Law Practice
Aug. 7, 2002
Business Tax on Law Firms Likely to Show Up on Ballot
SAN FRANCISCO - A controversial proposal to extend San Francisco's payroll tax to the profits of professional partnerships, including law firms, was tabled during a Board of Supervisors meeting Monday. But the procedural move appeared to have been taken for political advantage .
Board President Tom Ammiano said the maneuver will allow supporters to place the ordinance on the Nov. 5 ballot without a messy public debate.
The votes of six supervisors are needed to place initiatives on the ballot with the board's endorsement. However, as few as four supervisors can forward initiatives - although without the board's imprimatur - simply by signing their names. The board has 11 members.
Supporters of the measure, including Ammiano, believe they have lined up four supervisors. They appeared to be betting that once placed on the ballot, it would prevail.
"We outfoxed them," Ammiano said of the measure's opponents.
Opposition within the business community had been building and it "was smart for us to withdraw it," Ammiano said.
The last day to place an initiative on the November ballot is Wednesday.
Supervisor Jake McGoldrick, the measure's sponsor, moved to table the matter as dozens of businesspeople waited to testify on the subject.
Board Finance Chairman Aaron Peskin said during a committee hearing Monday morning that he supported the tax.
"If I had the legal authority to pass this today, I would do it," Peskin said.
Also on record in support of the measure is Supervisor Chris Daly, another Finance Committee member.
Peskin said the city could collect "to the tune of $10 million" from the largest industry affected by the proposed tax, the legal profession.
McGoldrick sponsored the measure to recoup some of the $20 million in annual revenue the city lost last year when it was forced by a lawsuit to change its business tax. He says his proposal would merely close a payroll tax loophole enjoyed by some partnerships.
The measure would update and amend the city's Business and Tax Regulations Code. Among the amendments is a proposal to impose a 1.5 percent payroll tax on profits for partners, including lawyers at limited liability partnerships.
Partners in professional corporations are considered employees and already pay the city's 1.5 percent payroll tax, said Stuart Lipton, managing partner of 140-lawyer San Francisco's Howard, Rice, Nemerovski, Canady, Falk & Rabkin, itself a professional corporation.
Lipton said in an interview that the proposal would most likely affect larger law firms set up as limited liability corporations, or LLCs, in the mid-1990s.
Lipton wouldn't predict whether litigation would arise from the ordinance, but, he said, litigation "is always a possibility."
Angela Bradstreet, a partner at San Francisco's Carroll, Burdick & McDonough and president of the 9,000-member Bar Association of San Francisco, opposes the measure.
"It would affect a large number of our members," she said, estimating that about 80 percent of BASF's membership would be subject to the tax.
"It's about the worst time to be hiking business taxes again, with the economy and Sept. 11," she said. "A number of firms are not doing well."
Some law firms have discussed leaving San Francisco to avoid the tax, Bradstreet said, while others may not open branch offices here if the measure passes.
To describe partner compensation as a salary subject to the city's payroll tax, she said, "seems rather strange to me."
Brian Donnelly, a tax partner at San Francisco's Farella Braun & Martel, said he opposes the measure, particularly with all the taxes already charged on law firms and other businesses by state and local agencies.
Donnelly said there will come a point when the board of supervisors, by trying to raise revenue, will be "counterproductive to the city at a time when the economy is down across the board."
Donnelly disagreed that the tax would close any loopholes enjoyed by partners at legal, architecture and other firms. Business owners, unlike employees, take enormous risks, including the loss of their investments, to run their companies and earn profits, he said.
Supporters are using the term "loophole" because of its "political ramifications," he said.
Erik Cummins
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