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California's Surreal Retroactive Tax On Tech Startup Investors
waderoush writes "Engineers and hackers don't think much about tax policy, but there's a bizarre development in California that they should know about, since it could reduce the pool of angel-investment money available for tech startups. Under a tax break available since the 1990s, startup founders and other investors in California were allowed to exclude or defer their gains when they sold stock in California-based small businesses. Last year, a California appeals court ruled that the tax break was unconstitutional, since it discriminated against investors in out-of-state companies. Now the Franchise Tax Board, California's version of the IRS, has issued a notice saying how it intends to implement the ruling — and it's a doozie. Not only is the tax break gone, but anyone who claimed an exclusion or deferral on the sale of small-business stock since 2008 is about to get a big retroactive tax bill. Investors, entrepreneurs, and even the plaintiffs in the original lawsuit are up in arms about the FTB's notice, saying that it goes beyond the court's intent and that it will drive investors out of the state. This Xconomy article takes an in-depth look at the history of the court case, the FTB's ruling, and the reaction in the technology and investing communities."
And you expected something else from a state run by "progressives"? They never have enough of other people's money!
Retroactive taxes aren't particularly surreal. An example of surreal taxes would be if you had to submit your check to a giant who was growing out of the floor in a building that's melting.
So let's use the word correctly, please.
There's no -1 for "I don't get it."
People have been up in arms over ex post facto law, so why do they think they can get away with taxes? Granted, not all retroactive laws are unconstitutional. The tax law shouldn't have been in the books in the first place if it was unconstitutional, but we're not talking slavery here. Repeal the law, if you must, and call it even.
This is just a sad attempt at increasing state revenue
If computers were people, I'd be a misanthrope.
Besides, it's only $150 million. A drop in the bucket, relative to the tech industry as a whole.
Have you read my blog lately?
So. Does this make a crime of not paying taxes out of a situation where it was not a crime?
If so, it would seem to be ex post facto:
Seems to me they should just not pay, because there's no legal way to punish them for not paying.
Not that the supreme court has actually paid that much attention to ex post facto violations on either the federal or state level... real bunch of pants-shittingly stupid people in SCOTUS lately...
I've fallen off your lawn, and I can't get up.
country can permit retroactive anything.
You buy a slave legally. Country decides that is unconstitutional and decides all slaves must be free - retroactively.
Maybe some retroactive decisions are good.
that's not really retroactive. it's not like slave owners were forced to retroactively pay proper working mans wages to the slaves when they were freed...
there's nothing retroactive about ending someones contract at a certain point in time. it just ends there and then.
now, punishing concentration camp guards.. that's sort of retroactive, deciding their job was illegal after they had been at it for years.
this retroactive tax sort of assumes that rich are still rich, though it might be true in most cases who are affected by this.
world was created 5 seconds before this post as it is.
California is net contributor to the federal budget, so a negative percentage of the federal budget deficit is due to California. Leaving aside the other inaccuracies in that sentence.
This isn't a retroactive law. This is invalidation of a law by a court. California basically created a tarrif to promote local buisnesses. States are not allow to create terrifs. California had two options. They could send money to every out of state buisness that was damage by the tarrif. Or they could undo the benifit the in state buisnesses recieved. California is broke so they did the second thing.
Oh, wait. This is TAX law. The IRS can do pretty much anything they want; even the state IRS.
Ex post facto laws are expressly forbidden by the United States Constitution in Article 1, Section 9, Clause 3.
People will sue - and this will go to federal courts... The question is will it make it to SCOTUS.
/me sips his coffee and ponders a new sig...
nice try -thanks to Governor Moonbeam, er Brown, the state is projected to break even this year after years of deficits.
http://news.yahoo.com/california-budget-plan-surprise-surplus-012349478.html
and like most Blue States, we pay more $ to the Feds than we get back in Benefits
http://thepoliticalcarnival.net/2012/11/11/chart-ruh-roh-red-state-socialism-alert/
as does Minnesota.
You don't have to live here, but we like it quite a bit.
