Naftali Harris

Gross Receipts Taxes as Payroll Taxes

January 17, 2022

A common critique of gross receipts taxes (where the government charges a small fixed percent of a business's total revenue) is that they have a disproportionate impact on low margin businesses. (For example, a 1% GRT for a 10% margin business represents 10% of their profits, but only 2% of the profits of a business with 50% margins). This critique compares GRTs to corporate income taxes, and is one useful lens for thinking about them. Another valuable lens though, particularly given that GRTs in the US are only charged by states and municipalities, is casting a GRT as a payroll tax on employees working in the GRT region. Let's do a few examples using San Francisco's Gross Receipts Tax:

Many of the companies in San Francisco do business outside of SF as well, and so SF's GRT specifies that only the portion of a business's revenue attributable to San Francisco is subject to the GRT. The definition of "attributable" varies based on the industry, but for the technology and financial services companies we'll be considering here it's based on the proportion of total payroll for employees working in San Francisco.

Let's first consider HashiCorp, which went public in December. In their S-1, they reported $142M in revenue in the first half of 2021. They've been growing quickly so assume for ease of math that they're now on a $300M/year run rate. They advertise over 1500 employees, which would put them at roughly $200k/employee in revenue. At the 0.784% GRT tax rate for 2021, this would be about $1600 in gross receipt taxes per employee in San Francisco.

Let's now consider Block (formerly known as Square): in the last 12 month period for which they've reported, they did about $17B in revenue. (Note that for the Square payments processing business this figure only counts Square's fees, not the full payments volume). As best I could tell, they have about 6000 employees, which would be around $2.8M in revenue per employee. At the same GRT tax rate, this would be about $22k/employee in San Francisco.

In reality these estimates are very likely low by a multiplicative factor because the San Francisco salaries at these companies are probably higher than average, given the tendency to put lower-cost functions like support or customer service in cheaper geographies. But this does illustrate the interesting point that on a per-employee basis, the San Francisco GRT has a bigger impact on companies that are more revenue efficient per employee, and that this can vary by an order of magnitude between companies.

Interestingly, San Francisco's gross receipts tax actually replaced a pre-2012 1.5% payroll tax on San Francisco employees. I couldn't figure out the total payroll for HashiCorp and Block (or the average salary per employee), but if you assume somewhere in the $100-150k range you see that the equivalent payroll tax rate for HashiCorp is probably comparable to the earlier 1.5% payroll tax rate, and that for Block it's probably around 10x higher.

You might also enjoy...