California To Hit Startup Founders with Big Retroactive Tax Bills

1/15/13Follow @BrianOverstreet

California is a great place to live and work, but it is not a particularly friendly place to start and run a small business.

In 1999, I co-founded Sagient Research Systems, an enterprise-focused data company in San Diego. Over the ensuing 13 years we tinkered, triumphed, failed, and even tempted bankruptcy. But through it all, we worked hard, we worked fairly, and we grew. Slowly, we evolved into a successful business employing nearly 40 people, all in California. In mid-2012, we sold Sagient Research in a transaction that was a good exit for everyone involved.

One of the very few benefits entrepreneurs and early-stage investors can look forward to in California is the partial state income tax exclusion on sales of stock of a Qualified Small Business (“QSB”). This exclusion incentivizes people to start businesses in California and to keep them here. As the law was written, founders and early investors in QSBs can exclude 50 percent of the taxable gain on the sale of their stock—meaning that they pay only half the regular California tax rate on the gain (about 4.5 percent instead of 9 percent).

While the QSB exclusion did not play a role in our decision to start Sagient Research, it justified our decision to stay in California. Although California taxes stock sales at nearly 10 percent (now nearly 13 percent due to Prop 30), we knew as a qualifying QSB, we’d only pay half that amount. Without the QSB provision, we might have decamped to a more tax- and business-friendly state.

After we completed the sale, I paid both my federal and state estimated taxes computed with the QSB exclusion. I thought I was clear until April 2013.

Then in late December, the FTB decided to cancel the QSB tax benefits and RETROACTIVELY deny the benefits for the past five years.

How is that even possible?

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.

What does this mean for you?

1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.

Here’s the real kicker. Just at the moment when California is retroactively taxing entrepreneurs, the federal government is extending the federal QSB benefit.

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. But not California—we’ll pay up to 13 percent!

Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?

I’m not ungrateful or unrealistic. I fully understand the scope of the economic problems at both the state and federal level and the need for everyone to pay their fair share. And as a product of California’s public university system, I fully appreciate the opportunities afforded to me by living and working in the great state of California.

But in this instance California changed the rules after the fact, and that’s just not right. More importantly, the FTB’s radical action is going to send a terrifying message that will have the unintended consequence of driving young, growing businesses to friendlier environments. That’s the last thing that the state of California needs right now.

The FTB’s retroactive sucker punch isn’t just about me. It’s about everyone in the startup community. It’s going to be a very painful time for entrepreneurs and investors in California over the next few months as these potentially debilitating tax bills start showing up in mailboxes all across the state.

My company was not a big, faceless corporation. We were good corporate citizens with a small but vibrant, local workforce. We were the epitome of a Qualified Small Business.

And we just got screwed. And so did you.

Brian Overstreet is the co-founder and president of AdverseEvents and the former CEO of Sagient Research Systems. Follow @BrianOverstreet

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  • http://twitter.com/NotOnTwtr Not On Tw-tt-r
  • dolphins78

    How can any responsible business owner want to run their business from California if they’ll change the rules after the fact? In the short run, California might get a few extra bucks, but in the long run, this kind of thing will kill the goose that lays the golden eggs. What a shame.

    • http://www.leanlearnin.com/ Brent Weber

      Uhh, California has a history of killing the goose…

  • http://twitter.com/BaabaRamdev AnonymousIndian

    Why do Americans copy Indians!!!! Please be innovative! Only Indian ministers have the right to screw industries with “Retroactive taxes” http://online.wsj.com/article/SB10000872396390443847404577629252353305754.html

  • Paul Scheurer

    Most tax incentive statutes have a
    severability clause, i.e., if any part
    is found to be invalid, the rest is
    still valid. And I also see a 14th
    amendment equal protection
    violation by the Franchise Tax
    Board. You should also read the
    CA constitution to see if it prohibits
    FTB from assuming legislative
    powers; it did so.

  • http://andyfleming.com/ Andy F

    How does this affect businesses based in other states, but operating in CA?

    • Scritti Politti

      CA will rip them off, too. Thanks to a recently passed, ignorant-as-hell proposition, CA will now work harder to screw out-of-state businesses. What the moron voters didn’t think through was that THEY might want to start a business and register it in another state to avoid getting ripped off by their own.

  • Loren Pechtel

    Will this pass constitutional muster?

    • http://twitter.com/crispyfotos John Waller

      Do you have the $$ in lawyer fees to figure that out?