-I'm just sayin'
Californians pay more in federal taxes than they recieve from the federal goverment. The following map shows Federal Taxes minus spending on a state by state basis. http://www.economist.com/blogs/dailychart/2011/08/americas-fiscal-union
Texas and Minnesota both pay more taxes than they recieve. The biggest debtor state in the union is Virginia.
California (and New York) are hemorrhaging population and business. Often (but not only) heading to Texas according to numerous articles and analysis over the past year as well as the last census.
Texas appears to be the largest recipient of the migrations but so are Arizona and Florida. Coincidentally Texas was also named the 2012 Top State for business. Every few weeks I see more and more business headlines of companies (namely tech) moving to or starting a branch in Texas such as Apple, Facebook, PayPal, Catepillar and so on
There had been, however, some controversy over the years of TX Gov Perry's use of the Texas Enterprise Fund to woo companies to relocate. While the deal-landing results appear to be evident, some worry about the taxpayer cost, total incentive packages, and net gain of these deals. The fund seems to be perfectly suited to situations like this, where California tax laws cause some turmoil thereby increasing the opportunity to woo away industry. Recently Texas AG Greg Abbott has also been advertising to New Yorkers to move to Texas on account of gun control issues.
I wonder how long Texas can remain "Texas" if it becomes stuffed with people who are accustomed to living like Californians and New Yorkers.
It's all about the weather.
Seriously. I've lived on the central coast most of my life and 5 years or so in the OC. When I visit other places, the weather often seems extreme. I visit family in the northwest and they've got this crazy stuff called snow that's like everywhere. It's where people live. In central and southern CA, we keep that shit up in the mountains where it belongs for ski weekends. I go to Vegas and it's ball-scorching hot. I don't care if it's a dry heat. An oven is dry heat, too. Don't even get me started on those New England summers and their 112% humidity. Just sit on the porch and sweat. Same in the south but they throw in thunderstorms and hurricanes.
Having said all that, I plan to be out of CA forever this year. I can take my equity from CA and be a semi-retired land baron in just about any other part of the country, living a comfortable life of leisure. Gonna load up the RV and head east until I find a nice place to settle down.
Elections have consequences.
NO NO! We hate it here! It's terrible! Don't move to California, the weather isn't nearly as nice as you think! And there are all these liberals everywhere! And the GAYS!
By all means move to the East Coast; or Texas! Anywhere else but here.
(wink wink).
signed,
lifelong Californian
"Well, this Californian was in Chicago last week and it was 12F. So, that's why."
Yeah, that can get old even for us Illinoisans.
But, on the other hand, it does help persuade the Californians to go back home after visiting. ;)
How do you figure that much of the national deficit is due to California? They pay more to the feds than they take in.
https://en.wikipedia.org/wiki/Federal_spending_and_taxation_across_states
No, much of the national deficit actually cannot be laid at CA's doorstep. Those decisions get made in Washington, DC. California has always been a net contributor, being still the eighth largest world economy in spite of the recession. You must be thinking of those red states... http://www.economist.com/blogs/dailychart/2011/08/americas-fiscal-union
*Certain* businesses flock to CA because the laws, business environment, and climate support their businesses well. Tech companies can find plenty of highly qualified staff because there are three public college systems, the local governments also help support the private ones, and employment/IP law favors job-hopping and entrepreneurship (making it possible for employees to leave disgruntled employers without fear of retribution). Ag companies like it here because you can farm year round, and CA ports are on the Pacific Rim. Manufacturers like it as well, but those who can't or won't avoid dumping pollutants into the water table (see ag) don't like CA, so they go to places like Louisiana instead.
Mexico couldn't keep CA. They were run by the Spanish at the time, and nobody wanted to deal with trying to maintain garrisons during a time of tall ships with months long voyages. That is why, when the US took over, they built the trans-continental railroad. Problem solved.
Really, I wasn't aware that California started two unfunded wars? Let me guess, you were "educated" in Texas
As an employee, why would I want to work in states like Texas or Arizona that provide much less in the way of protections for workers? One of the reasons I like working in California is the laws that give me some leverage when dealing with employers, and protections and safety nets when said employer folds due to dumb decisions by management.
