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Taxes are gross

Here’s a puzzle that has consumed me for days: Why would Square pay twice as much as Salesforce under San Francisco’s Proposition C’s proposed tax to fund homeless services?

That’s the claim that Square CEO Jack Dorsey made Friday in defending his personal and corporate opposition to Prop. C. Salesforce’s Marc Benioff, who volubly supports Prop. C, said his company, which expects to make around $13 billion this year, could easily afford the $10 million additional tax it would owe under Prop. C, which would institute an extra 0.5 percent tax for companies making more than $50 million in gross receipts a year. Dorsey said his company, which forecasts revenue of about $3 billion this year, would pay an extra $20 million.

How does that math work, you may ask? It comes down to the absurdly complex way San Francisco calculates gross receipts, and the (purposely!) unequal treatment of various industries under city rules.

San Francisco’s descent into grossness — tax-wise, anyway — began in 2012, when voters passed Proposition E, which replaced the city’s payroll tax with a gross receipts tax. Tech companies loudly supported this change, calling the payroll tax a job destroyer that threatened to push them out of the city.

Prop. E replaced a flat 1.5 percent tax on payrolls over $250,000 a year with a crazy quilt of tax rates for 20 categories of businesses. Retailers pay less than software businesses, which pay less than financial services companies. The very definition of “San Francisco gross receipts” varies based on the category. Believe it or not, business groups pushed for this structure, which they argued corrected the inequities of the payroll tax.

As my muse RuPaul sings, “Which category are we on right now?” For calculating the gross receipts tax, that is a crucial question. Though Dorsey hasn’t tweeted this bit, he surely knows that Square has fought with San Francisco over its classification.

In May, in a filing with the Securities and Exchange Commission signed by Dorsey, Square disclosed that the city’s “tax collector believes the company’s primary business activity is financial services rather than information services,” and had issued a decision to that effect. That translates to a tax rate increase from 0.475 percent to 0.56 percent on its gross receipts.

But Square took a much bigger hit than that, because financial companies’ San Francisco gross receipts are calculated differently than software companies’. Financial firms pay the tax on a share of their worldwide revenue that is equal to the share of their payroll in San Francisco. Software companies calculate their gross receipts based 50 percent on the proportion of local payroll and 50 percent on their share of sales in San Francisco.

Roughly two-thirds of Square’s 2,338 employees are based at headquarters; for Salesforce, it’s about 28 percent of 30,000 global employees. Though neither breaks out sales by city, it’s easy to guess that their hometown accounts for a tiny percentage of sales. That means that Square would cut its gross receipts tax by more than half if it were put in the same category as Salesforce. Square would get the same savings on the added 0.5 percent tax imposed by Prop. C. That’s how you land on Square paying twice as much as Salesforce on a smaller revenue base.

Stripe, which has said it is affected similarly by the gross receipts tax and whose CEO, Patrick Collison, has spoken out against Prop. C, is privately held, so it has not disclosed its revenue, but analysts told Bloomberg it’s about $1.5 billion a year. (Stripe did not respond to a request for comment.) Based on a search of LinkedIn profiles, about two-thirds of Stripe’s employees work in its San Francisco headquarters.

There’s one other issue with the gross receipts tax worth mentioning. If I were to pay Ramona the Love Terrier’s pet groomer with a Wells Fargo Visa card, the groomer pays tax to the city based on that sum. Square charges a fee to process that payment; that fee adds to Square’s gross receipts, on which it is also taxed. It pays a portion of that to Wells Fargo and Visa, which are also San Francisco companies, and — well, you guessed it. Critics of gross receipts tax point out that taxing a transaction so many times adds to businesses’ costs, which get passed on to consumers in the form of higher prices. That’s why Europe, Canada and other places have largely gone with value-added taxes, which seek to avoid those rounds of taxation.

I think that there’s a useful debate to be had about whether the city’s biggest businesses should pay more to combat homelessness. But digging into the details of the gross receipts tax has shown me that there are also questions we should be asking about the city’s existing business taxes. (Don’t get me started on the irony that the payroll tax, which the gross receipts tax was supposed to replace, is still with us, because not enough money was raised by taxing gross receipts.)

I also think businesses have mostly themselves to blame here. They wished for a gross receipts tax. And then they got it.

— Owen Thomas (othomas@sfchronicle.com)

Quote of the week

“I don’t even know why we study history. It’s entertaining, I guess — the dinosaurs and the Neanderthals and the Industrial Revolution, and stuff like that. But what already happened doesn’t really matter. You don’t need to know that history to build on what they made. In technology, all that matters is tomorrow.” — Fired Uber self-driving car chief Anthony Levandowski, in the New Yorker

Coming up

Thursday is earningspalooza, with Alphabet, Intel and Twitter reporting results. Depending on what their numbers are, the Bay Area tech bellwethers may reassure markets or confirm jitters that have caused the Dow and the Nasdaq to slide.

What I’m reading

Nitasha Tiku recommends three new books challenging Silicon Valley groupthink on “disruption.” (Wired)

Even as Amazon opens its first cashierless Amazon Go store, Roland Li has uncovered plans for a second one. (San Francisco Chronicle)

SoftBank chief Masayoshi Son flew to Riyadh, but skipped Saudi Arabia’s Future Investment Initiative conference. The “Davos in the Desert” is under a cloud after Saudi officials admitted regime critic Jamal Khashoggi had been killed. (Bloomberg)

Tech Chronicle is a thrice-weekly newsletter from Owen Thomas, The Chronicle’s business editor, and the rest of the tech team. Follow along on Twitter: @techchronicle and Instagram: @techchronicle

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