      • http://twitter.com/porkbelt Porkbelt

        this tax is aimed squarely at the kind of people who do

    • Brian

      What makes you think that they give a damn about the Constitutionality of anything anymore?

  • http://www.facebook.com/ethanranderson Ethan Anderson

    It is literally beyond belief that California would do this after passing the retroactive Prop 30 which also hits entrepreneurs particularly hard (see my post on All Things D: http://allthingsd.com/20121204/what-proposition-30-means-for-californias-entrepreneurs/

    • RecklessProcess

      They are democrat totalitarian tyrants. Why are you surprised when they rob you of freedom and your hard earned money? That is who they are; totalitarian tyrants.

      • ReaganSucksDickInHell

        You don’t know what any of those words mean you conservative clown. Go back to Breitbart.

        • Abba Okoro

          So Democrats don’t run the California government? LOL

  • Brian Overstreet

    Thanks for your comments. Lots of good questions being raised on this thread and it may be too early to answer any of them. Our discussion with legal counsel suggests that it may take an act of the CA legislature to over turn this. However, I think that as more people become aware of this issue – and it scope for so many entrepreneurs and investors in the state – there will be some type of legal challenge. In the meantime, spread the word to interested parties. Thanks all, Brian.

    • http://www.facebook.com/illustratz Rebecca Riel

      The ramifications of a retroactive tax like this are horrifying….. Totally blindsiding hardworking, risk-taking entrepreneurs like yourself. I’m quite worried that the company I’m working for (and have been working for since 2008) may also be affected…. Some of us “old guard” cashed out some of our hard-earned stock options in a private buy-out before the company went public last year, and I’m worried that we may be affected, too. People used the funds to pay off student loans, buy their homes, start other businesses…. The cascade effect could be disastrous…

      Keep us posted, and GOOD LUCK

      • Brian Overstreet

        Thanks Rebecca! Good luck to you too. We’re all going to need it.

  • http://twitter.com/crispyfotos John Waller

    What … you weren’t aware of every law every passed in California that you are responsible for knowing?! Even the updates that come out almost weekly?

    • Abba Okoro

      It’s ok for states to screw people like that?

      Go back to the farm sheep.

  • Kory Tegman

    people say that we dont have classes in america, and i know that was the intent of the founding fathers but this is one more place where the government is getting their hands in and stopping the american people from paving their own destiny. it goes like this rack up tons of dept, through the appeal of free stuff like helping poor and old people. you know who is stuck with the bill? anyone trying to make something of themselves and working hard to do it. the government is going to get a lot bigger. and people are going to get locked into lower middle class government dependance

    • http://www.allegiscapital.com Bob Ackerman

      There is a growing “political” class in America and its HQ is in California. They live to serve themselves – at the expense those they are sworn to serve. I was born and educated in California and have built three businesses here. The fourth one will be based outside of CA. Talent and Capital are both highly mobile – and they are leaving town.

    • RecklessProcess

      I keep seeing people say, “the government” here when they are talking about the democrat totalitarian tyrants who will take away your rights and tax your breathing.

      • Neoconservativesarefascists

        Is that the new phrase your master Glenn Beck taught you to parrot old man? I see you spewing it pretty often.

  • Bill Jackson

    I invoke the law of unintended consequences.

  • http://twitter.com/ADeGheest Anne DeGheest

    the 5 years retroactive aspect is just unbelievable! with the venture industry struggling, we see new emerging pockets of start ups in Health tech in other states.. California state greed is in the process of killing his innovation and job creation engine.. While other states provide tax credit for angel investing, CA is chasing them away.

  • http://twitter.com/vongillern Jon von Gillern

    Can you “retroactively” move out of the state, 5 years ago? I would.

    • http://www.facebook.com/mussa.mohamad.7 Mussa Mohamad

      I’d just move out of the state today and let them forward the tax bill to my new Caymen address.

    • Reluctant Objectivist

      Irrelevant to this comment, but relevant to the thread in general. In response to Jack Top below, which may be of interest.

      I am an entrepreneur looking to start a new business in the next few years. I am not the “entitled rich”, I have less than ten thousand dollars in assets and 75 thousand in student debt. However, I have a top notch education and a highly sought after skill set which I am very thankful for.

      Regardless, I am now deciding where to start. Guess where I wont be setting up shop.

      Half my family lives in California and I consider it to be one of the the most beautiful and exciting places in the world to live. Nonetheless, with the current anti-growth political trends, I would be foolish to start my business in California’s scary economic environment.