And as an employer, why would I want to set up business in a state where my pool of workers is limited to the kind who all they have to offer is their willingness to accept that lack of protection? One of the reasons tech companies locate in California is that that's where the people they need/want to hire are. If I set up business in Texas or Arizona, I do so knowing that the best employees, the ones I'd most want to have, aren't going to be willing to relocate there. I can't see that being a winning strategy long-term.
no, my flight from California will have been motivated by economic reasons rather than ideological.
My mother owns commercial real estate (a small strip mall) and she's been sued three times in the past three months by handicapped people under California ADA provisions. That's like... once a month.
First two have been settled for $2500 and $3200, third suit is pending.
Why did she get sued? First one was, the handicapped parking spot didn't have the words "Van Accessible" in the correct sized font. Second one, the towel rack/grab rail in the bathroom was 2 inches too high.
Here is the relevant part from the Appeal Court opinion:
Plaintiff asks us to hold that a refund is the only proper remedy in this case, under the authority of McKesson Corp. v. Florida Alcohol & Tobacco Div. (1990) 496 U.S. 18 [110 L. Ed. 2d 17, 110 S. Ct. 2238] (McKesson). In McKesson, the high court held that “[i]f a State places a taxpayer under duress promptly to pay a tax when due and relegates him to a postpayment refund action in which he can challenge the tax's legality, the Due Process Clause of the Fourteenth Amendment obligates the State to provide meaningful backward-looking relief to rectify any unconstitutional deprivation.” (McKesson, supra, 496 U.S. at p. 31, fn. omitted.) McKesson identified three ways to provide the “‘clear and certain remedy’” required for an unlawful tax collection. (Id. at p. 39.) These were (1) “refunding to petitioner the difference between the tax it paid and the tax it would have been assessed were it extended the same rate reductions that its competitors actually received”; (2) “assess[ing] and collect[ing] back taxes from petitioner's competitors who benefited from the rate reductions during the contested tax period”; and (3) “a combination of a partial refund to petitioner and a partial retroactive assessment of tax increases on favored competitors, so long as the resultant tax actually assessed during the contested tax period reflects a scheme that does not discriminate against interstate commerce .” (Id. at pp. 40–41.) In this case the statute of limitations prevents the state from collecting additional taxes from other taxpayers who benefited from the unconstitutional deferral provision.
Under this portion of the opinion the Franchise Tax Board can not do nothing. They are required by this opinion to level the playing field. The Franchise Tax Board has three options;
1. Refund the tax to him and every other other person that was denied or didn't file because they did not qualify.
2. Retroactively tax everyone
3. A combination of partial refunds and partial taxes opening up even more litigation.
Option 1 is bad because the state could loose a lot of revenue. Option 3 is bad because the state loses revenue and spends more on litigation. Option 2 is viable as it already falls under the process of filing and adjusted tax return. By requiring the Board to level the playing field the court threw a wrench in the works.
That merely freed them in the future. Had they been freed retroactively anyone who owned a slave within the previous years could have been imprisoned for kidnapping.
Still, some retroactive decisions are good. I don't think this tax collection is one of them, though I do agree with the court's ruling.
Owning a firearm is a right guaranteed under the Second Amendment. Call them "nuts" if it makes you feel better but the second you say it's OK to restrict one's gun rights they'll be restricting all your rights. I know this is a repost, but it's very relevant to my point (feel free to replace who "they're" coming for with items from our Bill of Rights):
When the Nazis came for the communists,I remained silent;I was not a communist.
When they locked up the social democrats,I remained silent;I was not a social democrat.
When they came for the trade unionists,I did not speak out;I was not a trade unionist.
When they came for the Jews,I remained silent;I wasn't a Jew.
When they came for me, there was no one left to speak out.
Virginia (and Maryland, the second biggest net recipient) are a little different from other states, in terms of this comparison. A lot of that money isn't state grants or welfare checks or other federal largesse. That's money spent on federal employees and facilities that were located outside DC. The Pentagon, for example, is just over the river in Arlington. These are facilities that need to be kinda close to DC, but don't really need to be right on top of the White House.
