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Square wants to be a bank but not be taxed like one
- p1necone 7y agoThis 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".
- olliej 7y agoWe 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.
- penagwin 7y agoYou're forgetting the part where you start lobbying for regulations that raise the barrier for entry to new potential competitors
- mc32 7y agoAnd 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!
- AimForTheBushes 7y agoHonestly, 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.
- malandrew 7y ago> 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.
- staticassertion 7y agoSame. I assume most people are just saving up to leave.
- vecinu 7y agoI 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.
- deleted 7y ago[deleted]
- mkskm 7y agoWhere did you go instead?
- ISL 7y agoOne 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.
- tathougies 7y agoI 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 7y agoYou 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 7y agoRegulation 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 7y agoI 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 7y agoEasy, 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...
- rolltiide 7y agoIt 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.
- rco8786 7y agoSquare 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.
- olliej 7y agoI 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.
- brianpgordon 7y agoOr Uber claiming to be a "technology platform for several different types of digital marketplaces?" :)
- jhall1468 7y agoAmazon 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 7y ago[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.
- seamyb88 7y agoEverything after Bank is redundant in the title.
- enahs-sf 7y agoProp 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 7y agoIs 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 7y agoFinancial services companies often have low margins against their revenues, so the tax disproportionately hits them relative to earnings.
- ian0 7y agoI 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 7y agoYeah 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 7y agoYeah 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.
- briandear 7y ago> 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.
- phonebanshee 7y agoThis 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.
- remotecool 7y agoThe 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.
- wavefunction 7y agoWhy no Wyoming Silicon Valley?
- paulie_a 7y agoThere 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.
- NoInputSignal 7y agoCurious 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 7y agoFinancial 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.
- ausbah 7y agoThe Uber of fintech and e-payments.
- the_watcher 7y agoSquare 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.
- Gokselc 7y agoGreat
- yonran 7y agoSee 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_displaySection.xhtml?lawCode=RTC§ionNum=17041.5. 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.
- deleted 7y ago[deleted]
- tedivm 7y agoThe 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 7y agoShocking how people go after their own self interests.
- brunoTbear 7y agoDiscussion 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 7y agoHow 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 7y agoYes, it's the same for grocery stores. Stripe and Square are trying to have their cake and eat it too.
- MentallyRetired 7y agoHasn't PayPal been doing this for decades?
- honkycat 7y agoMe too
- nwallin 7y ago> 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.
- chmaynard 7y agoIf your new startup wants to disrupt local markets by ignoring their laws and regulations, employee #2 needs to be a lawyer.