San Francisco’s Proposed Gross Receipts Tax Sourcing Rules for Asset Management Fees

This summary focuses on the market-based sourcing rules as they relate to asset management services outlined in the City’s proposed sourcing regulations. For most companies, 75% of the sourcing formula is now weighted using market-based sourcing rules, while the remaining 25% is based on the San Francisco payroll factor. This methodology is new for 2025, whereas in prior years, companies in the financial services sector generally sourced gross receipts to the City based solely on their San Francisco payroll factor.

When determining how to assign gross receipts from asset management services for San Francisco tax purposes, 75% of the formula will now look to where the benefit of those services is received. This is generally based on the domicile (location) of the investor. If the investor holds title to the assets for a beneficial owner, the sourcing regulations instead direct the taxpayer to look to the domicile of the beneficial owner of the assets.

Presumptions:

1. The investor’s domicile is presumed to be their billing address unless the manager knows the investor’s main place of business differs.

2. The beneficial owner’s domicile is presumed to be their billing address, unless the manager knows their primary residence or principal place of business differs.

Apportionment method:

1. Receipts are assigned to San Francisco in proportion to the average value of the investors’ (or beneficial owners’) interests domiciled in the City, calculated by averaging their beginning- and end-of-year percentages.

2. If the asset manager cannot determine the exact percentages, they shall make a reasonable estimate.

Definitions:

1. Asset management services - generally means the direct or indirect provision of management, distribution or administration services to funds.

2. Beneficial owner - a person who made an independent decision to invest their assets. Entities such as master or feeder funds, corporations investing excess capital, and defined benefit plan participants are not considered beneficial owners.

Sourcing Example:

Asset Management Co., domiciled in Town A, is the General Partner of Equity Fund, a limited partnership also domiciled in Town A. Asset Management Co. owns a 20% interest in the Fund and earns a 2% fee on committed capital for providing asset management services.

Equity Fund has two limited partners:

• Limited Partner 1 (20% interest) - domiciled in the City and not holding for a beneficial owner.

• Limited Partner 2 (60% interest) - domiciled in Town B and holding for beneficial owners. Initially, half of these beneficial owners are domiciled in the City and half in Town B.

At the beginning of the tax year, 50% of the asset interests are held by investors or beneficial owners domiciled in the City.

50% = (20% from Limited Partner 1 + (60% x 50% from Limited Partner 2)

By year-end, all beneficial owners of Limited Partner 2 are domiciled in Town B, leaving 20% of interests attributable to City residents.

20% = (20% from Limited Partner 1 + 0% from Limited Partner 2)

Accordingly, 35% of Asset Management Co.’s fee is sourced to the City, based on the average value of interests held by City-domiciled investors or beneficial owners

(50% + 20%)/ 2 = 35% = Average Value of Interest