
Square wants to be a bank but not be taxed like one - NN88
https://www.wsj.com/articles/square-wants-to-be-a-bank-but-doesnt-want-to-be-taxed-like-one-11568288012?mod=rsswn
======
yonran
See the earliest filing in CGC19579061 for Square’s complaint
([https://webapps.sftc.org/ci/CaseInfo.dll?CaseNum=CGC19579061](https://webapps.sftc.org/ci/CaseInfo.dll?CaseNum=CGC19579061)).

The headline is a bit misleading because I don’t think there are any banks in
a similar situation to Square: a bank that receives most of their revenue from
transaction processing fees and whose employees are almost all in San
Francisco (San Francisco apparently apportions company revenue according to
where the employees are).

Note: In California, local governments use relatively unfair gross receipts
taxes instead of more efficient taxes because Proposition 13 (1978) forbids
fair property taxes, and RTC 17041.5 (1963) forbids local income taxes
([https://leginfo.legislature.ca.gov/faces/codes_displaySectio...](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=17041.5.)).
So we tax gross receipts of large companies, with 7 different rate schedules
based on different industries in order to sort of approximate income.

~~~
tedivm
The CEO and Founder of Square lobbied in favor of those gross receipt taxes
when it benefited his previous company (Twitter) but has changed his tune
since then.

~~~
sieabahlpark
Shocking how people go after their own self interests.

~~~
sgt101
Surely: shocking how some people go after their own self interest, without
giving a damn about anyone else.

Tech bro and his pockets smashing up his society while the world burns.

~~~
close04
Much of the "disruption" that came over the past decade can be attributed to
someone wanting to be [something] while being treated like [something else],
trying to write their own rules, fill their pockets, with little regard to
what anyone else thinks or does.

The blanket excuse is always "We are a tech company". No, you are a company
who brought _more_ tech to the field but still very much in the same field.

~~~
jimmaswell
I for one am grateful for all that "disruption." The much needed improvement
in the areas of transportation, accommodation, payment, etc. might never have
happened if all these companies stuck by the old rules.

~~~
close04
> might never have happened if all these companies stuck by the old rules.

Then change the rules. Breaking them and pretending you are better is not the
way. This is the most common excuse when people break the law.

There are hundreds of examples where you'd feel less than grateful if someone
"disrupted" the sector by breaking the law and I'm sure you can think of a
few. Off the top of my head, law enforcement agencies are "disrupting" the
justice system by bypassing due process and warrants, just to optimize and
make things better of course. Just because it suits you once in a while
doesn't make it acceptable.

~~~
jimmaswell
You could have used this line of reasoning on civil disobedience in the 60s.
Sometimes it just has to be done that way. I don't particularly care that uber
or airbnb broke some laws I didn't strongly agree with in the first place.

------
nwallin
> Square SQ 1.65% Inc. has lent $5 billion to small businesses and consumers
> and applied for a banking license.

"Applied for a banking license". That application was rejected. Square doesn't
have a banking license. Square asked to become a bank and the government said,
"No."

Square should either be a bank and be taxed like a bank, or it should be a
not-bank and taxed like a not-bank. If I were to make $50,000 this year and
the government puts me in the $500,000 tax bracket I'd be a little miffed too.

IMHO this is dishonest reporting.

------
enahs-sf
Prop C put a few companies into this quagmire. Stripe is another prime target
for this gross receipts tax. As written, I wouldn't be surprised if these
types of companies that handle consumer payments or transactions moved HQ to
Oakland in a few years as they seek to avoid the taxes.

~~~
jameslevy
Is there anything specific in Prop C to financial services companies? I
thought the only criteria was making over $50M in revenue, and GMV would not
be relevant to the calculation.

~~~
ummonk
Financial services companies often have low margins against their revenues, so
the tax disproportionately hits them relative to earnings.

