Payroll tax a point of contention for San Francisco startups 

San Francisco has been home to innovative tech startups such as Twitter and Zynga — the gaming company behind hits “Farmville” and “Mafia Wars” — that have fueled the social media revolution.

But now that those companies are growing at fast paces, keeping them in San Francisco has become harder than ever.

“San Francisco is such a logical place for innovative companies to locate,” said Gabriel Metcalf, the executive director of the San Francisco Planning and Urban Research Association think tank. “It’s got highly educated people. It’s exciting. It’s convenient. And yet we seem to only be able to start companies and almost never retain them as they get big.”

A major reason for that, Metcalf and others said, is that San Francisco is the only city in California that charges a payroll tax. That encompasses all employee compensation, including any money made on stock options, according to Jennifer Matz, the head of the Mayor’s Office of Economic and Workforce Development. That is a major concern for tech firms thinking of taking companies public.

Stock options are a common form of compensation given to employees of 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.

In San Francisco, that would mean a major windfall in tax revenue from companies such as Twitter and Zynga, both of which are rumored to be exploring initial public offerings. But it also would mean a major hit to those companies’ bank accounts.

“Twitter’s potential future payroll tax liability associated with its stock options appears to be the largest cost factor weighing against a San Francisco location,” a report issued by Controller Ben Rosenfield said.

Twitter is likely to receive a payroll tax exclusion for six years if approved by the Board of Supervisors.

But Zynga recently signed a lease on a 270,000-square-foot office on Townsend Street and will not be able to move to the mid-Market Street area where the tax breaks are likely to apply.

With a company such as Zynga looking to go public with those stock options, that could “essentially double their rent,” Matz said.

Mayor Ed Lee and Board of Supervisors President David Chiu met with Zynga officials Tuesday to try to convince the growing company to stay in San Francisco.

What to know about the tax

San Francisco assesses a 1.5 percent tax on a company’s payroll. The tax is assessed to businesses whose payroll exceeds $250,000 annually. A business with 350 employees with an average annual salary of $102,000 pays $535,500 in payroll tax. Currently, the tax is applied to about 9,000 businesses. In fiscal year 2009-10, the tax generated $345 million.  

Sources: City Controller’s Office, budget analyst

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