Gilli-010 ATTORN EY OR PARTY MTHOUT ATTORNEY (?ame, State Bar number and address): FOR ONLY ?Amy Silverstein 154221.12 Cough St. San CA 94103 John Omtonde. 30.8524 1'2 Gouph 42, San Francisco. CA 94103 RobertT Petiaglia,264849.12 Ciough St. San Francisco CA 94103 Adam Hooberman.306038,12 Gough St San FRancisco CA 94103 su 1101' Court of TELEPHONE no: 415 5-93 3502 FAX No.2 4115 593- 3501 . (3%?an Of San Frame ATTORNEY FOR (Name).- Square Inc. SUPERIOR COURT OF CALIFORNIA COUNTY OF San Francisco a 2.19 smear ADORESS 400 MeAllister Street MAILING 40014558. 400 Street cm AND 21? 500E: San FranciSCO, 9401.2 BRANCH NAME: 7_ . Square, Inc, v. City and county'off San Francisco, et a1. 1 SHEET Compiex Case Designation 1791343? 9? 2-9. :5 9 0 613?? Un'lirnited Limited L__l El {Amount (Amount . Counter Jonnder . . demanded. . demanded 1's Filed 1{grim?rstappearance by defendant exceeds 3225.000) $25 000 or less) . (gal. Rules of?ourt. rule 3.402) ltems 1, obelow must?be completed (see instructions on page 1. Check onegboxsbeioiw' for-the'case typethet case: AutoTortt Provisionelly Conipletc'Civii Litigation Ail-$1252) Breachof ?pntracvwar'ranty (05) 10211; Rutes of court; Uoinsured motorist 14.3713 Role 3,7110, Co'llectio'ns 109) Antitrustfl'rjeide regulation (03) Other {Personal ?thencoilec?ons DamageIWrongful .Death)? T0371: (18) Cogsnucziop de'fecm Q) MESS tort "(491' 104.)- omg'r'comractra?) Seeur'itiesil?ttlgationI128) Pro?uot roentgen): Rea; prop-em, Entriro'nmenla'llToxic tort (so) Mepical malpractice (45) Eminent domamilnverse insurance {Leverage claims 'arisin'g' from the i:i Other (23) 1 . condemnation (.14) above-listed provisionally. complex .oas?e 'Ei 11144119144441.1011 1333 we? (13.7.) 'Ot'ti?er real property (26). .. l:l Gregorio-115313 Bii'liivif?l'u?tei?er 1:3 Enforcement ofjodgment- 1201 Defamation'tgifti . Summertime?) Etaud (1.6): Ci Reoden?am?) 'i:i meta-127?; intelleetuatpmperty'139) Ci [16119311381 142) ?095300311459??469?1255? Miscellaneousbivil Petition 9919? asset'foifeltpre {05) Partnership and corporate governance (21) Emi?lgyment arbitration award Other petition (not spear!" ed above) (43) i: Wrongfultennination136) W?lofimandatewZ) Other employment (15) 2. This base i: 15 15'th complex Linden role 3. 400 of the California RUles .of Court. 11? the case is Complex mark the factors requiring exceptional Eudictet management a '3 Large member of separately represented parties (1. i: Large number o't?witne'sses? b. Exvten?sivW'ezmotiori pragtice raising oil'?oo'lt' orgnovel Coordination with relatedactior'iS pending in one 01' more courts. resolve; in other oeunties, states, or Countries; or in a federal court 6. Substantial amount of sopenrision 3. Remedies sought (Chock all that appi'y): a - monetary b. nonmonetary; declaratory or :njuncitlve retief 5.,Ejpunitive 4. Number of causes of action (sperm/,1: One 5. This case is - 15119! a class action 51411.1?- 6. If there are any ?knoWn related cases 1? 1e and serve a: notice of related ca'se 1 You may use 1" Cit/1:015. Date: September 632019 . Amy L. 9 .. . . (Tree. 012: 9121117 1411:1151 roe PARTY) NOTIGE Plaintiff must 1e this cover sheet with the ?rst paper 1? led 1n the action or proceeding (except smelt claims Cases or cases ?led under the Probate Code. Eam'ily Code, or Welfare and lnStitthions Code). (Get. Rules of Court rule 3. 220. Failure to ?le may result in sanctions. - File this cover sheet in addition to any cover Sheet required by local court rule - If this case is Complex tinder rule 3 .400 et seq. .of the California Roles of Court you must serve a copy of this cover sheet on all other parties to the action or proceeding; 0 Unless this' is. to collections case unolerrule 3.740 or at complex case, this Cover sheetwill be?trsedfor'statistical; purposes (:1on Form Adopted [or Mandatory Uso . (331 Rules of Court rules 2 30, 3. 220, 3 400?8 403 3. 740: Judidai Council of Cetitom'ia CIVIL CASE COVER SHEET Cal Standards ol Judirjal Administration .51d. 3 '10 61144110 [Rev July 1 200?] courtinfo ca. gov X93 Ag SUM-100 (CIT Ego? lift), [3186 IA L) (sot?ZC?EA?ieiUt?fsToUEE NOTICE TO DEFENDANT: (A VISO AL DEMANDADO): City and County of San Francisco; os? Cisneros, Treasurer and Tax Collector of the City and County of San Francisco; Does 1 through 50 YOU ARE BEING SUED BY PLAINTIFF: (L0 ESTA DEMANDANDO EL DEMANDANTE): Square, Inc. You have been sued. The court may decide against you without your being heard unless you respond within 30 days. Read the information below. . You have 30 CALENDAR DAYS after this summons and legal papers are served on you to ?le a written response at this court and have a copy served on the plaintiff. A letter or phone call will not protect you. Your written response must be in proper legal form if you want the court to hear your case. There may be a court form that you can use for