SAN FRANCISCO -- On March 2, online review site Yelp will become the next major San Francisco-based tech firm to take advantage of a newly instituted payroll tax break designed to keep innovative, young companies within the city limits instead of fleeing for Silicon Valley's comparatively inexpensive pastures.
However, there's a possibility that, despite its purported tax cutting, business-growing benefits, the controversial payroll tax break given to San Francisco companies undergoing their IPOs won't save Yelp a single penny.
Unlike every other city in California, San Francisco raises a significant portion of its revenue from a tax on large businesses (meaning those with annual payrolls greater than a quarter of a million dollars) equal to one and half percent of the total compensation paid out to all their employees. Compensation here is defined as regular salaries, bonuses and--since 2004--exercised stock options.
The inclusion of stock options into the city's payroll tax structure wasn't much of an issue because, in the wake of the dot com bust, there weren't a whole lot of local companies looking make waves with large-scale IPOs.
All of that changed in the last few years, as a swarm of social media-fueled tech firms have looked to take the public plunge.
When micro-blogging phenomenon Twitter outgrew its space in the trendy South of Market neighborhood, the company took the opportunity to reconsider its need to be in San Francisco in light of the millions it would likely be forced to shell out to the city during its eventual IPO.
While Twitter's individual tax problem was solved when it was given a spot inside the mid-Market redevelopment zone, in which the payroll taxes of all companies are frozen at their current rates, the company's ultimately-aborted flight drew the attention of city leaders. Such officials worried that heavily taxing IPOs would put the new tech revival, one increasingly centered within San Francisco's trendy urban core rather than Silicon Valley's endless canopy of office parks, at risk.
As a result, the Board of Supervisors passed an ordinance last May limiting the total amount any company going though an IPO would have to pay in payroll taxes on stock-based compensation at either $750,000 or what the firm paid in 2010--whichever is greater.
This partial holiday from the city's payroll tax lasts though 2017, which, according to the text of the law, will allow enough time for a comprehensive review of how the San Francisco's tax code applies to local businesses.
According to a report by the San Francisco Examiner, online gaming powerhouse Zynga used the tax break to avoid paying up to $6 million to the city on its more than $1 billion IPO last December.
Despite a history of controversy, Yelp is widely seen as one of the leading lights of the new tech boom. And its IPO, while nowhere near the size of Zynga's massive haul, is expected to rake in around $115 million for the company before expenses.
In light of the city's substantial budget hole, the decision to leave what amounts to a very large pile of money sitting on the table, at least in the short term, has led some to question the value of so strongly incentivizing tech companies to stay in San Francisco--especially since many plan to remain here regardless.
"It rarely happens that a company starts looking at SF, decides it's too expensive and moves out to Walnut Creek," Brady Barbier, associate managing director of Integra Realty Resources, the largest independent commercial real estate valuation and consulting firm in North America, told The Huffington Post.
Even so, the tax break would only affect the largest IPOs, leaving the vast majority--possibly even Yelp's--totally unaffected. According to a report issued by the city's Office of Economic Analysis, of the 14 San Francisco companies that went public between last May and 1997, not a single one of them would have triggered the $750,000 cap on payroll taxes.
The city's average haul from a single IPO during that time period was a mere $140,000.
Not even the mighty Salesforce.com (aka the company that ate San Francisco) would have qualified for any savings under the current payroll tax structure.
Even so, Yelp spokesperson Vince Sollitto told The Wall Street Journal's Market Watch that while the company didn't go out and lobby city officials to make the change, Yelp is happy that it happened:
“Yelp is a frequent visit stop for candidates for city office. When they ask about the benefits and challenges of founding and growing a company in San Francisco, we are always sure to mention to them that the payroll tax is a powerful disincentive to hiring,” Sollitto said.
Sollitto added that the issue “was certainly one of the reasons it was more economical for us to expand in Phoenix, where we opened an office last year that now has over 200 employees in it.”
Yelp declined to discuss any specifics about the IPO due to legal restrictions involving the "quiet period" between the filing of its S-1 form with the SEC and the actual IPO date.
Yelp expects to sell just over seven million shares, at somewhere between $12 and $14 per share.
Check out this video showing how to use Yelp to find a local restaurant: