public record or distinction of that happening in the past.