your response. You can ?nd these court forms and more information at the California Courts Online Self-Help Center your county law library, or the courthouse nearest you. If you cannot pay the ?ling fee, ask the court clerk for a fee waiver form. If you do not ?le your response on time, you may lose the case by default, and your wages, money, and property may be taken without further warning from the court- There are other legal requirements. You may want to call an attorney right away. If you do not know an attorney, you may want to call an attorney referral service. if you cannot afford an attorney, you may be eligible for free legal services from a nonpro?t legal services program. You can locate these nonpro?t groups at the California Legal Services Web site the California Courts Online Self-Help Center or by contacting your local court or county bar association. NOTE: The court has a statutory lien for waived fees and costs on any settlement or arbitration award of $10,000 or more in a civil case. The court's lien must be paid before the court will dismiss the case. jA Lo han demandado. Si no responds dentro de 30 dies, la corte puede decidir en su contra sin escuchar su version. Lea la informacion a continuacion. Tiene 30 DIAS DE CALENDARIO despu?s de que le entreguen esta citacion papeles legales para presenter una respuesta por escrito en esta corte hacer que se entregue una copia al demandanfe. Una can?a una llamada telefonica no lo protegen. Su respuesta por escrito tiene que estar en formato legal correcto si desea que procesen su caso en la cone. Es posible que haya un formulario que usted pueda usar para su respuesfa. Puede enconfrar estos formuiarios de la corfe yma?s inforrnacion en el Centro de Ayuda de las Cortes de California en la biblioteca de [eyes de su condado 0 en la corte que le quede mas cerca. Si no puede pagarla cuota de presentacidn, pida al secretario de la con?e que le d? un formulario de exencion de page de cuotas. Si no presenta su respuesta a liempo, puede perder el caso porincumplimient?o la corte le podra quitar su sueldo, dinero bienes sin mas adventencia. Hay otros requisitos legales. Es recomendable que llama a un abogado inmediatamente. Si no Conoce a un abogado, puede llamar a un servicio de remision a abogados. Si no puede pagar a un abogado, es posible que cumpla con losrequisitos para obtener servicios legales gratuitos de un programa de servicios legales sin ?nes de lucro. Puede encontrar estos grupos sin ?nes de lucro en el sitio web de California Legal Services, en el Centro de A yuda de las Cortes de California, poni?ndose en contacto con la cone 0 el colegio de abogados.,locales. AVISO: Parley, la corte tiene derecho a reclamarlas cuofas los costos exentos por imponer un gravamen sobre cualquler recuperacion de $10,000 (3 mas de valor recibida mediante un acuerdo 0 una concesi?n de arbitraje en un 6630 de derecho civil. Tiene que pagar el gra vamen de la corte antes de que la corte pueda class-char el-caso. The name and address of the court is: - (El nombre direccion de la cort?e as): San Fransisco Supenor Court 400 McAllister Street . San Francisco, California 94102 The name, address, and telephone number of plaintiff's attorney, or plaintiff without an attorney, is: (El nombre, la direcci?n el namero o?e tel?fono del abogado del demandam?e, 0 del demandante que no tiene abogado, es): Amy Silverstein, 12'Gough Street 2, San Francisco, California 94103, (415)593-3502 DATE: September 6, 2019 Clerk, by . Deputy (Fecha) (Secretario) i (Ao'junto) (For proof of service of this summons, use Proof of Service of Summons (form (Para prueba de entrega de esta citation use at formulario Proof of Service of Summons, NOTICE TO THE PERSON SERVED: You are served l: as an individual defendant. CLERK OF THE COURT 2. as the person sued under the ?ctitious name of (specify): [2 on behalf of (specify): under: CCP 416.10 (corporation) CCP 416.60 (minor) CCP 416.20 (defunct corporation) (conservatee) :1 CCP 416.40 (association or partnership) CCP 416.90 (authorized person) other (specify): 4- by personal delivery on (date): 4. Page 1 of 1 Form Adopted for Mandatory Use SU MMO Code of Civil Procedure 412.20. 465 Judicial Council of Cal lfornia . SUM-100 [Rev. July 1. 2009] Silverstein (Bar No. 154221) John Ormonde (Bar No. 308524) Robert T. Petraglia (Bar No. 264849) Adam I-Iooberman (Bar No. 306038) Silverstein Pomerantz LLP 12 Gough Street, 2nd Floor San Francisco, California 94103 Telephone: (415) 593?3502 Facsimile: (415) 593?3501 E-Mail: asilverstein@sptaxlaw.com Attorneys for Plaintiff SQUARE, INC. 8 rt rCourt gotomlaD of San Francisco 063818 SUPERIOR COURT OF THE STATE OF CALIFORNIA CITY AND COUNTY OF SAN FRANCISCO UNLIMITED IURIS DICTION SQUARE, INC., Plaintiff, v. CITY AND COUNTY OF SAN JOSE CISNEROS, TREASURER AND TAX COLLECTOR OF THE CITY AND COUNTY OF SAN FRANCISCO, and DOES 1 through 50, Defendants. 