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.
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.
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.
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.
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-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.
You are still going to have the unions dominating the legislature and the cocomitant crushing pension obligations if you remove direct democracy from California.
The state is too big. You need too big of a budget to campaign here. So the unions dominate.
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.
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>
This situation was instigated by a successful lawsuit against the FTB. I wonder if another one is on the way. According to this, however, courts have ruled that retroactive tax laws are not considered ex post facto.
The funny thing is that this isn't even the only one that CA is imposing, the entirety of Prop 30 (voted on in Nov 2012) is retroactive for the entire tax year.
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.
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.
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.
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_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...)
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)
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]
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.
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.
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.
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.
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.
Thanks, but no thanks. I've experienced New York's laws on intellectual property ownership.
Any programmer who thinks that they should have any right to have "their own time" and "side projects" should leave for a more friendly state. Like California.
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.
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).
So, there can't be a disagreement over what the definition of what a modern government is or what's required to run it? What if my idea of a modern government costs less than your modern government?
What if my modern government gives out free money taken from people, through high taxation, with screen names that start with j? Can I tell you to shut up because you are refusing to provide the funds necessary to run a modern government?
Keep in mind that different people have different ideas about what is needed in government. Debates over taxation is just simply a symptom of that.
So the side you disagree with has no use for logic? There is definitely some 'starve the beast' mentality going on, and IMHO it's needed. Government spending is out of control, and taxes overall are too low. The problem is that both sides need to give in a lot if things are ever to be fixed. Neither will admit to any problem and just point fingers at the other.
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.
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.
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.
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.
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|13 years ago|reply
http://www.mondaq.com/unitedstates/x/214234/Income+Tax/FTB+I...
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.
[+] [-] preinheimer|13 years ago|reply
I can't plan today for what yesterday's laws will be tomorrow.
[+] [-] jey|13 years ago|reply
http://ballotpedia.org/wiki/index.php/California_constitutio...
https://en.wikipedia.org/wiki/Constitution_of_California#Dif...
https://en.wikipedia.org/wiki/California_Proposition_13_(197...
[+] [-] nostromo|13 years ago|reply
> 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.
[+] [-] jacoblyles|13 years ago|reply
The state is too big. You need too big of a budget to campaign here. So the unions dominate.
I say split the state in half.
[+] [-] homosaur|13 years ago|reply
[+] [-] anigbrowl|13 years ago|reply
[+] [-] legitsource|13 years ago|reply
[+] [-] pyre|13 years ago|reply
If I didn't know better, I'd say that they was a blatant money grab. </sarcasm>
[+] [-] ceejayoz|13 years ago|reply
[+] [-] jivatmanx|13 years ago|reply
I'm pretty sure "Ex Post Facto" is dead.
[+] [-] jere|13 years ago|reply
http://en.wikipedia.org/wiki/Ex_post_facto_law#United_States
This situation was instigated by a successful lawsuit against the FTB. I wonder if another one is on the way. According to this, however, courts have ruled that retroactive tax laws are not considered ex post facto.
[+] [-] aresant|13 years ago|reply
[+] [-] basseq|13 years ago|reply
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|13 years ago|reply
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.
[+] [-] lisper|13 years ago|reply
Where do you get that? The Constitution says simply:
"No Bill of Attainder or ex post facto Law shall be passed."
Period, end of story. Just because someone on the Internet says this applies only to criminal law doesn't make it so.
[+] [-] mturmon|13 years ago|reply
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_|13 years ago|reply
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_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...)
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)
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]
[+] [-] mudge|13 years ago|reply
[+] [-] jstalin|13 years ago|reply
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.
[+] [-] nugget|13 years ago|reply
[+] [-] DannyBee|13 years ago|reply
[+] [-] ryguytilidie|13 years ago|reply
[+] [-] twakefield|13 years ago|reply
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.
[+] [-] rdl|13 years ago|reply
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.
[+] [-] mturmon|13 years ago|reply
[+] [-] gcv|13 years ago|reply
[+] [-] macey|13 years ago|reply
[+] [-] prostoalex|13 years ago|reply
[+] [-] travisp|13 years ago|reply
[+] [-] KedarMhaswade|13 years ago|reply
[+] [-] rayiner|13 years ago|reply
[+] [-] btilly|13 years ago|reply
Any programmer who thinks that they should have any right to have "their own time" and "side projects" should leave for a more friendly state. Like California.
I am not joking.
[+] [-] ceejayoz|13 years ago|reply
[+] [-] kyrra|13 years ago|reply
[+] [-] whalesalad|13 years ago|reply
[+] [-] jacoblyles|13 years ago|reply
[+] [-] bbwharris|13 years ago|reply
[+] [-] jibjaba|13 years ago|reply
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|13 years ago|reply
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).
[+] [-] talmand|13 years ago|reply
What if my modern government gives out free money taken from people, through high taxation, with screen names that start with j? Can I tell you to shut up because you are refusing to provide the funds necessary to run a modern government?
Keep in mind that different people have different ideas about what is needed in government. Debates over taxation is just simply a symptom of that.
[+] [-] matwood|13 years ago|reply
[+] [-] gyardley|13 years ago|reply
Opinions differ.
[+] [-] stevewilhelm|13 years ago|reply
[+] [-] forgingahead|13 years ago|reply
[+] [-] rplacd|13 years ago|reply
> 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.
[+] [-] maxmax|13 years ago|reply
[+] [-] jacoblyles|13 years ago|reply
[1]http://jacobexmachina.blogspot.com/2013/01/the-fiscal-cliff-...
[+] [-] kevinpet|13 years ago|reply
[+] [-] viggity|13 years ago|reply