The states definitely benefit from it. If the government were to pack up and move, the DC metro area would become a ghost town, and the whole economy would change. But it's not just a subsidy or pork-barrel make-work projects; it's the government actually doing what it does. MD and VA don't get that because of power. It's just geography.
Because life is about risk and reward. Do I want to live in a nanny-state where people try to ban toys in happy meals? Where the cost of living is so high that you could make $100,000 a year and only live in a crappy apartment? Do I really need all these "protections" for workers? Or am I smart enough to always be learning and adopt a mind of an independent contractor and not a slave?
Taxation is legalized theft, no more, no less.
I'm another Silicon Valley expat (Australian now). I don't expect it will affect me. What interests me about it, though, is how this is going to fly in light of the Constitution forbidding ex post facto laws - you can't make a law that penalizes someone for something they did before the law was passed.
Can you?
Do not mock my vision of impractical footwear
As I recall from my Con. Law class, ex post facto has been interpreted to apply only to criminal prosecutions. So the government can tax the crap out of you retroactively as long as they don't do it under the criminal code. (But I don't practice constitutional law, so somebody who does can feel free to correct me.)
Today's Sesame Street was brought to you by the number e.
This kind of shit is soooo FAR beyond merely shooting yourself in the foot, its more like pointing a gun at your foot, letting loose one round, blowing half your foot off, then blithly taking the gun, shooting the rest of the original foot off, taking a morphene shot to kill the pain, then turning the gun on your other foot, and doing the same thing again.. The old MontyPython skit with the guy getting his limbs shot off and continuing to taunt his attacker is kind of appropriate for California.. To keep ratcheting down on business like they're doing will ONLY work in a *completely* totalitarian country, one that includes barbed wire fences on the borders, landmines, tank traps, reminicient of the old "Iron Curtain".. When a business can weigh the pros-cons of staying/leaving and decides to pack it up and head for one of the states that are welcoming business, like Texas, f'instance, with no chance of being shot while going over the fence, the "geniuses" in Sacramento can only sit back and watch their tax-base leave the state.
Of course, in the world that the California liberal bureaucrat lives in, they never see this.. Up until the reality of the situation jumps up and bites them on the ass.. namely when they have 20+ million mouths on the government feed trough and ZERO tax-paying businesses.. I was born in California many moons ago, in what is now "liberal-ville", better known as the "City By The Bay"... such a lovely town, gone to hell by the Nancy Pelosi-liberals.. The wife and I saw the handwriting on the wall back in the mid 90s and moved to Las Vegas Nevada.. Best move we ever made.. With that, we had to fight with the State Franchise Tax Board for nearly 3 years after moving to prove to them we no longer had any income from the State.. It finally took a tax attorney to rattle their cage and get their b.s. stopped. I hate to think about ALL the hassle any business will get today when they move out of California... My thoughts are with them...
THANK YOU, Edward Snowden!! Americans owe you a debt of gratitude (whether they know it or not..)
In that sense, none of the amendments guarantee your right to anything - they're all subject to judicial interpretation, and all were interpreted, and sometimes re-interpreted (like the 1st) over time.
Define "assault weapon". There is not a single "assault weapon" available on the civilian market. You're yet another victim of liberal hype. Talk to a veteran. Talk to almost any veteran, from any service. Some sailors never handled an assault rifle, and maybe some airedales. All marines have handled them, and I think all army soldiers have.
My own assault weapon was an M14. There is a little lever on the side that makes it what it is. That little lever switches the piece from semi-automatic to full automatic. That is the one determining characteristic of an "assault weapon". The bayonet lugs? I'll grant that it is probably unnecessary for civilians. Oversize magazines? Again, I'll grant that is probably unnecessary. But, those two features do not determine that the weapon is an "assault weapon".
However - if you're able to pass a background check, and you're willing to pay the licensing fee, you can purchase a Thompson submachine gun, perfectly legal.
Having spent most of an hour staring down the muzzles of several Thompsons while holding onto my M14, I'm here to tell you that it is a much more effective "assault weapon" than the M14 - or an M15 or an M16.
