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California To Hit Startup Founders with Big Retroactive Tax Bills

301 points by waderoush 14y ago

nvk 14y ago
Come to Toronto!
- martinshen 14y ago
  Taxes are even worse for (international) investors, small sales and so on in Ontario/Canada. With the exception of SRED which is being reformed
- preinheimer 14y ago
  But not Quebec, which just retroactively increased taxes on Liquor. http://www.crfa.ca/aboutcrfa/newsroom/2012/restaurants_oppose_retroactive_tax_increase_announced_in_quebec_budget.asp http://www.crfa.ca/aboutcrfa/newsroom/2012/restaurants_oppos...
- slajax 14y ago
  Even better, come to Vancouver. You get SRED and no snow. Just rain.
  - dubfan 14y ago
    Except when it does snow, and the entire city shuts down because they don't know how to deal with the snow (same thing happens in Seattle and Portland)
legitsource 14y ago
I would not have thought that retroactive tax bills were legal. Are there any other common examples or is this a new precedent?
- jivatmanx 14y ago
  The SC ruled that the retroactive immunity given to telecom companies was legal. I'm pretty sure "Ex Post Facto" is dead.
  - rayiner 14y ago
    Ex post facto is not synonymous with "retroactive." See the post by David Redden in this thread: http://www.connorboyack.com/blog/ex-post-facto-law http://www.connorboyack.com/blog/ex-post-facto-law. "Secondly, while there’s some evidence that some of the “framers” thought “ex post facto” included civil laws, it’s well-established that the most influential federalists in the late 18th Century understood an “ex post facto law” to mean a law that was 1) criminal, 2) functioned retroactively, and 3) worked to the detriment of the accused. (See Crosskey, The True Meaning of the Constitutional Prohibition of Ex-Post Facto Laws, 14 U.Chi.L.Rev. 539 (1947))."
  - _delirium 14y ago
    The Supreme Court ruled in Calder v. Bull (1798) that the prohibition on ex-post-facto laws applies only to criminal laws, not civil matters. One could argue that shouldn't be the case, but it's not a later shift away from the 18th-century interpretation.
  - mikeash 14y ago
    Retroactive immunity is rather the opposite of retroactive criminalization.
- pyre 14y ago
  The more troubling part is that he's claiming that they are charging interest and penalties on the 'unpaid taxes.' To retroactively change your bill, then charge you interest and penalties for 'late payment' seems well over-the-top. If I didn't know better, I'd say that they was a blatant money grab. </sarcasm>
- ceejayoz 14y ago
  Virtually every year TurboTax tells me I can't submit my return because they're still writing the rules for the year that just finished.
forgingahead 14y ago
Houston, we have a spending problem.
- rplacd 14y ago
  It's got nothing to do with increasing tax revenue - it's petty overreaction on behalf of the responsible state body - the FTB. I quote liberally from the article: > It turns out that a few years ago, someone sued the Franchise Tax Board over being denied the right to claim the QSB benefit [Cutler v. Franchise Tax Bd., 208 Cal. App. 4th 1247 (2012)]. The company at issue in that lawsuit did not meet one of the QSB requirements—that it maintain 80 percent of its employees and assets in California. In August of 2012, the California Court of Appeals sided with the plaintiff, ruling that denying him the QSB exclusion based on the “80 percent requirement” was an unconstitutional violation of the interstate commerce clause. > Since the FTB lost the case, you might think that they would strike the unconstitutional requirement and keep the rest of QSB statute intact. Not a chance. > What the FTB did instead was to take their ball and go home. They decided that since they could not impose the “80 percent requirement,” no one would be entitled to the QSB exclusion. They put out an announcement terminating the Qualified Small Business exclusion and retroactively disqualifying all exclusions and deferrals going all the way back to 2008.
  - _delirium 14y ago
    That's actually fairly common in decisions striking down agency interpretations. Sometimes a court will order a specific remedy, but other times they only rule that the existing regulation was illegal but leave open multiple ways of curing it. In the case where the problem was that a regulation impermissibly distinguished between groups that the law didn't allow distinguishing between, there are two ways to fix it: put everyone into bucket A, or put everyone into bucket B. And in fact in either case you have to do it retroactively, to fix the ruled-invalid error of treating the two groups differently.
    - dragonwriter 14y ago
      This is not a decision striking down an agency interpretation. The decision explicitly found that the statute supplying QSB benefits in California "is discriminatory on its face and cannot stand under the commerce clause". Had an agency interpretation been struck down, it would be fair to say that (within the bounds of the court decision and the governing statute) the FTB was free to come up with a new interpretation. But when a statute is struck down, it can only be fixed by the legislature. An administrative agency can't fix constitutional defects in statute: they have no authority to do so. (The court could have severed the unconstitutional provision and preserved the rest of the statute, and there is some indication in the decision that they probably would have done so rather than ruling the statute facially invalid if they had been reasoning clearly and consistently. But they didn't, and the FTB isn't really free to apply what the court should have ruled instead of what the court actually ruled.)
danielweber 14y ago
I thought this was the "taxes changed during 2012 for the whole 2012 tax year" issue, but this seems to extend back to previous years.
binarymax 14y ago
ex post facto, surely?
- rayiner 14y ago
  The prohibition against retroactive laws only applies to criminal laws. See Calder v. Bull (1798).
  - petercooper 14y ago
    So, theoretically speaking, could California retroactively increase the state income tax and claim billions from most of the populace?
    - forgingahead 14y ago
      This is exactly what happened when Prop 30 passed last year: http://allthingsd.com/20121204/what-proposition-30-means-for-californias-entrepreneurs/ http://allthingsd.com/20121204/what-proposition-30-means-for...
    - wmeredith 14y ago
      Absolutely.
nugget 14y ago
Vote with your feet; it's the only vote that matters in California these days.
deleted 14y ago
[deleted]
- JonnieCache 14y ago
  Speak for yourself.
  - deleted 14y ago
    [deleted]
    - dickbasedregex 14y ago
      This brand of unproductive sniping is what's wrong with HN comment threads.
      - thecurator 14y ago
        what's wrong with my comment?
  - ricardobeat 14y ago
    I think that was witty sarcasm in reference to recent events.
DannyBee 14y ago
We can't effectively manage a budget, give us more money!
- Aloisius 14y ago
  Actually, California's budget is balanced and it expects a surplus in two years. http://www.nytimes.com/2013/01/11/us/california-balances-its-budget.html?_r=0 http://www.nytimes.com/2013/01/11/us/california-balances-its...
  - DannyBee 14y ago
    Only after doing things such as threatening to cut 300 million from education unless folks raised taxes (retroactively as well). If your method of balancing the budget is always asking for more money, you haven't really balanced the budget. What are you going to do in a few years when those tax hikes expire, and you suddenly lose the same amount of revenue? I look forward to a few years when we begin to hear the claim in that we need to make the temporary hikes permanent, because we are running out of money again. (This is, btw, fairly similar as to how the federal income tax was created. It was originally temporary) As for the surplus claims: Of course the guy who supported the ballot initiative is going to say it's going to run a surplus. However, even the ballot initiative booklet mentioned the surplus claims are possibly false, as the kind of revenue they are depending on is very transient and hard to predict.
    - Aloisius 14y ago
      As for the surplus claims: Of course the guy who supported the ballot initiative is going to say it's going to run a surplus. The independent Legislative Analyst's Office, which had previously said Brown's budget would have had a $1.9 billion shortfall in November, now says that it is roughly in balance due to changes in income tax: http://lao.ca.gov/reports/2013/bud/budget-overview/budget-overview-011413.pdf http://lao.ca.gov/reports/2013/bud/budget-overview/budget-ov... If your method of balancing the budget is always asking for more money, you haven't really balanced the budget. How is increasing revenues not a valid way of balancing a budget? And always asking for more money? Reagan raised the top income tax bracket in California from 7% to 10%. It now stands at 10.3%. What are you going to do in a few years when those tax hikes expire, and you suddenly lose the same amount of revenue? I look forward to a few years when we begin to hear the claim in that we need to make the temporary hikes permanent, because we are running out of money again. Considering most of the budget deficit is mostly due to California's substantial social safety net being engaged by the Great Recession, as long as the economy continues to improve, California will probably get by fine with the increased revenues of more people working and lessened burden of people applying for medicaid and unemployment insurance.
