Square Inc. has sued San Francisco for allegedly misclassifying it as a financial services company for tax purposes.
The San Francisco-based company operates a national mobile money-transfer business, and its lending arm has issued more than $5 billion in loans to small businesses and consumers. It is also seeking approval from the Federal Deposit Insurance Corp. to become an industrial bank. But in a lawsuit filed Sept. 6, Square argues that it more resembles a technology company than a financial services firm.
Square is seeking to recover $1.3 million in taxes it paid in 2014 and 2015, plus interest and attorneys fees. The city charges financial services companies a tax rate between about 0.40% and 0.56% of their gross receipts, whereas tech companies see a rate between about 0.13% and 0.48%.
In the lawsuit, Square argued that the majority of its total operating expenses for 2014 and 2015, excluding overhead, were for designing, engineering and producing software and related hardware products.
"The vast majority of Square's employees were either software engineers or employees supporting them," the company said in the lawsuit.
The lawsuit includes only taxes paid in fiscal years 2014 and 2015, but the outcome of the lawsuit would impact the taxes Square owes for more recent years. Should the company not prevail, it could be required to pay additional taxes and any associated penalties and interest for subsequent years, according to Square's latest quarterly filing.
The lawsuit also named San Francisco Treasurer and Tax Collector José Cisneros as a defendant. Cisneros said in an emailed statement that he stands by his office's findings, calling Square's audit "both thorough and fair."
Also in the lawsuit, Square claimed that San Francisco overstates the company's gross receipts because it includes money that Square does not see. Square charges its merchants a 2.75% transaction fee, which is the amount the city taxes. But 1.75% of that fee goes directly to the card networks and banks and is never received by Square.
"We have and will continue to pay our fair share," a Square spokesperson said in an email. "But when we're treated differently than other companies and taxed on money we never actually receive, this is not fair or consistent."
In 2018, Square Chairman, President and CEO Jack Dorsey opposed a local ballot measure called Proposition C, which proposed increased taxes on Square and other businesses to fight against homelessness in the city.
A month after the proposition's approval last November, Square signed an office lease for Uptown Station in Oakland, Calif., the San Francisco Chronicle reported at the time. The 356,000-square-foot expansion gave Square room for 2,000 employees, almost enough space to hold its 2,200 employees currently working in San Francisco.
The Oakland office is not yet open, but Square initially expects it to house about 300 employees, with more added over time, according to a spokesperson.
The spokesperson declined to comment on whether Square would consider moving out of San Francisco entirely if the city prevails in this lawsuit.