I don't know how many Thompsons are currently held by private citizens in the United States. Funny thing, you don't hear of them being stolen, and used in criminal activity. Seems that the people who own them, keep them properly secured, and that common criminals just can't get to them.
Maybe THAT is where legislation needs to be aimed. Make the owners of ALL weapons responsible for securing those weapons that they own.
Nuts? There are plenty of nuts on both sides of the issue. None of the nuts want to address the real issues. Those issues include identifying whackos, kooks, and nuts who are likely to commit a mass shooting. Almost always, people step forward after a shooting, to inform the media that the shooter was some kind of mental case. Family and acquaintances are generally unable to "connect" with the guy. He's strange, weird, or whatever - often a "loner".
The real issue here, is identifying such people, and getting help for them - OR, institutionalizing them, so that they most definitely CANNOT access weapons.
But, boo-hoo-hoo - it violates some kind of "rights" if we start institutionalizing mental cases.
Meanwhile, we continue to incarcerate people for possession of natural substances like marijuana. It's alright for corporations to profit from incarcerating perfectly safe people, but we don't want to violate any civil rights of genuinely dangerous people.
This whole controversy borders on insanity.
"Windows is like the faint smell of piss in a subway: it's there, and there's nothing you can do about it." - Charlie Br
At the time the second amendment was debated, it was meant to prohibit the federal government from passing gun control laws as a means of controlling the states. But the person you are replying to is wrong in that he says "That right, as it exists today, is granted by a later court interpretation of the 2nd amendment." In fact, it was the fourteenth amendment which conferred those rights on individuals at the end of the civil war, to prevent them from oppressing their citizens. Of course, at the time they were thinking about ex-slaves, but anyone can be subjected to oppression by the government. It was a fairly recent court case in which the Supreme Court upheld that this was the case, but it's actually pretty hard to read the Fourteenth amendment any other way.
Some of us liberals are against gun control. Be careful where you point that thing.
Not all liberals swallow the liberal hype, just as not all conservatives go for the conservative hype. While the conservative nuts are telling us that elimination of bayonet lugs and oversized magazines violate the constitution, you'll note that I've dismissed both as unnecessary.
I think that you'll grant that liberals and conservatives alike have their hype machines. People who think for themselves can recognize hype for what it is.
"Windows is like the faint smell of piss in a subway: it's there, and there's nothing you can do about it." - Charlie Br
Creative accounting doesn't work for liberals or conservatives. Follow Ded Bob's link. Bullshit is bullshit, no matter which side the bullshit comes from. It's still a deficit.
"Windows is like the faint smell of piss in a subway: it's there, and there's nothing you can do about it." - Charlie Br
The Bill of Rights was a compromise to shut up the anti-federalists. The Founders felt it was obvious that if the Constitution hadn't explicitly granted a power to the Federal Government, they didn't have it. The anti-federalists voiced concerns that it wasn't clear.
The Founder's view seems evidenced in the level of detail in the Constitution listing exactly what the Federal Government can do, esp. in Article 1, Section 8.
I don't know the history of Prohibition well, but now it seems rather quaint that as recently as 1919, folks thought it was necessary to actually amend the Constitution (the Eighteenth Amendment) to ban the "manufacture, sale, or transportation of intoxicating liquors". Now, we seem to accept that if the Federal Government wants to ban a substance nationwide, they can just do it with, at most, Congressional and Executive approval. How far we have fallen in less than 100 years.
The Ninth and Tenth Amendments were meant to eliminate any possibility that people in the future would interpret the Bill of Rights as a complete list of rights held by the people and the states. As it turns out, these Amendments were obviously insufficient.
Subsequent Amendments and SCOTUS interpretations/decisions (perhaps most notably the Incorporation Doctrine) have altered the landscape of course by imposing restrictions on states as to what rights they can abridge.
Why is there an "insightful" mod and why isn't it "-1"? If I wanted insight, I wouldn't be reading
Do I want to live in a nanny-state where people try to ban toys in happy meals?
Good point! You should come to Texas where we have a sky-daddy state where the government keeps you from buying cars on Sunday.
If I have been able to see further than others, it is because I bought a pair of binoculars.