1 SEE 19 5790M Case No. VERIFIED COMPLAINT FOR REFUND OF SAN FRANCISCO GROSS RECEIPTS TAX A3 REFUND OF GROSS RECEIPTS TAX Plaintiff Square, Inc. (?Square? or ?Plaintiff?), in accordance with California Government Code Section 945.6 and San Francisco Business and Tax Regulations Code Tax Code?) Sections 6.15?1 through 6.15?4, hereby files this Complaint for Refund of Gross Receipts Tax (?Complaint?). This Complaint constitutes an appeal ofthe denial ofa claim for refund of gross receipts tax paid by Plaintiffto the City and County of San Francisco. Plaintiff states and alleges as follows: PARTIES 1. Plaintiff at all times mentioned herein was a corporation organized and existing under the laws of the State of Delaware. Plaintiff is headquartered at 1455 Market Street, #600, San Francisco, California, 94103. 2. Defendant City and County of San Francisco (?Defendant? or the ?City?) is a political subdivision ofthe State of California. The City is a ?local government? as defined in the California Constitution, Article Section 3. Defendant Jose Cisneros (?Treasurer?), at all times relevant herein, was the Treasurer and Tax Collector of the City. He is sued in his official capacity only. 4. The true names and capacities, whether individual, corporate, or otherwise, of Does 1 through 50, inclusive, are unknown to Plaintiff, who therefore sues such defendants by fictitious names. Plaintiffwill amend this Complaint to'allege the Doe defendants? true names and capacities once they are ascertained. JURISDICTION AND VENUE 5. Jurisdiction is vested in this Court under Sections 940 et seq. ofthe California Government Code. 6. Venue is proper in this Court pursuant to California Code of Civil Procedure Section 394. BASIS OF THE ACTION 7. Plaintiffbrings this action in accordance with California Government Code Section 945.6 and SF Tax Code Sections through 6.15-4. This is an action for refund of San Francisco Gross Receipts Tax paid by Plaintiff to Defendants pursuant to the SF Tax Code. Plaintiffis entitled to a refund for several reasons. First, the City?s tax as applied to Square is 2 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 10. l3. unconstitutional. Second, the City incorrectly classi?ed Square?s primary business activities for purposes ofthe SF Tax Code as ?financial services? rather than ?information.? Third, Plaintiff was improperly taxed on receipts collected and retained by third parties that were never in Square?s possession or control. Fourth, Plaintiff was improperly denied a credit for taxes paid to otherjurisdictions on the same gross receipts taxed by the City. Finally, Square was improperly taxed on gross receipts from the sale and lease of tangible personal property in the City. FACTS Square is a San rancisco?based company with of?ces across the United States and in Canada, Japan, Australia, Ireland and the United Kingdom. Jack Dorsey co-founded Square in 2009 to enable businesses (?Sellers?) to accept card payments, which historically had been prohibitively costly or complicated for many small?and medium?sized businesses. Since then, Square has developed a cohesive commerce ecosystem that helps Sellers start, run, and grow their businesses. San Francisco is home to a community of technology companies, which have established the City as one ofthe world?s leading technology and innovation hubs. Square competes with these companies for talent and capital. . Square?s employees in San Francisco, which currently number approximately 2,200, make up the majority of Square?s workforce and account for the majority of its payroll costs. Square?s San Francisco employees also made up the majority of its workforce and accounted for the majority of its payroll costs for 2014 and 20] 5.1 Excluding sales and marketing, legal, finance, facilities, IT, human resources departments and the executive assistant teams (hereinafter referred to as ?overhead?), the vast majority of Square?s total operating expenses for 20l 4 and 2015 are for designing, engineering and producing software and related hardware products. I All further ?gures concerning Square?s activities and operations relate to the 2014 and 2015 years unless otherwise noted. 3 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 14. 15. 16. 17. 18. 19. 20. 