gcv 14y ago
Does this apply to a Delaware corporation which happens to have offices ("do business") in California?
- macey 14y ago
  I doubt it - although you would still need to pay CA franchise tax ($800 minimum yearly). That's always been the case.
- prostoalex 14y ago
  Linked article is about "sales of stock of a Qualified Small Business", which normally applies to tax residence of people who own the corporation, not the corporation itself.
- KedarMhaswade 14y ago
  The first comment on the OP also asks this question. Looking for something definitive here.
- travisp 14y ago
  Generally you pay taxes where you do business, not where you are incorporated, so probably.
rayiner 14y ago
Come to New York! We're rolling in so much finance money we don't need to hit up small businesses.
- ceejayoz 14y ago
  As someone who works for a small business in New York... hahahahaha. Ha. Haha.
- kyrra 14y ago
  Your state's gun laws prevent me from ever living there.
  - untog 14y ago
    Don't come to New York, then. If your access to rifles is more important than the tax codes your startup may or may not face, stay where you are.
    - cullenking 14y ago
      I think it might be something more about the fact that New York's interpretation of the 2nd amendment differs so greatly from mine that I am fearful for what they might do in regards to other constitutional amendments. As a side note, I cannot move to most cities in Colorado because I happen to have two dogs who are banned by their breed. The point is, there is way more to the conversation than just taxes alone.
      - king_magic 14y ago
        Seriously, I've been throw into the gulags and tortured at least 5 times while living in NY. It's awful - just awful. Don't come here, whatever you do. Don't say I didn't warn you!
        untog 14y ago
        I've been throw into the gulags and tortured at least 5 times while living in NY Seriously, stop going to bars around Times Square. You should know better by now.
preinheimer 14y ago
As a business owner this crap terrifies me. Washington State was looking at changing their tax code retroactively to get more money from Microsoft, luckily level heads (and I might presume, extensive lobbying) prevailed. I can't plan today for what yesterday's laws will be tomorrow.
- rayiner 14y ago
  Unfortunately, I think you'll see more of these problems as states get crushed under their existing debt and new expenditures from pension obligations, etc. See: http://www.usgovernmentspending.com/compare_state_spending_2013pZ0d http://www.usgovernmentspending.com/compare_state_spending_2...
  - sliverstorm 14y ago
    Shove them (States) in between a rock and a hard place, and they pretty much run out of options. Not surprising.
    - tjic 14y ago
      They've got tons of options. They could, for example, cut back the bloated private sector. ...but the governments are on the side of the government workers (most government workers are unionized and these funds lobby the politicians). The result is that it becomes an "us vs them" fight, and while common citizens may theoretically have political power through the ballot box, in practice power is mostly exercised through campaign donations and backroom deals, so the politicians are taking the decisions that they're incentivized to take: stealing seed corn and feeding it to the public sector employees.
      - randallsquared 14y ago
        > They could, for example, cut back the bloated private sector. Isn't that what they're trying to do? :D But I guess this is a typo for "public sector"...
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brown9-2 14y ago
I'd be curious to know how many California taxpayers this decision affects.
ooorion 14y ago
Come to New Mexico. Cost of living is cheap and we have great weather.
basseq 14y ago
I did a quick google and found a discussion of retroactive tax laws (applying to gift taxes in 2010): http://www.assetprotectionsociety.org/the-likelihood-and-enforceability-of-a-retroactive-tax-2/ http://www.assetprotectionsociety.org/the-likelihood-and-enf... Potential arguments include due process, "wholly new tax", lack of notice, ex post facto (with the same caveat as mentioned here about applicability only to criminal cases), and the fifth amendment taking clause. Conclusion: it's hard to fight.
- bjornsing 14y ago
  Some things about the US still surprise me. In "socialist Sweden" (as it's sometimes called) retroactive taxation is unconstitutional. On the other hand capital gains is 20-30%, and most entrepreneurs actually have their gains taxed as income. That means you're lucky if you get to keep 13%. ;) I'm exaggerating a bit, but not much.
  - w1ntermute 14y ago
    > Some things about the US still surprise me. In "socialist Sweden" (as it's sometimes called) retroactive taxation is unconstitutional. The difference between the US and postage-stamp-sized European countries like Sweden is that there is great political and cultural variation between different parts of the US. California is chock full of socialists/liberals.
    - deleted 14y ago
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    - rosser 14y ago
      postage-stamp-sized European countries like Sweden At 174K mi^2, Sweden is larger than California's 164K mi^2.
      - aaronblohowiak 14y ago
        Population-wise, Sweden is about the same as new york city.
bbwharris 14y ago
Austin, TX would love to have you.
mturmon 14y ago
A lot of the comments are characterizing this as a money grab by the state. To me, it sounds more like the unintended consequences of a clever lawsuit and/or a poorly-crafted piece of tax-break legislation. People should be advised that California has a lot of clever lawyers who work to find and exploit holes in legislation.
- shawnee_ 14y ago
  The original provision gave preferential treatment to CA residents, which the courts ruled to be unconstitutional: a violation of the Interstate Commerce Clause. The provisions in California law regarding the 80 percent asset and payroll requirements were found to be unconstitutional in August 2012 by the California Court of Appeal in Cutler v. Franchise Tax Board (FTB). The court's decision made California's entire QSBS statute invalid and unenforceable. As a result, all QSBS gain exclusions and deferrals previously allowed under California law became invalid. It is important to note that the court's decision in Cutler did not change the federal treatment of QSBS. (Source: https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_and_Cutler_Decision.shtml https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_an... ) So the California FTB (and the rest of the states participating in the UDITPA Multistate Tax Compact) use the original "loophole" as a means to essentially siphon off a greater portion of the tax revenue from the occurrence of interstate commerce, and to keep it in the respective state. Washington, Oregon, California all participate (Source: http://www.startuplawblog.com/2012/08/17/interstate-business-taxes/ http://www.startuplawblog.com/2012/08/17/interstate-business...) This would be fine all fine and dandy, but for the fact that most of the "startups" or QSBs that benefit/ed from this exception derive/d revenue from multi-state commerce, on the Internet. This has made it and makes it more difficult for those businesses trying to do their "startup" thing out of state to compete with those here who get more tax breaks to re-invest. Interestingly, most of the VC money - over HALF of all venture capital in the USA -- goes to businesses in California. This is kind of messed up. (Source: http://news.cnet.com/8301-13846_3-20010486-62.html http://news.cnet.com/8301-13846_3-20010486-62.html) So looking at the bright side -- this should encourage startups to start places other than CA. [Edited to include info about UDITPA in response to dragonwriter's comment]
  - 14y ago
scarmig 14y ago
The repeal of the exclusion actually seems like okay policy (at least sans the 80% requirement). The retroactivity, not so much.
victorhn 14y ago
Come to Mexico, beautiful beaches, good weather, what else do you want?
- thebooktocome 14y ago
  A lack of institutionalized corruption and organized crime?
  - gte910h 14y ago
    Exactly. I don't ever plan on living someplace I need kidnapping insurance.
  - mindcrime 14y ago
    The USA has plenty of institutionalized corruption (see: Washington D.C.) and organized crime too, so how much worse can Mexico be?
    - rgbrenner 14y ago
      "so how much worse can Mexico be?" That's sarcasm right? Mexico: 3rd highest number of murders in the world (only India and Brazil are worse). Nearly 5x the murder rate in the US - nearly 2x the total number of murders. http://en.wikipedia.org/wiki/List_of_countries_by_intentional_homicide_rate http://en.wikipedia.org/wiki/List_of_countries_by_intentiona...