      Although your economy is very large, successful contemporary businesses take part in the global economy. Meaning, locality is a non factor if you’re trading in areas that have no specific geographic necessity. Ironically, examples of these types of businesses are usually technical in nature such as Google or Facebook. Although make no mistake, “Silicon Valley” may be in California today, but may not necessarily be there tomorrow.

      We businessmen do view taxes as incentives, and do use them proactively to decide where to start. “The truth of the matter is that no one thinks about the exclusion until they sell their business”, is a gross generality and in my case alone, simply wrong. I am using these and other measures as decision variables, and currently, California isn’t doing well.

      The purpose of this post isn’t to chastise, but to help re-frame the question. Don’t you want 7.5% of every dollar that I spend, and 8.84% of my corporations profits? In addition, wouldn’t you like my personal, property and Cap and Trade taxes to benefit you and your loved ones? Entrepreneurs definitively create jobs, and add to the success of a region through tax and spending multipliers. If you want us to bring money to you; woe us. If you don’t: that’s fine, I hear Dallas is nice.

      In summary, we live in an ever globalizing climate, meaning you and your community are competing on a continually increasing scale. Those that choose to use their geographical location to hamper other areas of prosperity may see their competitive advantage dwindle in years to come. Please don’t let something as boring as taxes bring down something as wonderful as California, lets work together and build a legacy to be proud of.

      • AynRandbot

        Whatever you say Jon Galt.

      • ITStartupGuy

        This is why you don’t run your own business yet, and why you should work for a few startups before deciding to put yourself into debt and lose whatever small nest egg you’ve acquired. Locality is a huge factor when it comes to hiring and attracting quality staff, and can impact growth a lot more than incremental changes in tax rates. This is why the Silicon Valley has rebounded after the dot-bomb years, and why Elko NV isn’t a bustling center of commercial activity in comparison.

        • Ender

          While all that is true, a 5-year retroactive doubling of the tax rate + interest is not what I’d call “incremental” I wonder what they will decide the 2013 taxes will be come 2015? How can anyone do business in an environment like that??

      • WayTooMuch

        Someone’s been smoking too much Fountainhead…..

  • Steven Baker

    Do you have a link to a publication from the FTB that states this new policy? I was wondering what the language is and how they justify it.

  • Jeabo Gishsawuh

    California needs your hard earned money to give away free stuff to get votes. Go figure.

  • Scritti Politti

    You’re too generous. California is a huge rip-off, working harder and harder to screw everyone and to tell businesses one thing: GET LOST.

    There’s no excuse for the astronomical state personal income tax or the array of small-business “taxes” for which entrepreneurs are continually hounded. If your business makes $0 per year (or, more likely, LOSES money) California still charges you an $800 “tax” on that.

    To top all this off, California doesn’t even DO anything for the money. Californians pay all these taxes and fees, and then have to pay PRIVATE firms AGAIN to actually have things done. For example, car-emissions testing. You have to go to a private garage and pay for it. Driver’s school for a ticket? You pay the court an extra fee for driver’s school… but you don’t get driver’s school. You then have to find a private driver’s school and pay AGAIN. WTF was the original fee for, then? Yep, more CA bullshit.

  • http://twitter.com/olinhyde Olin Hyde

    Yet another symptom that the bureaucrats in Sacramento won’t sleep until they kill off every entrepreneur in the state.

  • Brian Overstreet

    Steven Baker – you can view the FTB announcement here:
    https://www.ftb.ca.gov/law/notices/2012/2012_03.pdf

  • http://www.facebook.com/jared.lamar.33 Jared Lamar

    Thanks California for giving me all the reasons (and more) that I needed to move my business and my family to Texas! The business economy is GREAT here!

  • Nathan Alden

    You folks think California gives a shit about your “small, vibrant local workforces?” They care about wielding POWER over you in any way they can. Everyone who lives and works there is foolish for doing so when there are so many better alternatives for places to start businesses and raise families. By continuing to live there and pay taxes there you are implicitly giving your consent to the system.

    • Anonymous

      So then you implicitly consent to everything the federal government does? It’s quite a stretch to apply implied consent based on where one lives, considering the lack of truly free alternatives.

  • http://infiniteshelter.com/ Victor Piousbox

    Can all the people in New York City wait until 2015 and then retroactively buy insurance to cover them for the Sandy losses?

    • Kurt John

      You can buy retro-active insurance on the secondary market. The cost will be their discounted rate for materials plus their profit. It may even save you money, but you won’t be able to find an agent willing to make an effort to find it for you. It’s a very complicated product to market with little to no commission. It is used in large liability cases when it is unknown what the damages are.