21. Square?s production processes for 2014 and 2015 were primarily focused on the production of software. Square invests heavily in recruiting, training, and hiring talented software engineers in order to create sophisticated software?based products and related hardware. Excluding overhead, for 2014 and 2015, the vast majority of Square?s employees were either software engineers or employees supporting them. In 2014 and 2015, Square heavily invested its revenues in employees and research and development. Square also uses proprietary software it developed when it calculates the risk that a payment card transaction is fraudulent before authorizing it. After a Seller accepts a card payment and initiates a transaction, third parties ?process? the transaction. These third parties are referred to as Payment Network Participants (acquiring banks and issuing banks) and Payment Processors (service providers processing transactions under an acquiring bank?s bank identi?cation number or Interbank Card Association number). The Payment Processors and Payment Network Participants have the right to and do retain their fees for processing card transactions (collectively, ?Interchange Fees?) from the amount charged to a consumer at the time of sale prior to transferring the remaining funds to Square (for further transfer to the Seller). As such, Square never receives the Interchange Fees and does not have control over the settlement of Interchange Fees. On its original San Francisco Gross Receipts Tax retums, Square reported and included the Interchange Fees in its total gross receipts under Square?s accrual method of accounting. Excluding Interchange Fees reduces Square?s total gross receipts for Tax Periods 2014 and 2015 such that Square would be entitled to a refund ofthe full amount ofits Claim for Refund, which, as discussed in Paragraph 36 below, was filed in January, 2019. Square paid 2014 and 2015 gross receipts?based taxes to, amongst others, thejurisdictions of the State of Washington and the State of Ohio, some of which was for taxes imposed by subdivisions ofthe State(s). 4 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 22. 23. 24. 25. 26. 27. 28. 29. More than halfthe gross receipts taxed by the States of Washington and Ohio (or their subdivisions) were also taxed by the City of San Francisco. If Square was granted a credit for taxes paid to these jurisdictions on the same gross receipts taxed by the City, as provided for in SF Tax Code Section 954(g), it would have been entitled to a refund of approximately 70% ofthe total amount ofthe refund claimed in its claim for refund. Square paid San Francisco Gross Receipts tax on gross receipts from the sale or lease of tangible personal property in San Francisco for the Tax Periods 2014 and 2015. PROCEDURAL BACKGROUND AND EXHAUSTION OF ADMINISTRATIVE REMEDIES Square timely filed its San Francisco Gross Receipts and Payroll Tax Returns for Tax Periods 2014 and 2015. In these returns, Square computed its tax liability on the basis that, for purposes of the SF Tax Code, Square was engaged in the business activity of information, taxable under SF Tax Code Section 953.2. The San Francisco Of?ce of the Treasurer Tax Collector conducted an audit of Square?s San Francisco Gross Receipts and Payroll Tax Returns for Tax Periods 2014 and 2015. On or about June 12, 2017, the San Francisco Of?ce ofthe Treasurer Tax Collector issued a Notice of Tax Audit Deficiency for Tax Periods 2014 and 2015 (?Notice?). The Notice indicated that Plaintiff owed additional tax and interest for both Tax Periods 2014 and 2015. The basis for the tax adjustment, as set forth in the Notice, was a reclassification of Square?s business activity for purposes ofthe SF Tax Code to financial services, taxable under SF Tax Code Section 953.6. Square?s San Francisco competitors for labor and capital in the technology sector other software companies) are taxed by the City as information under SF Tax Code Section 953.2, and, thus, benefit from a lower tax rate as well as the significantly more favorable apportionment methodology. On or about July 1 1, 2017, a Petition for Redetermination. . On or about November 16, 2017, Plaintiff attended a hearing on the Petition for Redetermination before the Tax Collector. At the hearing, Plaintiff supplemented its Petition 5 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. for Redetermination. Following the hearing, the Tax Collector requested additional information, which Plaintifftimely provided. On or about February 8, 2018, the Tax Collector issued a Tax Collector Decision on Petition for Redetermination (?Decision?), upholding the determination that for purposes ofthe SF Tax Code, Square was engaged in the business activity of financial services. The Decision also granted Square a credit under SF Tax Code Section taxes paid to local jurisdictions in the State of Washington. But the Decision denied a credit for state- level, gross receipts-based taxes paid to Washington and Ohio. The Decision rejected Square?s position that the Interchange Fees collected by third parties were not Square?s taxable gross receipts. The adjusted tax liability per the Decision increased Square?s total liability to the City for both Tax Periods 2014 and 2015. On or about February 26, 2018, Plaintiff satis?ed its outstanding San Francisco tax obligations for