      - mindcrime 14y ago
        I was referring, specifically, to the issues of corruption and organized crime. But even considering the general murder rate, I'm going to go out on a limb and guess that your likelihood of being murdered in Mexico vary tremendously depending on where in Mexico you are. Maybe I'm wrong, but I'm guessing there are some areas that are pretty safe and some areas that you'd have to be brain-dead stupid to walk into.
        14y ago
jibjaba 14y ago
To me this is a symptom of the twisted politics around taxation in the US. You have one very powerful group that is continually fighting to lower or eliminate taxes and another somewhat less powerful group that wants to bring in enough tax money to fund government services. One side cuts taxes or refuses to raise them and the other side finds new things to tax or other taxes to raise. Normally such a tug of war is not an issue and is basically a natural consequence of a functioning democracy but in the US it has gone to the extreme. Personally I blame the anti tax group. They seem to have no use for logic or evidence and only demand more cuts regardless of the previous ones or the consequences. They are refusing to provide the funds necessary to run a modern government.
- jacoblyles 14y ago
  In California, our money goes to retired union worker's pensions, not current public services. Our most powerful lobbying group by money spent is the state teacher's union, followed by the state and municipal employee worker union. We have the highest taxes in the nation, poor public services, and massive debt. Pro-tax types should stop carrying water for bad governance. I am one of those anti-tax people you say "has no use for logic and evidence", and I am happy to pay taxes when I feel it is going to good use. But I am not willing to pay taxes so that politicians can turn around and give it to the unions that own them at the expense of the public good. It's funny that most of the world's entrepreneurship is in my country, where people can keep most of their money earned to fund new ventures (for now).
  - deleted 14y ago
    [deleted]
- gyardley 14y ago
  They are refusing to provide the funds necessary to run what you think a modern government should do. Opinions differ.
  - jibjaba 14y ago
    Sorry, it's not what I think. I am basing my analysis on the many polls I have seen on what government services people expect. For example a large majority of people expect to have Medicare available to them when they turn 65. I am not talking about European style socialism.
jstalin 14y ago
Come to (western) Michigan. We have new corporate tax reforms that dramatically reduced liabilities (6% rate for C-Corps, flow-through taxation for LLCs and S-Corps, personal income tax rate of 4.3%), we have a 6% sales tax, low property taxes, very cheap housing (compared to much of the nation), well-educated workforce, and liberal gun laws (for the guy who wouldn't move to NY). Our 4.3% income tax rate is still lower than CA's QSB credit rate. EDIT: Michigan's new corporate income tax also has an alternative rate of 1.8% for Qualified Small Businesses... those with net income under $1.3 million. If your corporation operates outside of Michigan and has no activity in Michigan itself, there is no corporate income tax.
- jstalin 14y ago
  Forgot to mention - it costs $50 to form an LLC in Michigan and takes about a week (I've heard horror stories about forming an LLC in CA). $100 additional for same-day service. And you don't have to publicly disclose the LLC's members, only the registered agent, which can be an attorney or any other resident of the state. Forming a Michigan corporation is $60 and has a few more public disclosure requirements.
  - rgbrenner 14y ago
    A whole $50?! Colorado: $1.00 for your Articles of Incorporation (Corp) or Articles of Organization (LLC). It's online filing.. takes a day(?). http://sos.state.co.us/pubs/info_center/fees/business.html#BIZ http://sos.state.co.us/pubs/info_center/fees/business.html#B...
    - jstalin 14y ago
      LOL, ok, you win.
- flagnog 14y ago
  And Detroit... oh, wait - Western Michigan. Should be a new state.
  - 14y ago
stevewilhelm 14y ago
Taxes have zero impact on my decision to start a company in California.
- billpaetzke 14y ago
  How come?
  - nvader 14y ago
    Perhaps for other more compelling reasons he has decided to start a company elsewhere.
- PKop 14y ago
  Absurd. Imagine they were 100%. You wouldn't start a company there. What if they were 90? You wouldn't start a company there (assuming your compensation is not much much higher than it would be in other areas minus taxes.) Decrease this until it reaches the point at which you're ok, weighing all the pros and cons of there or elsewhere, with starting a company there. Of course it's not true to say they have no impact on your decision, but rather at current levels, their impact is deemed acceptable compared with alternatives.
not_that_noob 14y ago
we unfortunately don't have enough votes to influence their thinking on this. this is sleazy but not out of character for california. you can try shaming them with some media exposure (which is what you are embarking on) and hope it kinda works. good luck.
ryguytilidie 14y ago
I guess the way I see it is this. I imagine most startups don't have much profit, so therefore they won't pay much in taxes. If you are making a lot of profit and paying a bit more in taxes, it seems like the system is working. If these people are selling millions of dollars in stock options and complaining about having to pay more taxes on them, I have a hard time having sympathy. I'd love for my biggest problem to be figuring out how much more in taxes I owe on all the millions of dollars I made.
- jacoblyles 14y ago
  Capital gains taxes are going up by 50% in CA this year. That's a big hit to future angel rounds. I wrote about it here: http://jacobexmachina.blogspot.com/2013/01/the-fiscal-cliff-silicon-valleys.html http://jacobexmachina.blogspot.com/2013/01/the-fiscal-cliff-...
redm 14y ago
I'm not sure I would recommend Texas either. Use tax means you pay annual taxes on everything you own, plus sales tax on any affiliate deals; franchise tax will hit you hard even if your not making a dime because it's based on 'net worth' and not on profit. It's a tough place to be.
- gyardley 14y ago
  The bit about use tax isn't accurate. If you don't pay Texas sales tax on something, which varies from 6.25% to 8.25% depending on the jurisdiction, you are supposed to pay the difference between Texas sales tax and the tax you paid elsewhere. You do this once, not annually. This is not unique to Texas. Use taxes exist in almost every other state, including California and New York. Like everywhere else, use tax is often (usually) completely ignored by taxpayers. After all, it's not like we file a state income tax return down here. No one goes, looks up, and files the individual form for 'use tax'. I don't pay franchise tax in Texas, and I'm not an affiliate marketer - but in my experience it's a rather low-tax jurisdiction with a rather low cost-of-living.
  - redm 14y ago
    "The revised franchise tax applies to partnerships (general, limited and limited liability), corporations, LLCs, business trusts, professional associations, business associations, joint ventures, incorporated political committees and other legal entities." So if you aren't one of those then no, you would not pay franchise tax, but most small businesses do.
- tarice 14y ago
  No state income tax, much cheaper housing costs than the national average, and cheap gas make it a pretty good place to live and work. Plus, because of all that, you can pay your employees much less (than California) and still provide them an equally-good standard of living. And Tex-Mex! I don't see how people in other parts of the country could live without Tex-Mex food.
  - redm 14y ago
jey 14y ago
Can we just hurry up and address the real problem: California's constitution? We should just burn that flawed thing and start over. As I understand it, one of the major problems with California is that the reasonable-sounding idea that citizens should be allowed to amend the constitution through a ballot proposition has backfired and led to all sorts of special interests amending the constitution to protect their own interests by lobbying the public. http://ballotpedia.org/wiki/index.php/California_constitutional_convention#Reasons_for_a_convention http://ballotpedia.org/wiki/index.php/California_constitutio... https://en.wikipedia.org/wiki/Constitution_of_California#Differences_from_other_constitutions https://en.wikipedia.org/wiki/Constitution_of_California#Dif... https://en.wikipedia.org/wiki/California_Proposition_13_(1978) https://en.wikipedia.org/wiki/California_Proposition_13_(197...
- homosaur 14y ago
  It doesn't sound reasonable though, it sounds moronic. A constitution should be the basis of all law (can someone let Obama's administration know about this?) and therefore should be extremely difficult and rely on vast, widespread consent to change. You're entirely right that until this gets fixed, CA will always be screwy.
- nostromo 14y ago