  • foramerica

    Brown seems to think the same way as Obama. Take as much money from the private sector to give it away. They can’t see beyond their noses that somewhere down the line there won’t be any businesses left to take from. Then we will see the complete collapse of California since there will be more takers than makers.

  • http://www.RiderBlog.NotLong.com/ Richard Rider

    I have an above-averate understanding of California taxes, but this is news to me. Amazing, but actually it’s SOP in rapacious California.

  • http://www.RiderBlog.NotLong.com/ Richard Rider

    I’m fairly knowlegeable on California taxes, but this is news to me! BAD news.

    California already treats capital gains as ordinary income, and it just DRAMATICALLY raised the personal income tax on those make $250K or more.

    Here’s a summary of our “Golden State” absurdly high personal income tax, from my updated fact sheet — CA vs. the Other States.
    http://riderrants.blogspot.com/2012/11/ca-vs-other-49-states-revised-11812.html#!/2012/11/ca-vs-other-49-states-revised-11812.html

    Prior to Prop 30 passing, CA already had the 2nd worst state income tax rate in the nation. Our 9.3% tax bracket started at $48,029 for people filing as individuals. 10.3% starting at $1 million.

    Now our retroactive (to 1/1/2012) “millionaires’ tax” rate is 13.3% – including capital gains. Increased taxes now start at $250K for single filers. CA now has by far the nation’s highest state income tax rate. We are 21% higher than the 2nd highest state (Hawaii), 34% higher than the 3rd highest state (Oregon), and a heck of a lot higher than all the rest – including 7 states with zero state income tax.
    CA is so bad, we also have the 2nd highest state income tax bracket. AND the 3rd. Plus the 5th and 7th! http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff2012.pdf
    Tables #11 and 13
    and
    http://www.twitpic.com/9g2pka/full

  • http://www.RiderBlog.NotLong.com/ Richard Rider

    It’s not just the personal income tax that is high in doomed California. A few more facts from my fact sheet:

    CA has the highest state sales tax rate in the nation. 7.25% (does not include local sales taxes). 7.50% starting in 2013.
    http://taxfoundation.org/article/state-and-local-sales-tax-rates-january-1-2012

    CA corporate income tax rate (8.84%) is the highest west of the Mississippi (our economic competitors) except for Alaska.
    http://taxfoundation.org/article/2013-state-business-tax-climate-index
    Table #1 – we are 6th highest nationwide.

    CA has the 2nd highest gas tax in the nation at 68.9 cents/gallon (October, 2012). National average is 49.3 cents.
    http://www.api.org/statistics/fueltaxes/
    (also CA has the nation’s 2nd highest diesel tax – 77.1 cents/gallon.
    National average 54.5 cents)

    California in 2009 ranked 15th highest in per capita property taxes (including
    commercial) – the only major tax where we are not in the worst ten states. But CA property taxes per owner-occupied home were the 10th highest in the nation in 2009.
    http://www.taxfoundation.org/taxdata/show/251.html
    and
    http://www.taxfoundation.org/taxdata/show/1913.html
    (2009 latest year available)

    CA has now instituted the highest “cap and trade” tax in the nation – indeed, the ONLY such U.S. tax. One study estimates the annual cost at $3,857 per household by 2020. Even proponents concede that it will have zero impact on global warming.
    http://tinyurl.com/WSJ-CA-cap-and-trade

    New Tax Foundation study ranks CA as the 4th worst taxed state. But if counting ONLY in-state and local taxes, we are arguably the 2nd highest. http://riderrants.blogspot.com/2012/10/new-study-verifies-ca-residents.html

    CA has the 3rd highest state unemployment rate. (November, 2012) – 9.8%. National unemployment rate 7.7%. National unemployment rate not including CA is only 7.4%, making the CA unemployment rate 32.2% higher than the average of the other 49 states.
    http://www.bls.gov/web/laus/laumstrk.htm
    Using the more accurate U-6 measure of unemployment (includes involuntary part-time workers), CA is the 2nd worst at 19.6% vs. national 15.0%. National U-6 not including CA is 14.4%, making CA’s U-6 36.4% higher than the other 49 states.
    http://www.bls.gov/lau/stalt.htm

    CA needlessly licenses more occupations than any state – 177. Second worst
    state is Connecticut at 155. The average for the states is 92. http://cssrc.us/publications.aspx?id=7707