Tax Periods 2014 and 2015 by paying $1,272,934.41. On or about January 10, 2019, Plaintiff ?led a claim for a refund oftaxes pursuant to California Government Code Section 910 et seq. and SF Tax Code Section 6.15?1 et seq. (?Claim for Refund?). Defendant did not provide noti?cation of any insufficiency ofthe Claim for Refund pursuant to the California Government Code or the San Francisco Municipal Code. See California Government Code Section 91 I. On or about March 8, 2019, the City and County of San Francisco denied Plaintiff's Claim for Refund. Plaintiff has exhausted all administrative remedies. See SF Tax Code Section 6.15?3. CAUSE OF ACTION ACTION FOR REFUND OF SAN FRANCISCO GROSS RECEIPTS TAX Plaintiff realleges and incorporates by reference the allegations set forth in paragraphs 1 through 39 above. 6 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 25 26 27 28 42. 43. 44. 45. 46. 47. 48. 49. The City?s Tax as Applied to Plaintiff is Unconstitutional (Commerce Clause and Due Process) Article 1, Sec. 8 ofthe US. Constitution (hereinafter the ?Commerce Clause?) requires that state and local taxes be externally consistent and, therefore, not tax extraterritorial values. The US. and California Constitutions incorporate the same requirement through their due process clauses. The Fourteenth Amendment to the US. Constitution provides that no State shall ?deprive any person oflife, liberty, or property, without due process oflaw.? Article 1, 7 ofthe California Constitution provides, person may not be deprived oflife, liberty, or property without due process of law or denied equal protection of the laws.? Because the SF Tax Code apportions to San Francisco Plaintiff?s gross receipts that are attributable, in whole or in part, to payments from Square?s customers located outside San Francisco, the City taxes extraterritorial gross receipts. A reasonable approach to apportioning gross receipts for purposes of a gross receipts tax would include recognition of the locations from which the gross receipts were derived. The apportionment methods required by the SF Tax Code cause the amount of plaintiffs gross receipts apportioned to the City to be out of all appropriate proportion to the gross receipts derived by plaintiff from sales to customers in the City. Therefore, the City?s gross receipts tax, as applied to Plaintiff, violates the Commerce Clause ofthe US Constitution and the Due Process Clause ofthe US. and California Constitutions. Plaintiffis entitled to a refund to the extent that the City has taxed extraterritorial values. The City?s Tax as Applied to Plaintiff is Unconstitutional (Equal Protection) The Fourteenth Amendment to the US. Constitution prohibits the states from denying to any person within itsjurisdiction the equal protection ofthe laws. Article 1, Sec. 7 ofthe California Constitution provides that a person may not be denied the equal protection ofthe laws. SF Tax Code Sections 953.] through 953.8 use one apportionment method for some taxpayers and a different apportionment method for other taxpayers. 7 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 50. 51. 52. 53. 54. 56. 57. 58. The use ofdifferent apportionment methods causes taxpayers using one apportionment method to owe a greater or lesser amount of tax than similar taxpayers using a different apportionment method. The differing apportionment methods treat similarly situated taxpayers differently. There is no rational basis for the differential treatment described in the preceding paragraph. Therefore, the SF Tax Code violates the equal protection guarantees of the 14th Amendment to the US. Constitution and Article 1, Sec. 7 ofthe California Constitution. Plaintiffis entitled to a refund to the extent it paid tax exceeding that computed using the SF Tax Code?s most favorable apportionment formula. The City?s Tax Violates California Government Code 37101(b) California Government Code Sec. 37101(b) requires that the measure ofthe City?s gross receipts tax fairly reflects the proportion of gross receipts from sales that actually occur within the City. . The City?s gross receipts tax includes within its measure gross receipts from sales made by taxpayers and Plaintiffthat did not actually occur within the City. Because the Tax Code imposes tax on gross receipts from sales made by taxpayers and Plaintiffthat did not actually occur with the City, on its face and as applied to Plaintiff, the Tax Code violates the requirement that the measure ofthe City?s gross receipts tax fairly re?ects gross receipts for sales that actually occur within the City. Plaintiffis entitled to a refund of gross receipts tax it paid to the City to the extent the measure ofsuch tax is based on sales made by Plaintiffthat did not actually occur within the City. Plaintiff is Entitled to Relief Under SF Tax Code Section 957 SF Tax Code Section 957 provides, ?The Tax Collector may, in his or her reasonable discretion, independently establish a person?s gross receipts within the City and establish or reallocate gross receipts among related entities so as to fairly re?ect the gross receipts within the City of all persons.? 