This article is more than 1 year old

This article is more than 1 year old

Jack Dorsey, whose company Twitter has long benefited from a huge tax break to operate in San Francisco, is now suing the city for a $1.27m tax refund for his company Square.

Attorneys for Square, a $25.9bn payment processing company, filed the lawsuit last week, alleging that “the city’s tax as applied to Square is unconstitutional”.

The lawsuit came about in 2017, when the city tax collector Jose Cisneros audited the taxes paid by Square in 2014 and 2015 and issued the company a notice that it had failed to pay the total amount owed.

The additional amount due came from a reclassification of Square to a category of “financial services” rather than “information”. The latter category has a lower tax rate and “significantly more favorable apportionment methodology”, the lawsuit reads.

The company filed a petition for redetermination, which was denied, and ultimately paid the amount owed. Square filed a claim for a refund that was again denied by the city, this time in March.

In addition to the reclassification, Square alleged that the city does not include the interchange fees it takes to process a payment in its calculations of the company’s gross receipts tax. Because the company is a payment processor, the company doesn’t receive the entirety of each payment; a percentage goes to financial institutions or other third parties.

Facebook Twitter Pinterest Square said it paid its fair share of taxes. Photograph: Square UK/PA

However, the city assesses the tax on the full amount, the lawsuit alleges.

“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.

“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.”

John Coté, a spokesman for the San Francisco city attorney, called the lawsuit “unnecessary”.

“We believe Square was properly taxed,” he said.

Jack Dorsey, the chief executive of Square, received a tax break in 2011 for his company Twitter to stay in San Francisco. Because of the tax break, city officials estimate that Twitter saved $40m in taxes on stock compensation in the two years since going public.

Dorsey was also an outspoken opponent of a measure proposed last year to raise much-needed funds to combat homelessness by implementing an average 0.5% gross receipts tax for companies with revenues over $50m. The measure passed with 60% of the vote, but it is still tied up in courts.

Square has more than 2,000 employees and is currently headquartered in San Francisco, but it signed a lease last year for a 356,000-square-foot building in downtown Oakland in one of the city’s biggest ever real estate deals. The company has offices across the country, as well as in Canada, Japan, Australia, Ireland and the United Kingdom.