    California’s 2013 “business tax climate” still ranks 3rd worst in the nation – behind New Jersey and New York state.
    http://taxfoundation.org/article/2013-state-business-tax-climate-index

    CA public school teachers the highest paid in the nation. CA students
    rank 48th in math achievement, 49th in reading.
    http://www.lao.ca.gov/reports/2011/calfacts/calfacts_010511.aspx
    page 36

    1 in 5 in Los Angeles County receiving public aid. http://www.latimes.com/news/local/la-me-welfare22-2009feb22,0,4377048.story

    California’s real poverty rate is by far the worst in the nation at 23.5%. We are 55.7% higher than the average for the other 49 states. The CA poverty rate is 19% higher than 2nd place Florida.
    http://www.huffingtonpost.com/2012/11/14/california-poverty_n_2132920.htm

    California has 12% of the nation’s population, but 33% of the country’s TANF
    (“Temporary” Assistance for Needy Families) welfare recipients – more than the
    next 7 states combined. Unlike other states, this “temporary” assistance
    becomes much more permanent in CA. http://www.utsandiego.com/news/2012/jul/28/welfare-capital-of-the-us/?print&page=all

    California prison guards highest paid in the nation. http://www.caltax.org/caltaxletter/2008/101708_fraud1.htm

    California is the worst ranked state for tax administration – another anti-business factor.
    http://www.sacbee.com/static/weblogs/capitolalertlatest/2010/03/cal-rated-worst.html

    California now has the 2nd lowest bond rating of any state – Basket case
    Illinois just beat us out for the lowest spot. We didn’t improve our rating – Illinois just got worse.
    http://www.calwhine.com/great-news-california-no-longer-has-worst-credit-rating/1554/

    CA is ranked as the “worst-run state” in new Wall St. analysis. CA “won” last year too.
    http://tinyurl.com/CA-worst-run-state

    California has the 6th highest (worst) state per capita debt. Not counted is local government debt.
    http://www.huffingtonpost.com/2011/10/24/states-debt-combined-may-exceed-4-trillion_n_1029162.html

    The American Tort Reform Association now ranks CA the “worst judicial hellhole” in U.S. – extremely anti-business. But the U.S. Chamber of Commerce ranks CA higher – “only” the 4th worst state (unfortunately, sliding from 7th worst in 2008).
    http://tinyurl.com/CA-worst-judicial-hellhole
    and
    http://www.instituteforlegalreform.com/states/california

    CA traffic tickets are incredibly high. Red-light camera ticket $480. Next highest state is $250. Most are around $100.
    http://reason.org/blog/show/red-light-cameras-and-the-enigmatic

    California has a nasty anti-small business $800 minimum corporate income tax, even if no profit is earned, and even for many nonprofits. Next highest state is Oregon at $150. A few others under $100, with most at zero. http://tinyurl.com/CA-800-tax

    California small businesses failed in 2011 at a rate 69% higher than the national average — the worst state in the nation.
    http://money.cnn.com/2011/05/19/smallbusiness/small_business_state_failure_rates/index.htm
    (based on Dunn & Bradstreet study)

    America’s top 650 CEO’s rank California “the worst state in which to do business” for the 8th straight year (May, 2012).
    http://chiefexecutive.net/best-worst-states-for-business-2012
    (It’s worth reading the short article, and especially the part about California.)

    • http://disqus.com Peter Mullen

      And don’t leave out that the California legislature (the only state entity with the power to tax and spend) has been under Democrat rule fo rthe last 40 years. It’s no coincidence that the state is basically bankrupt and raping the taxpayers to keep these assclowns in power.

      • http://www.RiderBlog.NotLong.com/ Richard Rider

        Right you are, Peter. The Dems love to point to some Republican governors (too often RINO’s) for our problems in the last 40 years, but it’s the state LEGISLATURE that passes the budget. Seldom is more than 1/4 of 1% of a state budget vetoed by a CA governor (sadly).

        I usually respond to such simpletons with the following “copy and paste” from Wikipedia:

        “The California State Legislature currently has a Democratic supermajority, with the Senate consisting of 29 Democrats and 11 Republicans and the Assembly consisting of 55 Democrats and 25 Republicans. Except for the period from 1995 to 1996, the Assembly has been in Democratic hands since the 1970 election (even while the governor’s office has gone back and forth between Republicans and Democrats). The Senate has been in Democratic hands continuously since 1970.”
        http://en.wikipedia.org/wiki/California_State_Legislature

      • JD

        Don’t forget the Democratic run & ruled Illinois- 30 + years & over 90B in unfunded pension liabilities….who says you can’t buy votes nowadays?