8 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 59. 60. 61. 62. 63. 64. 65. 66. Because the SF Tax Code apportions to San Francisco Plaintiff's gross receipts that are attributable, in whole or in part, to payments from Square?s customers located outside San Francisco, Plaintiff's gross receipts under the SF Tax Code do not fairly reflect the gross receipts within the City. Therefore, Plaintiff is entitled to apportionment relief under SF Tax Code Section 957, and a corresponding refund. Plaintiff is Not Properly Taxed under SF Tax Code Section 953.6 San Francisco?s Gross Receipts Tax is imposed on ?every person engaging in business within the City? and is ?measured by the person?s gross receipts from all taxable business activities attributable to the City.? SF Tax Code Section 953. The SF Tax Code further provides, person?s liability for the gross receipts tax shall be calculated according to Sections 953.] through 953.7.? ?Person? is de?ned to include a ?corporation.? SF Tax Code Sections 952 and 62?15. SF Tax Code Section 953.2(d) provides: ?Information includes producing and distributing information or cultural products; providing the means to transmit or distribute those products; and processing data; it includes business activity described in NAICS code 51.? NAICS is an acronym for the North American Industry Classification System. See SF Tax Code Section 952.4 code? means the numerical classification for business activities established in the North American Industry Classi?cation System used by federal governmental agencies to classify business establishments; references in this Article to particular numerical NAICS codes are intended to apply the definitions and descriptions adopted in that system as of the effective date of this Article?). NAICS is a ?production?oriented? business activity classification system, which focuses on the inputs and production processes of industries to classify business activities. This is in contrast to the North American Products Classification System which is a market-based system for the classi?cation of goods and services. By analyzing Square?s inputs and production processes, whether through operating expenses, headcount, or otherwise, most of Square?s activities are properly classified in NAICS 51. 9 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 25 26 27 28 67. 68. 69. 70. NAICS 5] applies to the extent that Square creates software and distributes it to Sellers and uses its own software to determine the risk that a transaction is fraudulent. Square?s production processes are primarily focused on the deveIOpment and production of software. Square heavily invests in recruiting, training and hiring talented software engineers in order to create sophisticated software?based products. Excluding overhead, the vast majority of Square?s employees are either software engineers or employees supporting them. Square?s costs also confirm that Square?s primary business activity is the development and production of software. Excluding overhead, the vast majority of Square?s total operating expenses are for developing and producing software and related hardware products. Therefore, most, if not all, of Square?s business activities for purposes of the SF Tax Code must be classified in NAICS 51 and taxed under SF Tax Code Section 953.2 and Square is entitled to a refund for the full amount requested in its Claim for Refund. Plaintiff?s Taxable Gross Receipts do not Include Amounts Retained by Third Parties 71. 72. 73. SF Tax Code Section 952.3 provides that gross receipts ?includes but is not limited to all amounts that constitute gross income for federal income tax purposes? and shall be recognized ?at the time such receipts are recognized as gross income for federal tax reporting purposes.? The Interchange Fees, which the Payment Processors and Payment Network Participants withhold in the course of processing transactions, are not required to be included in Square?s gross income for federal income tax purposes because they were never received by Square and never subject to Square?s control and, thus, would not be recognized under the federal income tax ?cash method.? Because the Interchange Fees would not be included in Square?s gross income under the cash method, the cash method and the accrual method would result in different total gross receipts for Square over its lifetime. Although Square is an accrual method taxpayer, the accrual method of accounting yields to the cash method where applying the accrual method would change a company?s total gross income over its lifetime. IO COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 74. 