~~~
ian0
I would have thought the opposite. Margins tend to be high in financial
services, revenue tends to be tiny. The value of payments / GTV is huge, but
the taxable component is the fees themselves?

~~~
vertoc
Yeah but Stripe doesn’t get to keep most of those fees - it’s mostly
interchange which goes to Visa which is then distributed to the issuing bank
of the credit card

~~~
ian0
Yeah but you don't book other peoples fees as your own revenue. VISA has a
profit margin of 54%. Surely they are not counting the entire interchange cost
(of which they receive a v. small percentage) as revenue.

~~~
scarejunba
AFAIK they count the entire processing fee as revenue. It sort of makes sense.
If I were to make a service on top of Twilio and charge you 1% more than
Twilio, then I have to count the whole amount you're paying me as revenue and
the whole amount I'm paying Twilio as a cost.

That's just as logical as if I were to build a value-added service on top of
AWS, or if I bought things on Alibaba and then sold them in America.

------
NoInputSignal
Curious if anyone else has put any thought in comparing companies like Square
and Stripe to the early goals of American Express (AMEX)?

Opinion (don't read on if you are looking for hard facts):

The way I look at it, AMEX designed a closed loop payment system to easily
ensure payments between customers and merchants.

Square and Stripe seem to be trying to accomplish the same goal, but in the
21st century.

Strictly calling Square a tech company, would be like calling 20th century
AMEX a paper processing company--or maybe I am misinterpreting the founder's
point.

~~~
devnulloverflow
Financial services (as opposed to actual investing) is a form of information
technology, albeit one that is older than electronic IT. It is probably no
coincidence that they really took with the arrival of paper and decimal
notation.

But then as now, the actual IT rapidly becomes the boring part of the
operation and the real business becomes, well the business. That of finding
clients and tailoring your services to them.

------
the_watcher
Square absolutely has a point about being taxed on money that they pay out to
vendors, but that unfortunately seems to be built into Prop C. The discussion
about tech company building products in the X space being X companies or tech
companies is a separate, more thorny one.

~~~
pedasmith
Yes, and note that the tax is .5% -- that's more of a pittance than a serious
boundary.

~~~
C1sc0cat
On the Gross which is kind of the point

------
brunoTbear
Discussion of this article and the article itself are mixing issues: 1)
differing taxes in SF between tech and banks. This is a difference of a few
basis points in taxes. Square doesn't want to be taxed as a bank here. This
will cost them a few tens of millions.

2) A new gross receipts tax which disproportionately impacts Square and Stripe
[1]. It's more than a matter of "low margins" in this business, it's the very
core of how revenue works[2] for Square/Stripe. Those companies take their
2.9% + $0.30 per transaction
([https://stripe.com/pricing](https://stripe.com/pricing)) and call that
revenue. Most of that flows _immediately_ back to Visa/MC/Amex/Discover and
the card issuing banks.

Treating all of that that as revenue for taxation purposes puts Stripe/Square
in a very challenging position. A more "fair" approach would be to tax the
portion of their fees that they kept before any other expenses.

As Yonran points out, this whole relatively unfair situation is one of many
many unfair symptoms of CA tax law. As a young person who doesn't own property
but earns a relatively high income in California, I am a provider of massive
and permanent subsidies to people lucky enough to have bought property before
Prop 13 was passed in 1978. The real issue here is Prop 13.

Libertarians love to argue that people vote to give themselves subsidies.
Mostly I hate this argument, because of course people vote to give themselves
services from governments they want. What I find abhorrent is that a group of
Californians receive different treatment from the government based solely on
when they bought their property. It's time to end prop 13. This article is
just one tiny example of where bad policy has bad results.

[1]Disclosure: former Stripe employee[3] [2]This simplifies things quite a
bit, but the distinctions underneath don't super matter. [3]You can tell by
the use of footnotes in plaintext

~~~
wmf
How is this accounting different from, say grocery stores or gas stations?
Doesn't most of their revenue flow immediately back to their suppliers?

0.5% of 2.9% is incredibly small; if Stripe/Square raised prices to 2.91% it
would more than cover the tax (somebody check my math).

~~~
gamblor956
Yes, it's the same for grocery stores. Stripe and Square are trying to have
their cake and eat it too.