  • http://twitter.com/TheBreen Tim Breen

    Thanks for the links in the comments to the FTB announcement and therefore to the FAQ document linked therein.

    The FTB makes no mention of the 80% provision in its document, but states that the QSB provision itself was ruled unconstitutional on appeal because it treated “foreign” businesses (e.g., outside California) unequally. It is, of course, illegal to give an unconstitutional benefit to certain parties. Accordingly, the document claims the only possible recourse is to strike the benefit for anyone who is within the statute of limitations (four years, in this case).

    There’s also no retroactive interest or penalty, unless you fail to timely file an amended return and pay the taxes due. Then, just like any other unpaid tax liability, interest and penalties will accrue at whatever the statutory rate is.

    For those in other states, or those decrying the ‘rapaciousness’ of California, what would other states’ governments due when their actions have been ruled unconstitutional? Ignore the court, or enforce the law?

    The links again, for those who want to read the documents:

    FTB Notice 2012-03 https://www.ftb.ca.gov/law/notices/2012/2012_03.pdf
    Qualified Small Business Stock (QSBS) Gains – FAQs https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_and_Cutler_Decision.shtml

    • Brian Overstreet

      Tim -

      The appelate court ruling was limited to the issue of the 80% rule only. The FTB decided to take it to the next step. Additionally, interest will absolutely be added (per the FTB FAQ’s) while penalties are dependant on each individual scenario.

      I would suggest you read the following or the Appelate decision itself:

      http://www.jdsupra.com/legalnews/ftb-retroactively-denies-qualified-smal-44564/

  • http://www.RiderBlog.NotLong.com/ Richard Rider

    The state’s message to California entrepreneurs could not be more clear:

    GET – OUT – NOW!

  • ToddDeModd

    OK you have to admit that is a fascinatng concepty.

    make-anon.tk

  • jie

    could everyone ‘rich enough’ get a retroactive Californian income tax bill for 30% in the future?
    if they could do things like this today to entrepreneurs today, they can do it further against every one they aim tomorrow.

  • AL

    Brian: what you are experiencing is a government that no longer serves the people. it is a government that consumes people. what we are also seeing is a singularity between a government, technology, ideology and economics that is resulting in events like this. the tempo of these events will increase – faster in some states such as California and slower in some such as Wyoming. In the meantime, the government will/has removed the Second Amendment Right from Citizens as this singularity continues. Personally, I left California 7 years ago and haven’t looked back and to start a company there? You might as well let the FTB hold a gun to your head.

  • Steve in Philly

    Brian, you think what happened to you is unfair. Why would it be any less fair if it happened to a “big, faceless corporation”? Those are businesses that are run by people just like you, and are owned by people just like you (either private owners or shareholders). The principle of just and equal application of the law doesn’t cease to apply just because a business becomes “big”.

    • Brian Overstreet

      Steve – I agree with you entirely. Many of my clients (past and present) are big businesses and they are all run and staffed with smart, hard-working people. But the issue at hand pertains to small businesses and the incentives provided to not only start, but maintain, a small business in CA.

  • RecklessProcess

    The gimmecrats think they deserve to strip working people of every dime they earn. Totalitarians don’t care if the peons have trouble facing their greedy and injurious tax bills. Totalitarian democrats think Santa Claus is the government. The democrats are willfully robbing their own children to fund teaching hookers in Russia to use condoms. There is nothing too foolish for a democrat to forcfully take your money and spend it on nonsense. Democrats do not believe you have a right to your own money.

    • ClownsTotheRightofMe

      Yeah keep blaming democrats for all your problems like a good conservative lap dog pops.

      So glad you boomers are dying off quick.

      • irandom

        Mr. Clown, please look at the public sector pensions.

  • mimo
  • mimo
  • mbecker908

    Brian, you’re a whiner. And while you may run a successful business I question just how bright you really are.

    Any businessman with a double digit IQ has seen California headed in the this direction for at least two decades. Nobody in their right mind would start a business in California, and the “lifestyle” isn’t worth the hassle. Companies that are considered the “business engine” in the Pyrite State (’tain’t “golden” any more) like HP and Intel announced long ago they would never add a net job to their California payrolls. I wouldn’t be surprised to one day read that they are going to eat the cost to move and shut down California operations.

    Oh, and don’t kid yourself, no matter what the court rules on these specific issues California isn’t going to get any better. Thanks to a one quarter surge of tax revenue – after at least eight straight quarters of missing their target – Governor Moonbeam and the Duma are all about increasing spending.