75. 76. 77. 78. Because federal tax law does not require the inclusion oflnterchange Fees in Square?s gross income for federal income tax purposes and Interchange Fees are not actually received by Square, they are not ?gross receipts? for purposes of the San Francisco Gross Receipts Tax. As such, Square is entitled to a tax refund for the full amount ofits Claim for Refund. Plaintiff Is Entitled to a Credit for Gross Receipts Taxes Paid to Both San Francisco and Any Other Taxing Jurisdiction SF Tax Code Section 954(g) provides: To the extent that any taxpayer has paid a substantially similar tax to any other taxingjurisdiction on any gross receipts attributed to the City and taxed under this Article, the tax paid to such taxing jurisdiction shall be credited against the tax due under this Article; in no event shall this credit reduce the taxpayer?s liability to less than zero. The City granted Square a credit for taxes paid to ?local jurisdictions? in the State of Washington to the extent that the receipts were double taxed, but it refused to grant such a credit for Washington and Ohio state-level taxes on the grounds that a ?substantially similar tax [paid] to any other taxingjurisdiction? does not include taxes paid to the taxing jurisdictions of Washington and Ohio. Square paid 2014 and 2015 gross receipts?based taxes to, amongst others, thejurisdictions of the State of Washington and the State of Ohio, some of which was for taxes imposed by subdivisions of the State(s). More than halfthe gross receipts taxed by the States of Washington and Ohio (or their subdivisions) were also taxed by the City of San Francisco. The State of Washington imposes a gross?receipts based tax, which is substantially similar tax to the City of San Francisco?s Gross Receipts Tax, Section 950 et seq. The tax is imposed: Upon every person engaging within this state in any business activity other than or in addition to an activity taxed explicitly under another section in this chapter or subsection (1) or (3) ofthis section; as to 11 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 79. 80. 81. 82. 83. such persons the amount oftax on account of such activities is equal to the gross income of the business multiplied by the rate of 1.5 percent. Revised Code of Washington Section (emphasis added). The State of Washington de?nes ?Gross income ofthe business? as: the value proceeding or accruing by reason of the transaction of the business engaged in and includes gross proceeds of sales, compensation for the rendition of services, gains realized from trading in stocks, bonds, or other evidences ofindebtedness, interest, discount, rents, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction on account of the cost of tangible property sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses. RCW Section 82.04.080(l) (emphasis added). The State of Washington employs a market?based sourcing rule to calculate the gross income gross receipts) of the business from services attributable to the state; speci?cally, the receipts are sourced based upon ?where the customer received the bene?t of the taxpayer?s service.? See RCW Sections 82.04.4600), Because San Francisco uses the proportion of payroll in the City to attribute receipts to the City, a double?tax results, and some of the same gross receipts taxed by the City are also taxed by the State of Washington. See SF Tax Code Sections 953.2, 953.6 and 956.2. Square is entitled to a credit for all gross receipts taxes paid to the State of Washington on the same gross receipts taxed by the City. The State of Ohio also imposes a tax that is substantially similar tax to San Francisco?s gross receipts tax, which is a ?commercial activity tax for the privilege of doing business in this state? on ?taxable gross receipts? sitused to the state. See Ohio Revised Code Sections (defining ?taxable gross receipts? to mean ?gross receipts l2 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 84. 85. 86. 87. 88. sitused to [Ohio] under section 575 .033 ofthe Revised Code?), (providing the applicable tax rate). Ohio de?nes ?gross receipts? as ?the total amount realized by a person, without deduction for the cost of goods sold or other expenses incurred, that contributes to the production of gross income of the person, including the fair market value of any property and any services received, and any debt transferred or forgiven as consideration.? ORC Section 5751 (F) (emphasis added). Ohio employs a market?based apportionment approach for sourcing gross receipts. Under ORC Section 575 I .033, ?Gross receipts from the sale of all other services, and all other gross receipts not otherwise sitused under this section, shall be sitused to this state in the proportion that the