  I also think states and locales should be able to declare bankruptcy and restructure their obligations. Currently there is no clear way to get out from under prior bad governance. Here's a good article about how San Bernardino is trying: http://www.reuters.com/article/2012/11/13/us-bernardino-bankrupt-idUSBRE8AC0HP20121113 http://www.reuters.com/article/2012/11/13/us-bernardino-bank... > a third of the city's 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. > In 2009, patrol lieutenant Richard Taack retired at the age of 59, after 37 years of service. He took home $389,727 that year, including $194,820 in unused sick time and $33,721 for unused vacation time, according to city payroll records. Shortly after Taack retired - on an annual lifetime pension of $128,000 - he was hired part-time by Penman's city attorney's office, at $32 an hour.
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- viggity 14y ago
  It's not clever, it is quite simple. The federal government has the SOLE ability to regulate interstate commerce.
shail 14y ago
Some people in this world are just plain ridiculous. Who runs the country like this? I really want to know who really thinks so stupidly while making/amending laws.
- thecurator 14y ago
  the people running the country, are running it like this... sadly
- thecurator 14y ago
  unfortunately, those in charge choose to vilify success and growth. rather than lauding the greatness of america, they choose to tax, burden and encumber it. i'm not sure there are good alternatives on either side of the aisle.
maxmax 14y ago
The FTB had two choices: allow the deduction for every QSBS that didn't qualify due to the 80% rule, or retroactively impose the tax on all who claimed it. I'm sure somebody did the math, and found a huge liability for the state if all the previously non-qualified QSBS' were given the deduction. Keep in mind the FTB can't allow the status quo: if they allow the previous claimants keep the deduction, they must grant the same ability to the previously non-qualified. They chose then to disqualify the previous claimants and fight with them on a case-by-case basis, rather than pay.
twakefield 14y ago
Am I missing something or has California crossed over into absurdity? I don't understand why the VC and tech community in California stand for this stuff [1]. There should either be more lobbying by the seemingly powerful tech and vc community or mass exodus out of the state. I don't see either happening and I wonder why. Perhaps these things just take time. Is CA killing the golden goose here? [1] I am guilty too by living here at the moment, but I am a relative new comer to the state. The situation is completely baffling to me after being here for almost two years and am exploring other states at the moment.
- mturmon 14y ago
  "Give us our targeted tax breaks or we'll leave for another state!". I like principled stands like this.
- rdl 14y ago
  I think part of the problem is there isn't a single other place which is objectively better than SFBA on every metric which matters to startup people, and yet people would prefer to stay together/have a critical mass of people. Seattle, Boulder, and Austin are probably the most viable options right now, if you want more libertarian/sustainable government combined with the same overall feel of the Bay Area. It would be better if there were one place which was head and shoulders better than all the others. Nothing really touches SFBA for VC, though, and Stanford is probably the world's best university for applied CS with startup involvement.
thecurator 14y ago
a prime example of fiscal policy going array. i hope our revered leaders figure out the fact that innovation is the key to the greatness that is America.
viggity 14y ago
Serious question, can one "retroactively" move out of the state? Isn't it kind of bullshit I wasn't afforded the opportunity to move out of the state before I sold my stock?
anigbrowl 14y ago
One-sided and confused article. Whether this is an attempt to mislead readers or a misunderstanding by the writer, I don't know. But this is not a case of California choosing to implement an unhelpful policy. This is a case of California's previous helpful policy being found illegal because it violates the commerce clause; the FTB had no other choice but to impose the tax. http://www.mondaq.com/unitedstates/x/214234/Income+Tax/FTB+Issues+Notice+To+Retroactively+Deny+Qualified+Small+Business+Stock+Tax+Benefits+Amended+Returns+Should+Be+Filed http://www.mondaq.com/unitedstates/x/214234/Income+Tax/FTB+I... https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_and_Cutler_Decision.shtml https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_an... The FTB did not 'take its ball and go home.' The Court told the FTB that it was not allowed to favor [EDIT: investment in qualifying] California corporations that way to begin with. An alternative would have been to extend the tax break to all companies that do business in California and send them a refund check for every year the QSB rule had been in place, but the FTB most likely doesn't have that much money available.
- dragonwriter 14y ago
  The FTB doesn't have a choice. The court invalidated the statute which provided the benefits. The legislature could pass a new statute which provided similar benefits without the features which made the old statute unconstitutional, but the FTB is an executive-branch agency and can't make up its own laws to replace ones that are struck down by the courts.
  - anigbrowl 14y ago
    Good point - the FTB doesn't have the authority to give away more of the state's money to people who sold stock in non-QSBs. I do think there's a problem here of notice; I can't pretend I'd feel enthusiastic about having to pay 5 years of back taxes if I had been enjoying this tax break [edit: well it's a deferral rather than a break, but it's still a benefit]. But as you say, that's not up to the FTB; some other taxpayer will have to sue the state and argue successfully against retroactive taxation.
  - brianoverstreet 14y ago
tesmar2 14y ago
A lot of the discussion arounds this makes me think that the joke "The Republic of California" is not just true of CA, but for Washington, too. Is the talk of high taxes just limited to those two Western states or is it a bigger trend in other parts of the West Coast?
jacoblyles 14y ago
On a related note - California capital gains tax is going up by 50% this year[1] (24.3% to 37.1%). That's a big jump and I haven't heard many people talk about it. In the short term it doesn't have much effect but in the long run it will reduce the amount of capital in the Valley available for angel investment and bootstrapping. [1]http://jacobexmachina.blogspot.com/2013/01/the-fiscal-cliff-silicon-valleys.html http://jacobexmachina.blogspot.com/2013/01/the-fiscal-cliff-...
- kevinpet 14y ago
  That's completely misleading. The capital gains tax paid by some Californians may be going from 24.3% to 37.1% but only 3% of that has anything to do with California. This is important because changes that affect other states as well do not affect the relative desirability of CA vs. other states.
protomyth 14y ago
If we're all recommending states, then how about ND. Yeah it gets cold and hot, but we have a budget surplus, wicked fast fiber, and low taxes. Fargo(1) is an ok town (Microsoft has a place there). 1) Fargo in no way resembles anything from the movie of the same name. That would be MN home of high taxes and no off-sale after 8pm.
zem 14y ago
even if the tax break was found unconstitutional and retroactively revoked, how is the "interest and penalties" bit in any way legal?
azarias 14y ago
I also found this section interesting...and I didn't know about it before: "Per amendments in the new “fiscal cliff” law, if you started or invested in a QSB between September 28, 2010 and January 1, 2013 and ultimately sell stock under the federal QSB provisions, you’ll pay no federal capital gains tax, and in some states, no state taxes."
songer-john 14y ago
Dear friends, I wanted to let you know about a new petition I created on We the People, a new feature on WhiteHouse.gov, and ask for your support. Will you add your name to mine? If this petition gets 25,000 signatures by February 09, 2013, the White House will review it and respond! We the People allows anyone to create and sign petitions asking the Obama Administration to take action on a range of issues. If a petition gets enough support, the Obama Administration will issue an official response. You can view and sign the petition here: http://wh.gov/Pw20 http://wh.gov/Pw20
songer-john 14y ago
Dear friends, I wanted to let you know about a new petition I created on We the People, a new feature on WhiteHouse.gov, and ask for your support. Will you add your name to mine? If this petition gets 25,000 signatures by February 09, 2013, the White House will review it and respond! We the People allows anyone to create and sign petitions asking the Obama Administration to take action on a range of issues. If a petition gets enough support, the Obama Administration will issue an official response. You can view and sign the petition here: http://wh.gov/Pw20 http://wh.gov/Pw20

