1.5% Tax on Stock Options May Drive High Tech Firms Out of San Francisco

Following up on my prior posts (links below): New York Times, A Business Tax Charged When Employees Cash in Stock Options Is Scrutinized:

A rare provision in San Francisco’s business tax code that taxes companies when employees cash in their stock options has caused a stir in this hotbed of fledgling tech companies.

Remarkably, few companies even knew about the tax, which has been in effect for seven years. But since city officials offered Twitter a payroll-tax break as an incentive for it to remain in San Francisco (the company is considered likely to go public soon), the stock-option provision has suddenly come under intense scrutiny.

A number of other booming companies, including Zynga, the maker of online games and one of the city’s fastest-growing firms, have threatened to leave the city unless they receive similar payroll-tax exemptions before going public. ...

Because of the dearth of I.P.O.’s inside the city limits in the last decade, the stock-option tax has gone under radar until now. Businesses, city officials and even seasoned tax lawyers are confounded. “Nobody ever talked about this because nobody’s really tested these issues before,” said Thomas H. Steele, a partner in Morrison & Foerster’s San Francisco office, specializing in state and local tax.

• The Bay Citizen, Following Twitter, Zynga Now Threatening to Leave San Francisco; City Officials Stunned by Demand for Waiver on Tax of Employee Stock Options
• Forbes, Zynga Threatens to Leave S.F. for the Valley Over Tax Issue
• MarketWatch, Zynga ‘Encouraged’ by San Francisco Talks; Company Eyes Other Locations as Twitter Poised to Get Tax Break
• San Francisco Chronicle, Twitter Tax Break Moves Forward
• TaxProf Blog, Taxing Twitter (Feb. 14, 2011)
• TaxProf Blog, San Francisco to Impose 1.5% Tax on Stock Options (Feb. 19, 2011)