Zynga saved millions on its taxes 

click to enlarge Zynga's tax break saved the company millions. - SF EXAMINER FILE PHOTO
  • SF Examiner file photo
  • Zynga's tax break saved the company millions.

The value of the tax break that apparently kept the social gaming company Zynga from fleeing San Francisco for friendlier business environs could have exceeded $6 million.

Zynga is expected to receive that benefit next week when it files its payroll taxes and exercises a tax exemption created to woo tech companies.

As Zynga prepared for its December 16 stock offering, executives warned city officials that the company would leave San Francisco without a tax break. San Francisco is the only city in California with a payroll tax, and that 1.5 percent tax also applied to stock options, a vital form of compensation for tech startups.

So the Board of Supervisors, with the backing of Mayor Ed Lee, adopted a citywide tax break on such stock compensation. The tax was modified around the same time that a payroll tax break for new employees was adopted to woo the micro-blogging service Twitter to the mid-Market neighborhood.

Zynga, the creator of online games such as “Farmville” and “Mafia Wars,” reported $510 million in employee stock compensation last year as a result of going public, according to a Feb. 14 filing with the Securities and Exchange Commission.

If that compensation had been fully taxed at the old rate, Zynga would have owed The City some $7.65 million. However, that amount could have varied due to other factors, such as how much compensation went to employees who work outside San Francisco.

As a result of The City’s action, Zynga’s annual tax bill for stock-based compensation will be capped at $750,000 or whatever it paid in 2010, whichever was greater. Thus, the value of the tax break could have exceeded $6 million.  And the tax break's value to Zynga could continue to grow; the company told the SEC it expects to award another $400 million to $425 million in stock based compensation in 2012.

Zynga declined to discuss its tax debt to The City.

San Francisco politicians engaged in a debate last year over providing such tax breaks to tech companies. Supporters said the payroll tax stymies the local tech industry, while critics called the tax breaks wrong-headed policy.

Supervisor Mark Farrell argues that Zynga’s tax break didn’t cost The City anything since the company wouldn’t have stuck around if it hadn’t been offered. “They wouldn’t have been here,” Farrell said.

Instead, he noted, Zynga remained in San Francisco and company employees are spending their newfound money in the local economy. And San Francisco can boast that Zynga is located here. “It’s a big deal,” Farrell said. “You can’t dismiss that.”

Because tax filings are not made public, the exact size of Zynga’s tax break will remain unclear for a while. But the tax collector must submit an annual report to the Board of Supervisors on the amount of exemptions and how many claimed them. Reports are expected around June.

The tax exemption is in place from 2011 until 2017, and other tech companies also are poised to benefit from the changes. Yelp is reportedly going public next month with shares priced in the $12 to $14 range. Twitter is thought to be eyeing a 2013 public offering


Zynga facts

Dec. 16: Date Zynga went public

$10.00: Price of stock at opening

$12.93: Price of stock Friday

Source: Zynga

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