301 points by waderoush 14y ago

nvk 14y ago

Come to Toronto!

martinshen 14y ago
Taxes are even worse for (international) investors, small sales and so on in Ontario/Canada. With the exception of SRED which is being reformed
preinheimer 14y ago
But not Quebec, which just retroactively increased taxes on Liquor. http://www.crfa.ca/aboutcrfa/newsroom/2012/restaurants_oppose_retroactive_tax_increase_announced_in_quebec_budget.asp http://www.crfa.ca/aboutcrfa/newsroom/2012/restaurants_oppos...
slajax 14y ago
Even better, come to Vancouver. You get SRED and no snow. Just rain.
- dubfan 14y ago
  Except when it does snow, and the entire city shuts down because they don't know how to deal with the snow (same thing happens in Seattle and Portland)

legitsource 14y ago

I would not have thought that retroactive tax bills were legal. Are there any other common examples or is this a new precedent?

jivatmanx 14y ago
The SC ruled that the retroactive immunity given to telecom companies was legal. I'm pretty sure "Ex Post Facto" is dead.
- rayiner 14y ago
  Ex post facto is not synonymous with "retroactive." See the post by David Redden in this thread: http://www.connorboyack.com/blog/ex-post-facto-law http://www.connorboyack.com/blog/ex-post-facto-law. "Secondly, while there’s some evidence that some of the “framers” thought “ex post facto” included civil laws, it’s well-established that the most influential federalists in the late 18th Century understood an “ex post facto law” to mean a law that was 1) criminal, 2) functioned retroactively, and 3) worked to the detriment of the accused. (See Crosskey, The True Meaning of the Constitutional Prohibition of Ex-Post Facto Laws, 14 U.Chi.L.Rev. 539 (1947))."
- _delirium 14y ago
  The Supreme Court ruled in Calder v. Bull (1798) that the prohibition on ex-post-facto laws applies only to criminal laws, not civil matters. One could argue that shouldn't be the case, but it's not a later shift away from the 18th-century interpretation.
- mikeash 14y ago
  Retroactive immunity is rather the opposite of retroactive criminalization.
pyre 14y ago
The more troubling part is that he's claiming that they are charging interest and penalties on the 'unpaid taxes.' To retroactively change your bill, then charge you interest and penalties for 'late payment' seems well over-the-top. If I didn't know better, I'd say that they was a blatant money grab. </sarcasm>
ceejayoz 14y ago
Virtually every year TurboTax tells me I can't submit my return because they're still writing the rules for the year that just finished.

forgingahead 14y ago

Houston, we have a spending problem.

rplacd 14y ago
It's got nothing to do with increasing tax revenue - it's petty overreaction on behalf of the responsible state body - the FTB. I quote liberally from the article: > It turns out that a few years ago, someone sued the Franchise Tax Board over being denied the right to claim the QSB benefit [Cutler v. Franchise Tax Bd., 208 Cal. App. 4th 1247 (2012)]. The company at issue in that lawsuit did not meet one of the QSB requirements—that it maintain 80 percent of its employees and assets in California. In August of 2012, the California Court of Appeals sided with the plaintiff, ruling that denying him the QSB exclusion based on the “80 percent requirement” was an unconstitutional violation of the interstate commerce clause. > Since the FTB lost the case, you might think that they would strike the unconstitutional requirement and keep the rest of QSB statute intact. Not a chance. > What the FTB did instead was to take their ball and go home. They decided that since they could not impose the “80 percent requirement,” no one would be entitled to the QSB exclusion. They put out an announcement terminating the Qualified Small Business exclusion and retroactively disqualifying all exclusions and deferrals going all the way back to 2008.
- _delirium 14y ago
  That's actually fairly common in decisions striking down agency interpretations. Sometimes a court will order a specific remedy, but other times they only rule that the existing regulation was illegal but leave open multiple ways of curing it. In the case where the problem was that a regulation impermissibly distinguished between groups that the law didn't allow distinguishing between, there are two ways to fix it: put everyone into bucket A, or put everyone into bucket B. And in fact in either case you have to do it retroactively, to fix the ruled-invalid error of treating the two groups differently.
  - dragonwriter 14y ago
    This is not a decision striking down an agency interpretation. The decision explicitly found that the statute supplying QSB benefits in California "is discriminatory on its face and cannot stand under the commerce clause". Had an agency interpretation been struck down, it would be fair to say that (within the bounds of the court decision and the governing statute) the FTB was free to come up with a new interpretation. But when a statute is struck down, it can only be fixed by the legislature. An administrative agency can't fix constitutional defects in statute: they have no authority to do so. (The court could have severed the unconstitutional provision and preserved the rest of the statute, and there is some indication in the decision that they probably would have done so rather than ruling the statute facially invalid if they had been reasoning clearly and consistently. But they didn't, and the FTB isn't really free to apply what the court should have ruled instead of what the court actually ruled.)

danielweber 14y ago

I thought this was the "taxes changed during 2012 for the whole 2012 tax year" issue, but this seems to extend back to previous years.

binarymax 14y ago

ex post facto, surely?

rayiner 14y ago
The prohibition against retroactive laws only applies to criminal laws. See Calder v. Bull (1798).
- petercooper 14y ago
  So, theoretically speaking, could California retroactively increase the state income tax and claim billions from most of the populace?
  - forgingahead 14y ago
    This is exactly what happened when Prop 30 passed last year: http://allthingsd.com/20121204/what-proposition-30-means-for-californias-entrepreneurs/ http://allthingsd.com/20121204/what-proposition-30-means-for...
  - wmeredith 14y ago
    Absolutely.

nugget 14y ago

Vote with your feet; it's the only vote that matters in California these days.

deleted 14y ago

[deleted]

JonnieCache 14y ago
Speak for yourself.
- deleted 14y ago
  [deleted]
  - dickbasedregex 14y ago
    This brand of unproductive sniping is what's wrong with HN comment threads.
    - thecurator 14y ago
      what's wrong with my comment?
- ricardobeat 14y ago
  I think that was witty sarcasm in reference to recent events.

DannyBee 14y ago

We can't effectively manage a budget, give us more money!

Aloisius 14y ago
Actually, California's budget is balanced and it expects a surplus in two years. http://www.nytimes.com/2013/01/11/us/california-balances-its-budget.html?_r=0 http://www.nytimes.com/2013/01/11/us/california-balances-its...
- DannyBee 14y ago
  Only after doing things such as threatening to cut 300 million from education unless folks raised taxes (retroactively as well). If your method of balancing the budget is always asking for more money, you haven't really balanced the budget. What are you going to do in a few years when those tax hikes expire, and you suddenly lose the same amount of revenue? I look forward to a few years when we begin to hear the claim in that we need to make the temporary hikes permanent, because we are running out of money again. (This is, btw, fairly similar as to how the federal income tax was created. It was originally temporary) As for the surplus claims: Of course the guy who supported the ballot initiative is going to say it's going to run a surplus. However, even the ballot initiative booklet mentioned the surplus claims are possibly false, as the kind of revenue they are depending on is very transient and hard to predict.
  - Aloisius 14y ago
    As for the surplus claims: Of course the guy who supported the ballot initiative is going to say it's going to run a surplus. The independent Legislative Analyst's Office, which had previously said Brown's budget would have had a $1.9 billion shortfall in November, now says that it is roughly in balance due to changes in income tax: http://lao.ca.gov/reports/2013/bud/budget-overview/budget-overview-011413.pdf http://lao.ca.gov/reports/2013/bud/budget-overview/budget-ov... If your method of balancing the budget is always asking for more money, you haven't really balanced the budget. How is increasing revenues not a valid way of balancing a budget? And always asking for more money? Reagan raised the top income tax bracket in California from 7% to 10%. It now stands at 10.3%. What are you going to do in a few years when those tax hikes expire, and you suddenly lose the same amount of revenue? I look forward to a few years when we begin to hear the claim in that we need to make the temporary hikes permanent, because we are running out of money again. Considering most of the budget deficit is mostly due to California's substantial social safety net being engaged by the Great Recession, as long as the economy continues to improve, California will probably get by fine with the increased revenues of more people working and lessened burden of people applying for medicaid and unemployment insurance.

