By Rachel Brahinsky

The Gap Inc., headquartered in downtown San Francisco, is actively working to limit how much it pays in city taxes, according to an internal company e-mail obtained by the Bay Guardian.

The memo, from Gap Inc. payroll tax supervisor Cora Hernandez, urges managers to document hours its San Francisco employees spend working outside of the city. "Examples of this could be meetings in San Bruno, travel to locations outside of San Francisco, and working from home (as long as it is outside of San Francisco)," the e-mail says.

What's wrong with this picture? Well, companies aren't expected to pay taxes on out-of-city work – so that they aren't unconstitutionally charged twice if a neighboring town has a similar tax – so the move by the trend-generating apparel company to show that its employees work outside of town seems to be perfectly legal. But the Gap's searching for ways to use the loophole amounts to a bit of a tax dodge at a time when the city is reeling from closing a painful budget deficit.

"My first concern would be anything that higher-ups at the Gap would be doing to encourage fraud," Sup. Chris Daly told us when we read him the memo. "It doesn't seem like a good-faith thing for the Gap to be doing, given the fact that we're going to the ballot to ask people to raise the sales tax," added Daly, who's pushed for a more progressive business tax structure.

San Francisco treasurer Susan Leal, whose office collects payroll taxes, said the Gap directive probably isn't unusual and doesn't signal illegal activity. But, she said, "What would get me excited is if that kind of memo goes out and then we see a big decrease in what they're reporting – and I will make a note of that."

Hernandez confirmed over the phone from her Albuquerque, N.M., office that she wrote the memo and referred further questions to the company's public relations department. Gap Inc. spokesperson Stacy Maclean told us in an e-mail that the Gap is just following city law. "We have actually taken this deduction in the past, as is expected and appropriate per the City's regulations," she wrote. "This is not necessarily something new."

The payroll tax is an important source of revenue for San Francisco. In 2003 the tax generated just over $275 million; that money feeds the General Fund, which pays for public health care programs, homeless assistance, park upkeep, and other city services.

We don't know how much the Gap pays in payroll taxes, because its tax filing is confidential. But, just for fun, since we know the Gap has more than 8,500 Bay Area employees (most of them in San Francisco), let's imagine that the company has 500 San Francisco employees who either live outside of the city or travel frequently for business meetings and that they earn an average of $75,000 a year. And let's say the company is able to document that half of their time on the clock is spent out of town. Since the Gap is taxed 1.5 percent of its payroll, the company would save – and the city would lose – $281,250.

Now, this number is totally fictitious, and it's probably a very low estimate; the company wouldn't tell us exactly how many employees it has in the city or how much they earn. We suspect the Gap's money managers believe they can significantly cut their tax liability by combing through their records for out-of-city hours that wouldn't normally be tracked – and they're probably right.

This isn't the first time the Gap has tried to wiggle its way out of paying taxes. The company was part of the group of 52 businesses that challenged the city's old tax structure in court several years back. They won a settlement from the city in 2001 that eliminated the dual tax structure (which included a gross-receipts tax), diminishing the city's take by about $30 million a year.

This fall voters will weigh in on a $26 million tax package that would hike the sales tax by a quarter cent to 8.75 percent, levy a gross-receipts tax on businesses that earn more than $500,000 annually, and close a payroll tax loophole to include limited partnerships (like law firms). If it fails, more city services will likely have to be cut.

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