Opponents of California's Retroactive Tax on Investors Win A Reprieve

2/28/13Follow @wroush

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whether or not they would get that money.” The FTB has estimated that about $120 million in unpaid back taxes is at stake overall.

Business groups have been working feverishly to mobilize opposition to the FTB’s plan in Sacramento. Some 39 state legislators signed a February 19 letter to Selvi Stanislaus, the FTB’s executive officer, calling the December notice a “sucker punch” to taxpayers and asking Stanislaus to reverse the policy.

Now Gov. Brown’s office has joined the fray. Overstreet says members of California Business Defense, as well as tax law experts hired by the group, have been in consultation with Brown’s senior staff throughout February. “The problem was that the governor’s office, as well as the legislators, have only been hearing from the FTB about what they could and couldn’t do” in reaction to the Cutler ruling, Overstreet says. “So we showed up and said, ‘Listen, there are alternatives, and here is an opinion about what those could be, and the minimum you should ask for is a standstill until there is additional time taken to get input from the governor, the legislature, and other interested parties.”

Overstreet, who is CEO of a Healdsburg, CA-based drug safety startup called AdverseEvents.com, says members California Business Defense heard “rumblings” early this week “that we had convinced the right people [in the governor’s office] and that a change from the FTB was imminent.”

Those changes showed up today in the form of the alterations to the FAQ. Now Overstreet says his group is waiting for a more formal indication from the FTB or the governor’s office about the most likely path toward a resolution.

Under continued pressure from the Brown Administration, the board could ultimately conclude that the Cutler ruling doesn’t actually require it to claw back payments from past tax years. But such a thorough reversal might be unlikely—in which case Overstreet says California Business Defense would turn to sympathetic legislators, who are already drafting bills that would aim to restore the small business investment incentives without violating the Commerce Clause.

“It was an administrative decision and we’d like to find an administrative fix,” Overstreet says. “That may or may not be possible. If it does end up going the legislative route, obviously we would like to see a provision that wipes out the retroactive tax, and if it’s possible, preserves the option of a QSB tax incentive going forward.”

Says Overstreet, “This isn’t just about protecting our own personal pocketbooks—it’s about maintaining the incentive for people to start, grow, and keep their businesses in California.”

Update, March 6, 2013: California state Senator Ted Lieu, a Democrat from Torrance, CA, announced March 5 that he is working with members of the California State Assembly to write legislation that would override the retroactive tax assessments. Lieu said that bills moving through the Senate and the Assembly will be amended to “bring relief” to taxpayers who received notices of assessment from the FTB, and to prohibit the agency from seeking penalties and interest when it asks for retroactive tax payments as the result of court rulings like the Cutler ruling. Lieu told U-T San Diego that “The language will very clearly fix the problem that the FTB said they could not fix administratively.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • Davidws

    The real issue here is the State’s Taxing Authority being overly aggressive, with a four (4) year reach back for correcting a law that our legislatures founded and intended to help spur small business growth in California. Now, as the courts have found, a clause in the Tax Code was unconstitutional. Going back four (4) years was not a stipulation of the courts findings…this was decided by the Franchise Tax Administrative body…NOT the “GOVERNOR” and NOT our “LEGISLATORS” and NOT the Franchise Tax “BOARD OF DIRECTORS”.

    If this retroactive tax affected the general tax paying population of California citizens,..it never would have happened!. And since it affects 2,000 job creating entrepreneurs and investors…it isn’t getting the press it would have. Our government servants well know the general population will have little sympathy for an additional tax burden on the rich….we can thank our current President for setting this tone. On the other hand, every citizen knows deep in their hearts that reaching back four (4) years is …. SIMPLY WRONG!