------
chmaynard
If your new startup wants to disrupt local markets by ignoring their laws and
regulations, employee #2 needs to be a lawyer.

------
MentallyRetired
Hasn't PayPal been doing this for decades?

------
honkycat
Me too

------
p1necone
This is the story of every startup ever "we'll walk like a duck, talk like a
duck, but quietly avoid being regulated like a duck for as long as possible to
disrupt all the other ducks".

~~~
tathougies
I mean, government regulations are designed for large companies. By
themselves, they act as a moat to protect monopolies and oligopolies. Of
course smaller companies need to essentially break the law. Every time we see
success only at the cost of breaking laws, we should really start to re-
examine our laws instead of continuously blaming those who succeeded. In this
case square not only succeeded but literally makes life better / possible for
many many people.

If there were regulations in the way that would have prevented them from doing
so, we should probably self-reflect a bit and have a sense of shame.

~~~
dave5104
You make it sound like all regulation is bad. There's surely some unnecessary
and bad individual regulations, but overall, I prefer a world where a startup
can't have success dumping toxic chemicals into a river.

~~~
eloff
Regulation can be both beneficial and serve as a barrier to entry that
protects the incumbents. In fact, that's probably the common case. It's worth
recognizing that there are these two competing interests, that every
regulation bears this hidden cost, and that the benefit had better be enough
to justify that cost. I think often this is not true. Regulations could often
be much less burdensome while still achieving most of the benefits.

~~~
jklehm
I think most regs were driven by events or behaviors at the time of their
creation.

To revert them I'd hope there'd be a compelling case as to why the catalyst
that brought the regs into existence no longer applies or will not reappear in
the future.

I'm not sure that it's an easy process.

~~~
eloff
Easy, no. Necessary, yes. Imagine a world where regulations only grow on the
whole. How far out do you have to extrapolate that system for it to implode
under its own weight? That can happen to nation states too...

~~~
tatersolid
> Imagine a world where regulations only grow on the whole.

This is the world in which we currently live.

~~~
tathougies
Right and it leads to several negative externalities, such as high income
inequality:
[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2869155](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2869155)

------
ausbah
The Uber of fintech and e-payments.

------
Gokselc
Great

------
seamyb88
Everything after Bank is redundant in the title.

------
briandear
> San Francisco voters approved Proposition C last November. A month later,
> Square announced plans to open a large new office across the Bay Bridge in
> Oakland.

When you increase taxes, you drive away people that pay those taxes.

~~~
wavefunction
Why no Wyoming Silicon Valley?

~~~
paulie_a
There are tech companies in Wyoming but due to the relative lower population
density it will be less. But people are fleeing sv so tech bastions are
sprouting up throughout the country and have been for the last ten years.

Sv isn't the end all be all of tech.

------
olliej
I get that the vast majority of Square's employees are engineers, etc, but
literally the entirety of its earnings come from financial services.

I don't think it is remotely reasonable to claim that your company is
<business type A> when the bulk of its income comes from <business type B>.

That would be like companies like apple claiming to be retail companies,
amazon being a warehouse company, etc. Hell many companies might be able to
claim that they are janitorial businesses.

~~~
jhall1468
Amazon isn't a warehouse company, it's a retail company. Actually it's an IAAS
company. Soon it may be an advertising company.

And that's exactly why this isn't as cut and dry as it seems. Fintech is
definitely more tech than fin. They are just taking the big tech models, and
applying them to finance. They are tech companies that _happen_ to sell
financial products. Taxing that differently than a tech company that _happens_
to sell database products makes little sense.

~~~
olliej
[ed: I reread this and it came off meaner than I intended. Reworded a bit to
reduce any sense of personal attack as that isn’t my intent]

You’re missing the point I was trying to make: square is arguing that they
aren’t a financial services company because the majority of their employees
are engineers, not accounting or sales type folk.

The equivalent would be amazon to say the majority of their employees are
warehouse workers so therefore they are a warehouse company.

That’s the nonsense. What matters is how a company makes its money: Facebook
and google are advertising companies, Apple is a consumer product company,
amazon is a retail company, etc.