As an outsider reading it, I would say that the second amendment reads pretty clearly that the right to keep and carry weapons cannot be restricted.
Any law in the USA that purports to control weapons should be unconstitutional.
Arguing ethics, morals, need, danger or anything else in regards to weapons is (or should be) irrelevent.
If you don't like that situation you should work to get the second amendment changed, not work to undermine the constitution.
America has, in the past, been an example of freedom and rule of law that has inspired many people. It would be a tragedy if you were to undermine your rule of law and slide into becoming a police state by subverting your constitution.
If you truly believe that the situation and weapons have evolved to the point where that amendment is no longer needed, or needs to be changed, then the constitution contains methods for amending itself.
Please don't throw away the rule of law.
I'm guessing that wasn't on their radar screen...
Well, as a Christian we have the concept of tithing (although that is more O.T. than N.T - so more of a guideline / suggestion than a "commandment"). If God thinks he can get by on just 10 percent, I think that all the federal, state, and local folks that are into my pocket for 50+ percent have got to be considered a bit greedy. Seriously it is getting to the point where I actually drag my butt out of bed every morning to go and pay the government more than I bring home to my family. All the lectures on top of that about how I am not paying my fair share by all these folks who want to do GREAT things with other peoples money get really old. Here is a radical idea. Have everyone pay a flat tax of 20 percent off the top with no deductions paid to the states who can "remit" a percentage of that to the feds for defense and other national programs. That does two things, it keeps the money a bit closer to home for better accountability and the more you make, the more you keep. Then limit the government to spending only 90 percent of what is brought in from last years collections and quit making promises to people that you know you are never going to keep just to buy their vote. I know, I know ...crazy talk.
Any weapon that can be used to assault. E.g. a club.
Nothing to thank for.
Most people would call a full-auto M16 an assault rifle.
That's the point. "Assault rifle" has a specific definition, being a selectable semi-/full-auto shoulder arm firing a rifle-caliber round; a selectable semi-/full-auto shoulder arm firing pistol rounds is a submachine gun, and a selectable semi-/full-auto handgun is a machine pistol. "Assault weapon" is an invention of the media, defined as "any semi-automatic weapon that looks evil by dint of possessing one or more cosmetic aspects of a military weapon, these cosmetic features including, but not limited to, bayonet fittings, bipod attachments, pistol grips on a shoulder arm, removable box magazines, flash hiders, or any other characteristic that we deem to be sufficiently 'icky', making them suitable for conflating with actual military weapons when fanning public fears about gun violence."
I have a few friends that got hit with the retroactive (facebook) tax in California and they are leaving as well. They arent moving over taxes, just (like myself) they would rather their time, money and effort go towards a community that is better aligned with their beliefs.
I will be the first to admit, I know nothing about child pornography. But if you are correct, that probably is a violation of the first amendment of the constitution. I say probably, I am not an attorney,
So as a constitutionalist, I will not ask the government to pass a law abridging the freedom of speech, or of the press. The constitution is a simple and elegant document that limits the powers of our government, I accept that as the rules I have agreed to live under.
Does this mean I am helpless to try and stop child pornography, or anything else I object to? I think not. If the only solution I can see, to address a problem, is to ask my government to pass a law, and enforce it, then I believe I am not meeting my responsibilities a human being. I am free to use my honor, my wealth, my time, and my life to work to end child pornography (for example), I believe I should not ask someone else to do it for me, but I can recruit other like minded individuals, I believe this is what the writers of the constitution intended, they understood that the capacity of individuals, unrestricted by government, to make the world a better place, was the correct choice, I think their experiment has more success then failure so far, and I am willing to continue to follow their example.
Look to the article that began this discussion, this is an example of a government out of control, the people of California, have ceded so much of their responsibility to the government as to make this discussion even necessary. 30-50% if my income is claimed by my governments in various form of taxes. Too many hours of my life are devoted to monitoring, and trying to suggest solutions to, my elected representatives.
I am willing to pledge my honor, treasure, time and my life to try to change this, in the hope that at a time in the future, I will not have to live under this burden of government, nor will the people that come after me.