gcv 14y ago

Does this apply to a Delaware corporation which happens to have offices ("do business") in California?

macey 14y ago
I doubt it - although you would still need to pay CA franchise tax ($800 minimum yearly). That's always been the case.
prostoalex 14y ago
Linked article is about "sales of stock of a Qualified Small Business", which normally applies to tax residence of people who own the corporation, not the corporation itself.
KedarMhaswade 14y ago
The first comment on the OP also asks this question. Looking for something definitive here.
travisp 14y ago
Generally you pay taxes where you do business, not where you are incorporated, so probably.

rayiner 14y ago

Come to New York! We're rolling in so much finance money we don't need to hit up small businesses.

ceejayoz 14y ago
As someone who works for a small business in New York... hahahahaha. Ha. Haha.
kyrra 14y ago
Your state's gun laws prevent me from ever living there.
- untog 14y ago
  Don't come to New York, then. If your access to rifles is more important than the tax codes your startup may or may not face, stay where you are.
  - cullenking 14y ago
    I think it might be something more about the fact that New York's interpretation of the 2nd amendment differs so greatly from mine that I am fearful for what they might do in regards to other constitutional amendments. As a side note, I cannot move to most cities in Colorado because I happen to have two dogs who are banned by their breed. The point is, there is way more to the conversation than just taxes alone.
    - king_magic 14y ago
      Seriously, I've been throw into the gulags and tortured at least 5 times while living in NY. It's awful - just awful. Don't come here, whatever you do. Don't say I didn't warn you!
      - untog 14y ago
        I've been throw into the gulags and tortured at least 5 times while living in NY Seriously, stop going to bars around Times Square. You should know better by now.

preinheimer 14y ago

As a business owner this crap terrifies me. Washington State was looking at changing their tax code retroactively to get more money from Microsoft, luckily level heads (and I might presume, extensive lobbying) prevailed. I can't plan today for what yesterday's laws will be tomorrow.

rayiner 14y ago
Unfortunately, I think you'll see more of these problems as states get crushed under their existing debt and new expenditures from pension obligations, etc. See: http://www.usgovernmentspending.com/compare_state_spending_2013pZ0d http://www.usgovernmentspending.com/compare_state_spending_2...
- sliverstorm 14y ago
  Shove them (States) in between a rock and a hard place, and they pretty much run out of options. Not surprising.
  - tjic 14y ago
    They've got tons of options. They could, for example, cut back the bloated private sector. ...but the governments are on the side of the government workers (most government workers are unionized and these funds lobby the politicians). The result is that it becomes an "us vs them" fight, and while common citizens may theoretically have political power through the ballot box, in practice power is mostly exercised through campaign donations and backroom deals, so the politicians are taking the decisions that they're incentivized to take: stealing seed corn and feeding it to the public sector employees.
    - randallsquared 14y ago
      > They could, for example, cut back the bloated private sector. Isn't that what they're trying to do? :D But I guess this is a typo for "public sector"...
- 14y ago

brown9-2 14y ago

I'd be curious to know how many California taxpayers this decision affects.

ooorion 14y ago

Come to New Mexico. Cost of living is cheap and we have great weather.

basseq 14y ago

I did a quick google and found a discussion of retroactive tax laws (applying to gift taxes in 2010): http://www.assetprotectionsociety.org/the-likelihood-and-enforceability-of-a-retroactive-tax-2/ http://www.assetprotectionsociety.org/the-likelihood-and-enf... Potential arguments include due process, "wholly new tax", lack of notice, ex post facto (with the same caveat as mentioned here about applicability only to criminal cases), and the fifth amendment taking clause. Conclusion: it's hard to fight.

bjornsing 14y ago
Some things about the US still surprise me. In "socialist Sweden" (as it's sometimes called) retroactive taxation is unconstitutional. On the other hand capital gains is 20-30%, and most entrepreneurs actually have their gains taxed as income. That means you're lucky if you get to keep 13%. ;) I'm exaggerating a bit, but not much.
- w1ntermute 14y ago
  > Some things about the US still surprise me. In "socialist Sweden" (as it's sometimes called) retroactive taxation is unconstitutional. The difference between the US and postage-stamp-sized European countries like Sweden is that there is great political and cultural variation between different parts of the US. California is chock full of socialists/liberals.
  - deleted 14y ago
    [deleted]
  - rosser 14y ago
    postage-stamp-sized European countries like Sweden At 174K mi^2, Sweden is larger than California's 164K mi^2.
    - aaronblohowiak 14y ago
      Population-wise, Sweden is about the same as new york city.

bbwharris 14y ago

Austin, TX would love to have you.

mturmon 14y ago

A lot of the comments are characterizing this as a money grab by the state. To me, it sounds more like the unintended consequences of a clever lawsuit and/or a poorly-crafted piece of tax-break legislation. People should be advised that California has a lot of clever lawyers who work to find and exploit holes in legislation.

shawnee_ 14y ago
The original provision gave preferential treatment to CA residents, which the courts ruled to be unconstitutional: a violation of the Interstate Commerce Clause. The provisions in California law regarding the 80 percent asset and payroll requirements were found to be unconstitutional in August 2012 by the California Court of Appeal in Cutler v. Franchise Tax Board (FTB). The court's decision made California's entire QSBS statute invalid and unenforceable. As a result, all QSBS gain exclusions and deferrals previously allowed under California law became invalid. It is important to note that the court's decision in Cutler did not change the federal treatment of QSBS. (Source: https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_and_Cutler_Decision.shtml https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_an... ) So the California FTB (and the rest of the states participating in the UDITPA Multistate Tax Compact) use the original "loophole" as a means to essentially siphon off a greater portion of the tax revenue from the occurrence of interstate commerce, and to keep it in the respective state. Washington, Oregon, California all participate (Source: http://www.startuplawblog.com/2012/08/17/interstate-business-taxes/ http://www.startuplawblog.com/2012/08/17/interstate-business...) This would be fine all fine and dandy, but for the fact that most of the "startups" or QSBs that benefit/ed from this exception derive/d revenue from multi-state commerce, on the Internet. This has made it and makes it more difficult for those businesses trying to do their "startup" thing out of state to compete with those here who get more tax breaks to re-invest. Interestingly, most of the VC money - over HALF of all venture capital in the USA -- goes to businesses in California. This is kind of messed up. (Source: http://news.cnet.com/8301-13846_3-20010486-62.html http://news.cnet.com/8301-13846_3-20010486-62.html) So looking at the bright side -- this should encourage startups to start places other than CA. [Edited to include info about UDITPA in response to dragonwriter's comment]
- 14y ago

scarmig 14y ago

The repeal of the exclusion actually seems like okay policy (at least sans the 80% requirement). The retroactivity, not so much.

victorhn 14y ago

Come to Mexico, beautiful beaches, good weather, what else do you want?