    There is absolutely no rational reason for a business to remain in California. And, if you finally wise up and move, leave every vestige of California political, social and “lifestyle” thinking behind. Don’t ruin another state.

    • Brian Overstreet

      Not trying to be a whiner, just trying to let others in the same situation as me understand the consequences of the FTB action. -Brian

      • mbecker908

        How could the consequences have been a surprise? Not paying attention or living on “hope”? And, hope is NOT a plan. Moving out of state is a plan.

    • http://www.facebook.com/izmir.ramirez Izmir Ramirez

      I think a guy named Zuckerberg started a business somewhere in CA.

      • mbecker908

        Yes he did. And from all indications, he may be a reasonably bright techie who fell into the concept, but in the world of “smart” people he’s on the bottom tier. “Profits aren’t important…”

  • http://www.facebook.com/profile.php?id=100004610920242 John Henry

    Why would anyone want to live in that sunny gulag? Sunny or not … a repressive communist state is what it is. Get out while can. Move your biz to Texas or better yet, to Canada!

  • s_c_f

    This is also unconstitutional. You cannot retroactively apply changes to law. Ex post facto laws are expressly forbidden by the United States Constitution in Article 1, Section 9, Clause 3: “No Bill of Attainder or ex post facto Law shall be passed.”

    • http://www.RiderBlog.NotLong.com/ Richard Rider

      Tell that to the rich folks in CA who now owe 30% higher income taxes for the entire 2012 calendar year, thanks to Prop 30 passing in NOVEMBER, 2012. Sadly, the courts will not overturn this retroactive aspect — it’s been tried before.

      Don’t get me wrong — your interpretation of the Constitution is correct by any common sense standard. But the courts don’t use common sense, or even legal reasoning, it seems.

  • pmanner

    I guess you didn’t build that…

  • http://www.RiderBlog.NotLong.com/ Richard Rider

    Some wag once commented that a conservative often is a liberal who has been mugged. This injustice is more like legalized rape.

    Brian, are you a Democrat?

  • http://www.RiderBlog.NotLong.com/ Richard Rider

    Brian O., another question: I’d like to “print” this article on several blogs (and highlight my blog reproduction on Facebook, Twitter, etc.), complete with full attribution and URL to this article.
    Is that okay by you? Please EMAIL your response to me at RRider9213 AT Gmail.com .

    • http://www.xconomy.com/san-francisco Wade Roush

      Hi Richard — To respond to your question, please direct requests for reproductions of Xconomy articles to reprints@xconomy.com.

  • Joe

    Isn’t it true that without the 80% requirement, companies would no longer have to actually have a strong presence in California to benefit from the QSB clause? And if that’s true, isn’t the point of the QSB exclusion made moot? It’s a sugar free incentive for Californian residents given the raison d’être is no longer there. I’m surprised that they can make an ex post facto change to your taxes, but as a Californian, I want to see schools funded, and roads maintained. A 10-13% tax on stock doesn’t sound all that egregious. It’s a heck of a lot less than payroll taxes.

  • Jack Top

    You have seriously misplaced your anger on this issue. You should be upset with the supremes court and Cutler. He knew that if he “won” his case that everyone would lose. California does not conform to the Federal QSBS exclusion statute (IRC Sec 1202). They had their own QSBS exclusion statute that was deemed unconstitutional by the Supreme Court. As such, there is no longer a QSBS exclusion under California tax law. Further, when the CA statute was enacted provisions were specifically included to encourage businesses to invest and stay in CA. So, without those provisions there is no incentive for investing in CA as opposed to any other state. The truth of the matter is that no one thinks about the exclusion until they are selling their business. It is not an incentive. It is just another deduction for the rich. Does it suck to get hit with a bill? Yes. However, how can the FTB justify giving you an exclusion that does not exist? Oh yeah, you’re super rich so you’re just naturally entitled to it. The reason that businesses stay in CA is because in spite of the high taxes etc. EVERYONE wants to live there. Thus, there is a never-ending stream of cash. Please let me see you walk away from money. That makes great business sense.

    • Reluctant Objectivist

      I am an entrepreneur looking to start a new business in the next few years. I am not the “entitled rich”, I have less than ten thousand dollars in assets and 75 thousand in student debt. However, I have a top notch education and a highly sought after skill set which I am very thankful for.

      Regardless, I am now deciding where to start. Guess where I wont be setting up shop.

