Pedestrians walk by the headquarters of Square at 1455 Market St. (Kevin N. Hume/S.F. Examiner)

Jack Dorsey’s Square sues SF for a big tax refund

Company argues it was misclassified by city tax collector

The payment service company Square that was co-founded by Jack Dorsey is suing San Francisco to obtain a more than $1 million tax refund.

The lawsuit was filed in San Francisco Superior Court on Sept. 6 against The City and San Francisco’s tax collector Jose Cisneros.

The tax dispute was previously reported by the San Francisco Examiner, but the amount in question wasn’t known at the time and the company was attempting to resolve the matter through the tax collector’s administrative process.

Square, headquartered at 1455 Market St., had disclosed the dispute to its shareholders in required Securities and Exchange Commission filings, where it suggested a lawsuit was possible. The company has offices throughout the United States and in Canada, Japan, Australia, Ireland and the United Kingdom.

The lawsuit seeks a $1.27 million tax refund, a portion of the gross receipts tax the company paid in 2014 and 2015.

“We have and will continue to pay our fair share, but when we’re treated differently than other companies and taxed on money we never actually receive, this is not fair or consistent,” a Square spokesperson said in a statement to the Examiner. “We’ve done everything we can over several years now to work with the city in pursuit of a resolution. Unfortunately, litigation is our only remaining option, which we hope will open up better lines of communication so we can resolve this in the best interests of Square and San Francisco.”

The lawsuit said Square is entitled to the tax refund for “several reasons.”

“First, the City’s tax as applied to Square is unconstitutional,” the lawsuit said.

The lawsuit argues that The City has incorrectly classified Square’s business under the tax code as “financial services.” Instead, the company argues they should be classified as “information,” entitling them to a lower tax rate.

The City’s gross receipts tax rate varies by business type and the amount of gross receipts. An “information” business pays a rate ranging from .125 percent to .475 percent while a “financial services” business pays a rate ranging from .4 percent to .56 percent.

The lawsuit also said that The City “improperly taxed” Square “on receipts collected and retained by third parties and were never in Square’s possession or control.”

The lawsuit also argues that “Square was improperly taxed on gross receipts from the sale and lease of tangible personal properly in the City” and that they didn’t receive proper tax credits for gross receipts paid in other states.

Dorsey co-founded Square in 2009 to accept card payments, “which historically had been prohibitively costly or complicated for many small-and-medium-sized businesses.”

The company employs about 2,200 workers in San Francisco, according to the lawsuit.

Cisneros audited Square’s taxes paid in 2014 and 2015 and issued the company in June 2017 a notice that it failed to pay the total taxes owed The City.

That set off a number of administrative hearings and appeals. Ultimately Square paid the taxes Cisneros said they owed and in January filed a claim with The City for a refund. The claim was denied by The City in March.

And now Square is taking The City to court. The outcome could impact the amount of taxes paid in subsequent years.

“The audit in question was both thorough and fair, and I stand by the findings of this office,” Cisneros told the Examiner. “We look forward to the opportunity to respond in court.”

City Attorney Dennis Herrera’s spokesperson John Cote said, “We’ll review the lawsuit once we’ve been served with it. We believe Square was properly taxed and this lawsuit is unnecessary.”

Dorsey is also the founder and CEO of Twitter, which received a six-year tax break from The City.

City officials have estimated the Twitter tax break saved Twitter about $40 million in taxes on stock compensation in the two years after it went public in 2013.

Last November, Dorsey was a vocal opponent of Proposition C, a tax an average of .5 percent gross receipts tax to company earnings in excess of $50 million to pay for homeless services. He contributed $125,000 to the campaign against the measure, which 61 percent of the voters approved.

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