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Square wants to be a bank but not be taxed like one (wsj.com)
149 points by NN88 9 months ago | hide | past | favorite | 74 comments

See the earliest filing in CGC19579061 for Square’s complaint (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...). So we tax gross receipts of large companies, with 7 different rate schedules based on different industries in order to sort of approximate income.

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.

Shocking how people go after their own self interests.

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.

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.

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.

> 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.

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.

Almost no improvement in transportation.

You must not know what taxis used to be like.

I didn’t even realize that the headline was incorrect for another reason: The tax rate for banks under the Gross Receipts Tax is actually 0%, not 0.4%+ as implied by the headline! (Business and Tax Code 954(f)(1) http://library.amlegal.com/nxt/gateway.dll/California/busine...) Instead of a local gross receipts tax, the state of California imposes a 2% bank tax on net income (RTC 23151 http://leginfo.legislature.ca.gov/faces/codes_displayText.xh...). The gross receipts tax on financial services is on businesses other than banks and insurance companies.

> 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.

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.

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.

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

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?

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

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.

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.

"It will charge corporations with revenue above $50 million about 0.5 percent in gross receipts tax, with the proceeds going entirely toward homeless programs"


Gross receipts for payment processing are very high relative to actual revenue. They product moving in not directions is money, after all.

“...in not directions...” -> “...in both directions...”

looks like this is 2014-2015 tax years, which is well before prop c. square's already announced an oakland expansion though

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.

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.

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.

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

On the Gross which is kind of the point

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) 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

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).

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

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

Hasn't PayPal been doing this for decades?

Me too

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".

Honestly, I don't think that applies to the situation in the article. The gross receipts tax is hindering them from being globally competitive. Companies like Salesforce, with it's huge gross margins barely get taxed anything while companies with minimum margins are being taxed on every sale. It seems like SF over regulation will push fintech companies to pretty much anywhere else.

> It seems like SF over regulation will push fintech companies to pretty much anywhere else.

I personally hope that happens. I never want to live/work in SF ever again, so the more tech jobs that leave, the more options I have that aren't SF. These companies are in a city and state that do not deserve their golden geese. The entire time I lived there I was constantly asked myself why I was paying such high taxes to a state that consistently works against my self interest.

Same. I assume most people are just saving up to leave.

I think the numbers would be staggering if they could be accurately measured.

I know so many people that live in SF/Bay Area saving up to move away ASAP.

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.

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.

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.

The solution to that is in having regulations enforcement gradually eased in.

It is kind of a given that a newcomer to an industry won't be compliant with everything and will need time to build up to full regulatory compliance.

The idea then is for the regulator to work out a compliance roadmap which the regulated commits to, and is audited for compliance with occasionally.

Think of it as a learning experience for small businesses.

We would have to do a much better job at keeping track of people's association through corporation's however, as it would lead to an unintended incentive to just dissolve a company when the regulatory compliance costs heat up, reform a new one, and reset the level of regulatory expectation.

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.

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...

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

This is the world in which we currently live.

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

Is the idea that they are never refactored? I don't know that that's true, we see changes to the regs somewhat often: simplifications, clarifications typically?

Regulations aren't particularly good at preventing large companies or even the government from dumping toxic chemicals into rivers: https://trofire.com/2019/06/28/3m-corporation-admits-to-ille... https://www.cincinnati.com/story/news/2018/02/08/ohio-files-... https://environmentamerica.org/news/ame/206-million-pounds-t... https://freebeacon.com/issues/epa-dumps-one-million-gallons-...

Startups would presumably be as successful as everyone else at dumping and getting away with it, meaning at least a few years of growth.

> but overall, I prefer a world where a startup can't have success dumping toxic chemicals into a river.

Nice strawman, but that's not anything I said.

> You make it sound like all regulation is bad.

No... I made it sound like regulation is bad when it negatively affects a good solution from coming into existence. Stripe does not dump toxic chemicals. Rather, it increases access to credit cards and money transfers to people who were being underserved by big banks. Had you ever had to take CC payments in person before square? They made it much easier.

> government regulations are designed for large companies.

So a publicly traded company with 25B in market cap and member of Russell 1000 index is a 'small company'?

Well, Square was -- in living memory for HN -- a startup. If every company has to skirt regulations in order to gain a 25B market cap to compete with larger players, then we need to re-think what our regulations are. Otherwise, they just serves as validators for oligopolies.

This is called regulatory capture, and is not something to be defended.

Square is a 10 year old public company with a 25B market cap. Hard to call them a startup.

More like “every company ever” wants to minimize their taxes.

One can readily argue that all of the early Silicon Valley hardware startups were not attempting to end-run regulation, but rather exploit emerging integrated-circuit technology.

I doubt OP is referring to the startups from 50+ years ago, and is much more likely referring to startups from the past 15 years.

Airbnb + Uber = All Startups

It is up to the government to create rules that are clearly defined and not arbitrary and capricious as the 5th amendment dictates. The 14th amendment was found to retroactively apply the bill of rights to all government entities and it will have taken centuries for this standard to be the default way governments interact with their people.

The side effect of this is that clear rules create the way to circumvent them.

When irreconcilable the courts are how this has to be resolved, and I believe what I wrote is a factor in that argument as municipal governments regulations reactionary based on a the sentiments of a very small number of people.

And then when they feel like they are become ducks then they say all those others who walk like dicks and quack like ducks are ducks too and should be regulated like ducks. See! We’re volunteering ourselves —and them cuz we’re all ducks!

"walk like dicks" is an amusing typo...

Classic example of UI error.

[EDIT wording]

We want to compete with these other companies by not following the law. Then argue that any attempt to enforce the law is an attack on innovation, rather than acknowledge that their competitive(?) prices only exist because they aren't playing on a level (legal) playing field.

You're forgetting the part where you start lobbying for regulations that raise the barrier for entry to new potential competitors

The Uber of fintech and e-payments.


Everything after Bank is redundant in the title.

> 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.

Why no Wyoming Silicon Valley?

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.

This is, of course, absolute hogwash. If it were true Silicon Valley would have been built in a low tax, low regulation state. Blue state regulations and taxes are what enable technology companies, not the other way around.

The direct result of Blue state regulations and taxes is rich and poor. The middle class is shrinking rapidly and will eventually be gone. This isn't an example I would use for the rest of the US.

How exactly do taxes and regulations enable these companies? Most of these companies outright ignore regulations and incorporate in Delaware to get around some of the ridiculous taxes.

Taxes and regulations only serve the rich and will keep out smaller companies that don't have the resources to compete or attorneys to get around regulations.

Left-leaning people usually dislike big corporations, yet ironically support everything that keeps them in power.

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.

Or Uber claiming to be a "technology platform for several different types of digital marketplaces?" :)

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.

[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.

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