purchaser?s bene?t in this state with respect to what was purchased bears to the purchaser?s benefit everywhere with respect to what was purchased.? Because San Francisco uses the proportion ofpayroll in the City to attribute receipts to the City, a double-tax results, and some of the same gross receipts taxed by the City are also taxed by the State of Ohio. See SF Tax Code Sections 953.2, 953.6 and 956.2. Square is entitled to a credit for all gross receipts taxes paid to the State of Ohio, for 2014 and 2015, on the same gross receipts taxed by the City. In sum, Square is entitled to a credit for taxes paid to otherjurisdictions on the same gross receipts taxed by the City and on that basis a refund of approximately 70% of the total amount claimed in its Claim for Refund. Plaintiff Is Entitled to a Refund of Taxes Paid on Gross Receipts from the Sale or Lease of 89. 90. Tangible Personal Property in the City The Bradley-Burns Uniform Local Sales and Use Tax Law (?Bradley?Burns Act?), Cal. Rev. Tax. Code 7200 et seq. preempts taxation of gross receipts from the sale or lease oftangible personal property by local jurisdictions. The Bradley?Burns Act requires that local sales and use tax laws be identical (with minor exceptions) to the state sales and use tax laws, and that local jurisdictions ?contract . . . with 13 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX 91. 92. 93. 94. 95. 96. the State Board of Equalization to perform all functions incident to the administration or operation ofthe [local] sales and use tax ordinance.? See RTC 7202, 7203. The Bradley?Burns Act does not preempt local taxes ifthe tax is ?substantially different? from sales taxes and use taxes. See RTC 7203.5 (?Nothing in this section shall be construed as prohibiting the levy or collection by a city, county, redevelopment agency, or city and county of any other szibstantially different tax authorized by the Constitution of California or by statute or by the charter of any chartered Whether a tax is ?substantially different? must be determined by its incidence rather than its name. The California sales tax is imposed on the ?retailer? and is the privilege of selling tangible personal property at retail.? RTC 6051. The tax is calculated by applying the tax rate to the ?gross receipts of any retailer from the sale of all tangible personal property sold at retail.? Id. ?Gross receipts? mean ?the total amount of the sale or lease or rental price, as the case may be, ofthe retail sales ofretailers . . RTC 6012. The definition of?sale? also includes ?[a]ny lease of tangible personal property in any manner or by any means whatsoever,? with certain exceptions. RTC 6006(g). Courts have found, reality, the sales tax is not a tax on sales but is an excise tax for the privilege of conducting business measured by gross receipts from sales.? Henry ?s Rests. of Pomona, Inc. v. State Bd. of Equalization, 30 Cal. App. 3d 1009, 1019 (1973). The San Francisco Gross Receipts Tax imposes a tax on retailers based on gross receipts from the sale of tangible personal property in the City (SF Tax Code Section 953.1) and the leasing oftangible personal property in the City (SF Tax Code Section 953.7). The taxes imposed by SF Tax Code Sections 953.1 and 953.7 are not substantially different from a sales tax. Because the taxes imposed under SF Tax Code Sections 953.1 and 953.7 are not ?substantially different? from the sales tax, they are preempted by the Bradley-Burns Act and Square is entitled to a refund of taxes paid on gross receipts from the sale or lease of tangible personal property. 14 COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX (.0 .13 IA.) U1 PRAYER FOR RELIE WHEREFORE, Plaintiff prays forjudgmem agains?t Defendants as fellows: 1. For a refund ofGross Receipts Tax paid by Plaintiff-for the petibds 201.4 and 2015 in theamnunt 053:1? {372,934.41 or such other amount as the evidence may Show, .frdm the date of; payment- as- provided by law; reagonable; For Plaintiffs attorneys? fees and costs of suit as permittdd by. For such Ot-lle?r and ~;further legal and cqu1?%?ic relief as the Qouft ?hm: and Dag-ad}. f6, 2019 By: Amy Silverw- Attorneys: for Plaintiff Square, 11118. 1.3 COMPLAINT REFUND OF GROSS TAX VERIFICATION 1, Philip M. Seabrease, am the Head of Tax at Square, Inc., and I am authorized to make this veri?cation. I have read the foregoing Veri?ed Complaint for Refund of San Francisco Gross Receipts Tax and know the contents thereof. 1 am informed and believe that the information contained in said document is true, and on that ground I allege that the information stated therein is true. I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. a Executed this C2 dayr of .2 gicnlao? 201 9 at San Francisco, California. Philip M. Seabrease Head of Tax Square, Inc. COMPLAINT FOR REFUND OF GROSS RECEIPTS TAX