      Half my family lives in California and I consider it to be one of the the most beautiful and exciting places in the world to live. Nonetheless, with the current anti-growth political trends, I would be foolish to start my business in California’s scary economic environment.

      Although your economy is very large, successful contemporary businesses take part in the global economy. Meaning, locality is a non factor if you’re trading in areas that have no specific geographic necessity. Ironically, examples of these types of businesses are usually technical in nature such as Google or Facebook. Although make no mistake, “Silicon Valley” may be in California today, but may not necessarily be there tomorrow.

      We businessmen do view taxes as incentives, and do use them proactively to decide where to start. “The truth of the matter is that no one thinks about the exclusion until they sell their business”, is a gross generality and in my case alone, simply wrong. I am using these and other measures and decision variables, and currently, California isn’t doing well.

      The purpose of this post isn’t to chastise, but to help re-frame the question. Don’t you want 7.5% of every dollar that I spend, and 8.84% of my corporations profits? In addition, wouldn’t you like my personal, property and Cap and Trade taxes to benefit you and your loved ones? Entrepreneurs definitively create jobs, and add to the success of a region through tax and spending multipliers. If you want us to bring money to you; woe us. If you don’t: that’s fine, I hear Dallas is nice.

      In summary, we live in an ever globalizing climate, meaning you and your community are competing on a continually increasing scale. Those that choose to use their geographical location to hamper other areas of prosperity may see their competitive advantage dwindle in years to come. Please don’t let something as boring as taxes bring down something as wonderful as California, lets work together and build a legacy to be proud of.

  • http://www.facebook.com/people/Steve-Gilbert/1450832861 Steve Gilbert

    If Obama and the Democrats could they would do this nation wide.
    They see the author of this article not as a hard working man trying to succeed.
    No, to the Democrats he’s a greedy SOB that is making money from the sweat and labor of his poor down trodden workers that he only pays half of what they should be making.
    If they could they could throw such a man in prison for abuse after having him publicly whipped.

  • Tom Jones

    So let me get this straight… The FTB owes you an exclusion that does not exist in their tax laws? Why? Oh, because you’re rich and entitled? Nice try. I can guarantee that you knew nothing about the QSBS statute BEFORE you decided to sell your company. Thus, it never played a role in your starting up and keeping your business in California. You did it because California, even with all of it’s problems, has one of the WORLDS’ largest economies and there is a ton of money flowing through it. Yes, you could have moved your business to another state but you have no idea how successful your business would have been in another state.

  • http://twitter.com/adamlavine adamlavine

    Is that even legal? It seems highly questionable to revoke the tax code retroactively. If the situation is indeed how you describe it, I’ve got to think it will be litigated.

  • http://www.facebook.com/people/Ben-Franklin/714663846 Ben Franklin

    Frankly, you got exactly what you deserved for staying in the third world banana republic that is the state of California. A small business guy complaining that California is screwing him even after he chose to stay and support them is like a Jew choosing to stay in Nazi Germany and then saying “who could have known it wasn’t all just rhetoric?” It’s not like they didn’t warn you that you would be demonized and punished for any success you had while the risks and failures would be completely your own to bear.

    No, rule by fiat and selective enforcement of the law as we see with Obama, and retroactively changing laws as you just saw in California, are what happens when the people running things are willing to resort to tyranny to maintain power. In fact those exact actions are what defines tyranny and they are what statists of every stripe ALWAYS end up doing.

    You may have gotten a college degree in California but you clearly didn’t learn much.

    • Anonymous

      “is like a Jew choosing to stay in Nazi Germany”

      So those Jews in the Holocaust deserved it, should have known better? Your federal government kidnaps people, holds them without trial, and tortures. You deserve whatever comes next.

  • http://www.slopeofhope.com Tim Knight

    I don’t see why they should stop at 2008, or even at the state level. How about a 60% income tax for the US retroactive to – - I dunno – - 1995? Good-bye, deficit!

  • Mark VanBrighten

    Boo Fucking Hoo. If we listened to you, noone would ever make a business in California. Oh wait. SILICON VALLEY. Tool.

  • Marc

    Don’t forget… it isn’t called the State Board of Revenue, or the State Tax Board… it is the Board of EQUALIZATION…so fair share may end up being everything to ensure everyone is equal.

  • http://twitter.com/RGseattle Rob

    come to seattle, bring all your engineers and scientists with you, leave all your politicians and lawyers behind, take 90% of your tax savings and put it in your pocket….then take the remaining 10% and buy a plane ticket to Disneyland every other week to get some sun. problem solved!