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An infinite while ago, in the Before Times, Square had a disagreement with its hometown of San Francisco over taxation. Square thought of itself as a software company, while San Francisco viewed it as a financial services business, and under the city’s hopelessly Byzantine gross receipts tax, that made a big difference in how much tax Square owed the city. Prop. C, a measure that increased business taxes to fund homelessness services, promised to magnify the difference. In September, Square sued the city.
The two parties have reached a proposed settlement, Square revealed in an SEC filing this month. The deal is now headed to the Board of Supervisors, who must sign off, along with the mayor and the city controller. A board agenda shows that the agreement involves the city refunding Square $7 million in taxes. Square indicated that it had already paid $9.7 million above the amount it believed it owed. If the agreement falls apart and it does not prevail in the lawsuit, Square could owe as much as $66 million, it told investors.
The board agenda describes the $7 million settlement as involving a “partial resolution” of the business-tax refund claims and the agreement that Square “shall take certain filing positions” with respect to its business taxes for specified recent periods and in the future.
“While I can’t comment on the specifics of our proposed settlement with Square, this filing should provide San Francisco taxpayers assurances that I continue to fairly enforce tax rules for all businesses in San Francisco,” San Francisco Treasurer José Cisneros said in a statement.
A spokesman for Square did not respond to an emailed request for comment.
The fact that Square is getting a refund suggests at least a partial victory for the company. The question I have is what “filing positions” Square will take in the future. Will it file as a financial services company and pay more tax, or as a software company, and pay less? This would be a key question for city supervisors to ask as they review the settlement.
I also wonder whether the agreement may become moot. Mayor London Breed and Board President Norman Yee brought up the idea of a more sweeping overhaul of business taxes last year. In April, Breed suggested such a revamp might be off the table, given other priorities. But there is still a window of time to submit a ballot proposition: The deadline for Breed and the board, who could unify on a new tax proposal or submit competing ones, is June 16. A spokesman for Breed did not respond to a request for comment.
A ballot measure might get rid of the city’s payroll tax once and for all. The gross receipts tax introduced in 2012 was supposed to do just that, but it never quite raised enough money and so the payroll levy held on.
And as I have pointed out, there are aspects of the gross receipts tax that make it a stealth payroll tax, particularly for financial services companies, which are disproportionately taxed on the basis of the concentration of their workers in San Francisco. City leaders might want to consider a new tax that provides more incentives to keep jobs here.
Tax reform in the city is increasingly urgent for two reasons.
For one, there is the pandemic-induced recession, which makes getting businesses back on their feet a more pressing matter than maximizing their civic outlays.
There is also the flight of workers from downtown office towers, first at the urging of their employers and then at the directive of city health officials. Telework is still prescribed for most, even as some businesses prepare to return a small number of employees to workplaces. And Square has declared itself an all-remote company.
How will the current gross receipts and payroll taxes function when it is unclear where a worker’s location is? When thousands of employees piled onto BART and Muni and presented themselves at the office, taking advantage of city services along the way, the nexus of taxation was clear. The remote future of work has upended many assumptions, including those undergirding the city’s system of taxation.
— Owen Thomas, firstname.lastname@example.org
Quote of the week
“At the end of the day, the market has no conscience.” — CNBC host Jim Cramer, on the disconnect between the Wall Street stock rally and Main Street protests
It’s a quiet week, tech-wise, unless you count the social-media innovations of “RuPaul’s Drag Race All-Stars,” which sees its fifth season debut Friday.
What I’m reading
Noah Kirsch on StubHub co-founder Eric Baker’s cosmically mistimed deal to buy back the event-ticketing business. (Forbes)
Roland Li and Carolyn Said on what it will take to bring workers back downtown. (San Francisco Chronicle)
Barry Schnitt, a former top Facebook communications official, on his former employer’s woes. (Medium)