Ride-sharing giant Lyft has filed a lawsuit against the city of San Francisco, alleging that the municipality has overcharged the company by a staggering $100 million in taxes spanning the period from 2019 to 2023. The crux of Lyft’s legal challenge lies in the assertion that the city’s calculations have inaccurately portrayed the essence of the company’s operational model.
According to the lawsuit, Lyft contends that its primary source of revenue is derived from a percentage of the fees collected from riders. The company’s official stance, as outlined on its website, asserts that drivers receive a minimum of 70% of the payments made by passengers. The lawsuit highlights Lyft’s unique approach to revenue recognition, emphasizing that the fees paid by riders to Lyft drivers constitute the core component of the company’s income stream. Furthermore, Lyft adamantly maintains that its drivers are not classified as employees for any organizational purposes.
The crux of Lyft’s legal argument is encapsulated in its assertion that the city’s tax assessment methodology is fundamentally flawed due to its failure to incorporate the payments made to drivers within the relevant payroll factor. Lyft contends that this omission results in a distorted representation of the company’s gross receipts attributable to its business operations within San Francisco.
Moreover, Lyft’s legal challenge extends to what it perceives as inconsistent classification by the city in terms of assessing the company’s business activities for tax-related purposes. The taxes under scrutiny in the lawsuit encompass the Gross Receipts Tax, Homelessness Gross Receipts Tax, Traffic Congestion Mitigation Tax, and various business registration fees.
Lyft’s lawsuit against San Francisco emerges against the backdrop of broader legislative changes within California, notably the passage of Assembly Bill 5 (AB 5). This legislation ushered in a reclassification of taxation and employee categorization criteria pertaining to independent contractors. In a premonitory missive addressed to California Assembly members, Governor Gavin Newsom underscored the imperative of combatting worker misclassification, which he argued undermined fundamental labor protections such as minimum wage guarantees, paid sick leave entitlements, and health insurance coverage.
The fallout from AB 5 materialized in the form of heightened regulatory scrutiny and obligations imposed on ride-sharing entities such as Lyft, which were reclassified as employers mandated to furnish health benefits to their workforce. However, California voters intervened in this regulatory landscape by approving Proposition 22 in 2020, thereby restoring the independent contractor status of ride-sharing drivers and delivery personnel. Notably, Lyft devoted significant financial resources amounting to $47.5 million towards advocating for the successful passage of Proposition 22.
The legal saga surrounding Proposition 22 endured protracted courtroom battles until a definitive resolution was reached in July 2024, when the California Supreme Court decreed that gig workers could operate as independent contractors rather than employees. Meanwhile, San Francisco finds itself grappling with a substantial budget deficit nearing $1 billion, a financial predicament that prompted S&P Global Ratings to downgrade the city’s credit rating in December 2024.