thebooktocome 14y ago
A lack of institutionalized corruption and organized crime?
- gte910h 14y ago
  Exactly. I don't ever plan on living someplace I need kidnapping insurance.
- mindcrime 14y ago
  The USA has plenty of institutionalized corruption (see: Washington D.C.) and organized crime too, so how much worse can Mexico be?
  - rgbrenner 14y ago
    "so how much worse can Mexico be?" That's sarcasm right? Mexico: 3rd highest number of murders in the world (only India and Brazil are worse). Nearly 5x the murder rate in the US - nearly 2x the total number of murders. http://en.wikipedia.org/wiki/List_of_countries_by_intentional_homicide_rate http://en.wikipedia.org/wiki/List_of_countries_by_intentiona...
    - mindcrime 14y ago
      I was referring, specifically, to the issues of corruption and organized crime. But even considering the general murder rate, I'm going to go out on a limb and guess that your likelihood of being murdered in Mexico vary tremendously depending on where in Mexico you are. Maybe I'm wrong, but I'm guessing there are some areas that are pretty safe and some areas that you'd have to be brain-dead stupid to walk into.
      - 14y ago

jibjaba 14y ago

To me this is a symptom of the twisted politics around taxation in the US. You have one very powerful group that is continually fighting to lower or eliminate taxes and another somewhat less powerful group that wants to bring in enough tax money to fund government services. One side cuts taxes or refuses to raise them and the other side finds new things to tax or other taxes to raise. Normally such a tug of war is not an issue and is basically a natural consequence of a functioning democracy but in the US it has gone to the extreme. Personally I blame the anti tax group. They seem to have no use for logic or evidence and only demand more cuts regardless of the previous ones or the consequences. They are refusing to provide the funds necessary to run a modern government.

jacoblyles 14y ago
In California, our money goes to retired union worker's pensions, not current public services. Our most powerful lobbying group by money spent is the state teacher's union, followed by the state and municipal employee worker union. We have the highest taxes in the nation, poor public services, and massive debt. Pro-tax types should stop carrying water for bad governance. I am one of those anti-tax people you say "has no use for logic and evidence", and I am happy to pay taxes when I feel it is going to good use. But I am not willing to pay taxes so that politicians can turn around and give it to the unions that own them at the expense of the public good. It's funny that most of the world's entrepreneurship is in my country, where people can keep most of their money earned to fund new ventures (for now).
- deleted 14y ago
  [deleted]
gyardley 14y ago
They are refusing to provide the funds necessary to run what you think a modern government should do. Opinions differ.
- jibjaba 14y ago
  Sorry, it's not what I think. I am basing my analysis on the many polls I have seen on what government services people expect. For example a large majority of people expect to have Medicare available to them when they turn 65. I am not talking about European style socialism.

jstalin 14y ago

Come to (western) Michigan. We have new corporate tax reforms that dramatically reduced liabilities (6% rate for C-Corps, flow-through taxation for LLCs and S-Corps, personal income tax rate of 4.3%), we have a 6% sales tax, low property taxes, very cheap housing (compared to much of the nation), well-educated workforce, and liberal gun laws (for the guy who wouldn't move to NY). Our 4.3% income tax rate is still lower than CA's QSB credit rate. EDIT: Michigan's new corporate income tax also has an alternative rate of 1.8% for Qualified Small Businesses... those with net income under $1.3 million. If your corporation operates outside of Michigan and has no activity in Michigan itself, there is no corporate income tax.

jstalin 14y ago
Forgot to mention - it costs $50 to form an LLC in Michigan and takes about a week (I've heard horror stories about forming an LLC in CA). $100 additional for same-day service. And you don't have to publicly disclose the LLC's members, only the registered agent, which can be an attorney or any other resident of the state. Forming a Michigan corporation is $60 and has a few more public disclosure requirements.
- rgbrenner 14y ago
  A whole $50?! Colorado: $1.00 for your Articles of Incorporation (Corp) or Articles of Organization (LLC). It's online filing.. takes a day(?). http://sos.state.co.us/pubs/info_center/fees/business.html#BIZ http://sos.state.co.us/pubs/info_center/fees/business.html#B...
  - jstalin 14y ago
    LOL, ok, you win.
flagnog 14y ago
And Detroit... oh, wait - Western Michigan. Should be a new state.
- 14y ago

stevewilhelm 14y ago

Taxes have zero impact on my decision to start a company in California.

billpaetzke 14y ago
How come?
- nvader 14y ago
  Perhaps for other more compelling reasons he has decided to start a company elsewhere.
PKop 14y ago
Absurd. Imagine they were 100%. You wouldn't start a company there. What if they were 90? You wouldn't start a company there (assuming your compensation is not much much higher than it would be in other areas minus taxes.) Decrease this until it reaches the point at which you're ok, weighing all the pros and cons of there or elsewhere, with starting a company there. Of course it's not true to say they have no impact on your decision, but rather at current levels, their impact is deemed acceptable compared with alternatives.

not_that_noob 14y ago

we unfortunately don't have enough votes to influence their thinking on this. this is sleazy but not out of character for california. you can try shaming them with some media exposure (which is what you are embarking on) and hope it kinda works. good luck.

ryguytilidie 14y ago

I guess the way I see it is this. I imagine most startups don't have much profit, so therefore they won't pay much in taxes. If you are making a lot of profit and paying a bit more in taxes, it seems like the system is working. If these people are selling millions of dollars in stock options and complaining about having to pay more taxes on them, I have a hard time having sympathy. I'd love for my biggest problem to be figuring out how much more in taxes I owe on all the millions of dollars I made.

jacoblyles 14y ago
Capital gains taxes are going up by 50% in CA this year. That's a big hit to future angel rounds. I wrote about it here: http://jacobexmachina.blogspot.com/2013/01/the-fiscal-cliff-silicon-valleys.html http://jacobexmachina.blogspot.com/2013/01/the-fiscal-cliff-...

redm 14y ago

I'm not sure I would recommend Texas either. Use tax means you pay annual taxes on everything you own, plus sales tax on any affiliate deals; franchise tax will hit you hard even if your not making a dime because it's based on 'net worth' and not on profit. It's a tough place to be.

gyardley 14y ago
The bit about use tax isn't accurate. If you don't pay Texas sales tax on something, which varies from 6.25% to 8.25% depending on the jurisdiction, you are supposed to pay the difference between Texas sales tax and the tax you paid elsewhere. You do this once, not annually. This is not unique to Texas. Use taxes exist in almost every other state, including California and New York. Like everywhere else, use tax is often (usually) completely ignored by taxpayers. After all, it's not like we file a state income tax return down here. No one goes, looks up, and files the individual form for 'use tax'. I don't pay franchise tax in Texas, and I'm not an affiliate marketer - but in my experience it's a rather low-tax jurisdiction with a rather low cost-of-living.
- redm 14y ago
  "The revised franchise tax applies to partnerships (general, limited and limited liability), corporations, LLCs, business trusts, professional associations, business associations, joint ventures, incorporated political committees and other legal entities." So if you aren't one of those then no, you would not pay franchise tax, but most small businesses do.
tarice 14y ago
No state income tax, much cheaper housing costs than the national average, and cheap gas make it a pretty good place to live and work. Plus, because of all that, you can pay your employees much less (than California) and still provide them an equally-good standard of living. And Tex-Mex! I don't see how people in other parts of the country could live without Tex-Mex food.
- redm 14y ago

jey 14y ago

Can we just hurry up and address the real problem: California's constitution? We should just burn that flawed thing and start over. As I understand it, one of the major problems with California is that the reasonable-sounding idea that citizens should be allowed to amend the constitution through a ballot proposition has backfired and led to all sorts of special interests amending the constitution to protect their own interests by lobbying the public. http://ballotpedia.org/wiki/index.php/California_constitutional_convention#Reasons_for_a_convention http://ballotpedia.org/wiki/index.php/California_constitutio... https://en.wikipedia.org/wiki/Constitution_of_California#Differences_from_other_constitutions https://en.wikipedia.org/wiki/Constitution_of_California#Dif... https://en.wikipedia.org/wiki/California_Proposition_13_(1978) https://en.wikipedia.org/wiki/California_Proposition_13_(197...

