Square’s $7 Million Tax Settlement Gets San Francisco’s OK

Square Inc. will receive $7 million from San Francisco to settle a tax dispute that could have cost the company up to $66 million.

The Board of Supervisors on Tuesday unanimously approved settling the lawsuit that Square, a popular payment app for businesses including online platforms such as Etsy, filed last fall against its hometown over the classification of its business activities for tax purposes. San Francisco reclassified Square’s activities as financial services, rather than what the company said was information services, resulting in higher taxes and nearly double the amount of gross receipts subject to tax.

California requires taxpayers to pay first, protest, and then litigate later. As such, Square paid an additional $1.3 million for fiscal years 2014 and 2015 in the first quarter of 2018, and $8.4 million for fiscal years 2016 and 2017 in the fourth quarter of 2019, the company said in a Securities and Exchange Commission filing. Square then sued San Francisco, seeking refunds for the taxes paid.

The terms of the settlement weren’t disclosed other than the city’s proposed ordinance approving the settlement, which dictates a partial refund of all claims from 2016 through 2018, and that Square and its related entities will “take certain filing positions with respect to its gross receipts taxes, homelessness gross receipts taxes, payroll expense taxes, and business registration fees for tax years 2019 and subsequent years and registration years ending June 30, 2021, and subsequent years.”

“Once finalized, this agreement would resolve Square’s tax obligations to the City for all prior tax years, and achieve a workable solution on a go-forward basis. We look forward to finalizing this agreement and resolving the matter,” a Square spokesperson said in an emailed statement.

If the company hadn’t prevailed in tossing out the legal challenge, it could have faced up to $66 million in taxes, interests, and penalties for 2016 through 2019 and for the three months ended March 31, the SEC filing said.

“While I can’t comment on the specifics of our proposed settlement with Square, this filing should provide San Francisco taxpayers assurances that I continue to fairly enforce tax rules for all businesses in San Francisco,” Treasurer and Tax Collector Jose Cisneros said in an emailed statement.

The board voted 11-0. The settlement still requires approval by Mayor London Breed and the Superior Court of California of the County of San Francisco.

The City Attorney’s office declined to comment.

The case is Square, Inc. v. City and Cty. of San Francisco, Cal. Super. Ct., No. CGC-19-579061, board approval 7/14/20.