homosaur 14y ago
It doesn't sound reasonable though, it sounds moronic. A constitution should be the basis of all law (can someone let Obama's administration know about this?) and therefore should be extremely difficult and rely on vast, widespread consent to change. You're entirely right that until this gets fixed, CA will always be screwy.
nostromo 14y ago
I also think states and locales should be able to declare bankruptcy and restructure their obligations. Currently there is no clear way to get out from under prior bad governance. Here's a good article about how San Bernardino is trying: http://www.reuters.com/article/2012/11/13/us-bernardino-bankrupt-idUSBRE8AC0HP20121113 http://www.reuters.com/article/2012/11/13/us-bernardino-bank... > a third of the city's 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. > In 2009, patrol lieutenant Richard Taack retired at the age of 59, after 37 years of service. He took home $389,727 that year, including $194,820 in unused sick time and $33,721 for unused vacation time, according to city payroll records. Shortly after Taack retired - on an annual lifetime pension of $128,000 - he was hired part-time by Penman's city attorney's office, at $32 an hour.

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viggity 14y ago
It's not clever, it is quite simple. The federal government has the SOLE ability to regulate interstate commerce.

shail 14y ago

Some people in this world are just plain ridiculous. Who runs the country like this? I really want to know who really thinks so stupidly while making/amending laws.

thecurator 14y ago
the people running the country, are running it like this... sadly
thecurator 14y ago
unfortunately, those in charge choose to vilify success and growth. rather than lauding the greatness of america, they choose to tax, burden and encumber it. i'm not sure there are good alternatives on either side of the aisle.

maxmax 14y ago

The FTB had two choices: allow the deduction for every QSBS that didn't qualify due to the 80% rule, or retroactively impose the tax on all who claimed it. I'm sure somebody did the math, and found a huge liability for the state if all the previously non-qualified QSBS' were given the deduction. Keep in mind the FTB can't allow the status quo: if they allow the previous claimants keep the deduction, they must grant the same ability to the previously non-qualified. They chose then to disqualify the previous claimants and fight with them on a case-by-case basis, rather than pay.

twakefield 14y ago

Am I missing something or has California crossed over into absurdity? I don't understand why the VC and tech community in California stand for this stuff [1]. There should either be more lobbying by the seemingly powerful tech and vc community or mass exodus out of the state. I don't see either happening and I wonder why. Perhaps these things just take time. Is CA killing the golden goose here? [1] I am guilty too by living here at the moment, but I am a relative new comer to the state. The situation is completely baffling to me after being here for almost two years and am exploring other states at the moment.

mturmon 14y ago
"Give us our targeted tax breaks or we'll leave for another state!". I like principled stands like this.
rdl 14y ago
I think part of the problem is there isn't a single other place which is objectively better than SFBA on every metric which matters to startup people, and yet people would prefer to stay together/have a critical mass of people. Seattle, Boulder, and Austin are probably the most viable options right now, if you want more libertarian/sustainable government combined with the same overall feel of the Bay Area. It would be better if there were one place which was head and shoulders better than all the others. Nothing really touches SFBA for VC, though, and Stanford is probably the world's best university for applied CS with startup involvement.

thecurator 14y ago

a prime example of fiscal policy going array. i hope our revered leaders figure out the fact that innovation is the key to the greatness that is America.

viggity 14y ago

Serious question, can one "retroactively" move out of the state? Isn't it kind of bullshit I wasn't afforded the opportunity to move out of the state before I sold my stock?

anigbrowl 14y ago

One-sided and confused article. Whether this is an attempt to mislead readers or a misunderstanding by the writer, I don't know. But this is not a case of California choosing to implement an unhelpful policy. This is a case of California's previous helpful policy being found illegal because it violates the commerce clause; the FTB had no other choice but to impose the tax. http://www.mondaq.com/unitedstates/x/214234/Income+Tax/FTB+Issues+Notice+To+Retroactively+Deny+Qualified+Small+Business+Stock+Tax+Benefits+Amended+Returns+Should+Be+Filed http://www.mondaq.com/unitedstates/x/214234/Income+Tax/FTB+I... https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_and_Cutler_Decision.shtml https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_an... The FTB did not 'take its ball and go home.' The Court told the FTB that it was not allowed to favor [EDIT: investment in qualifying] California corporations that way to begin with. An alternative would have been to extend the tax break to all companies that do business in California and send them a refund check for every year the QSB rule had been in place, but the FTB most likely doesn't have that much money available.

dragonwriter 14y ago
The FTB doesn't have a choice. The court invalidated the statute which provided the benefits. The legislature could pass a new statute which provided similar benefits without the features which made the old statute unconstitutional, but the FTB is an executive-branch agency and can't make up its own laws to replace ones that are struck down by the courts.
- anigbrowl 14y ago
  Good point - the FTB doesn't have the authority to give away more of the state's money to people who sold stock in non-QSBs. I do think there's a problem here of notice; I can't pretend I'd feel enthusiastic about having to pay 5 years of back taxes if I had been enjoying this tax break [edit: well it's a deferral rather than a break, but it's still a benefit]. But as you say, that's not up to the FTB; some other taxpayer will have to sue the state and argue successfully against retroactive taxation.
- brianoverstreet 14y ago

tesmar2 14y ago

A lot of the discussion arounds this makes me think that the joke "The Republic of California" is not just true of CA, but for Washington, too. Is the talk of high taxes just limited to those two Western states or is it a bigger trend in other parts of the West Coast?

jacoblyles 14y ago

On a related note - California capital gains tax is going up by 50% this year[1] (24.3% to 37.1%). That's a big jump and I haven't heard many people talk about it. In the short term it doesn't have much effect but in the long run it will reduce the amount of capital in the Valley available for angel investment and bootstrapping. [1]http://jacobexmachina.blogspot.com/2013/01/the-fiscal-cliff-silicon-valleys.html http://jacobexmachina.blogspot.com/2013/01/the-fiscal-cliff-...

kevinpet 14y ago
That's completely misleading. The capital gains tax paid by some Californians may be going from 24.3% to 37.1% but only 3% of that has anything to do with California. This is important because changes that affect other states as well do not affect the relative desirability of CA vs. other states.

protomyth 14y ago

If we're all recommending states, then how about ND. Yeah it gets cold and hot, but we have a budget surplus, wicked fast fiber, and low taxes. Fargo(1) is an ok town (Microsoft has a place there). 1) Fargo in no way resembles anything from the movie of the same name. That would be MN home of high taxes and no off-sale after 8pm.

zem 14y ago

even if the tax break was found unconstitutional and retroactively revoked, how is the "interest and penalties" bit in any way legal?

azarias 14y ago

I also found this section interesting...and I didn't know about it before: "Per amendments in the new “fiscal cliff” law, if you started or invested in a QSB between September 28, 2010 and January 1, 2013 and ultimately sell stock under the federal QSB provisions, you’ll pay no federal capital gains tax, and in some states, no state taxes."

songer-john 14y ago

Dear friends, I wanted to let you know about a new petition I created on We the People, a new feature on WhiteHouse.gov, and ask for your support. Will you add your name to mine? If this petition gets 25,000 signatures by February 09, 2013, the White House will review it and respond! We the People allows anyone to create and sign petitions asking the Obama Administration to take action on a range of issues. If a petition gets enough support, the Obama Administration will issue an official response. You can view and sign the petition here: http://wh.gov/Pw20 http://wh.gov/Pw20

songer-john 14y ago