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California's Surreal Retroactive Tax On Tech Startup Investors 514

Posted by timothy
from the do-not-pass-go-remit-$200 dept.
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."
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California's Surreal Retroactive Tax On Tech Startup Investors

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  • "Deferred"? (Score:3, Interesting)

    by 14erCleaner (745600) <FourteenerCleaner@yahoo.com> on Thursday January 24, 2013 @06:52PM (#42684905) Homepage Journal
    If the tax is truly just deferred, then it's not "retroactive".

    Besides, it's only $150 million. A drop in the bucket, relative to the tech industry as a whole.

  • Ex post facto? (Score:5, Interesting)

    by fyngyrz (762201) on Thursday January 24, 2013 @06:52PM (#42684907) Homepage Journal

    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:

    1st. Every law that makes an action done before the passing of the law, and which was innocent when done, criminal; and punishes such action.

    2d. Every law that aggravates a crime, or makes it greater than it was, when committed.

    3d. Every law that changes the punishment, and inflicts a greater punishment, than the law annexed to the crime, when committed.

    4th. Every law that alters the legal rules of evidence, and receives less, or different, testimony, than the law required at the time of the commission of the offense, in order to convict the offender.

    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...

  • As a Californian (Score:2, Interesting)

    by Spy Handler (822350) on Thursday January 24, 2013 @07:09PM (#42685079) Homepage Journal

    I am ashamed of my state government and the populace that elected it. As soon as I have enough money to be worthy of Franchise Tax Board's notice, I'm fleeing to a free state.

  • by AlienSexist (686923) on Thursday January 24, 2013 @07:10PM (#42685095)
    California (and New York) are hemorrhaging population and business. Often (but not only) heading to Texas according to numerous articles and analysis [manhattan-institute.org] 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 [yahoo.com] 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 [wired.com], Facebook [statesman.com], PayPal [austinnovation.com], Catepillar [msn.com] 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.
  • Re:California (Score:4, Interesting)

    by jtownatpunk.net (245670) on Thursday January 24, 2013 @07:10PM (#42685099)

    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.

  • by Iconoc (2646179) on Thursday January 24, 2013 @07:14PM (#42685135)
    Elections have consequences.
  • by sycodon (149926) on Thursday January 24, 2013 @07:31PM (#42685277)

    Austin is afflicted wit the same disease as CA.

    We have a 20 million dollar "commuter rail" that transports maybe a few hundred a day. Of course, it loses money.

    They just decided to pay millions of dollars on a "bike sharing" program that involves bike shelters costing hundreds of thousands of dollars each. They charge people to participate, but the fees don't come close to paying for it.

    The voters have twice turned down a Bond that would fund home shelters and other low income stuff, but the City Council has directed staff to prepare for another election. They'll get their Bond money (and go into debt) no matter how many times it takes.

    The are also looking at Light Rail down town. No matter it doesn't make sense and costs Billions, they want to be like all the other "
    grown up and enlightened cities".

    The State Government, on the other hand is debating on how to spend surplus money or just save for the next session.

  • Re:As a Californian (Score:4, Interesting)

    by Spy Handler (822350) on Thursday January 24, 2013 @07:57PM (#42685517) Homepage Journal

    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.

  • by ganjadude (952775) on Thursday January 24, 2013 @08:25PM (#42685767) Homepage
    As someone who lives upstate, I would be more than happy if NYC became its own state. see what the real numbers look like when we arent paying to support the city infrastructure. When my bridges get neglected yet our toll rates go up to pay for more NYC spending, It really gets on my nerves.
  • by Nefarious Wheel (628136) on Thursday January 24, 2013 @08:33PM (#42685845) Journal

    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?

  • Re:Obama effect (Score:4, Interesting)

    by Austerity Empowers (669817) on Thursday January 24, 2013 @09:31PM (#42686505)

    Some of us liberals are against gun control. Be careful where you point that thing.

  • by Runaway1956 (1322357) on Thursday January 24, 2013 @09:38PM (#42686575) Homepage Journal

    " in Texas you're on your own if something bad happens"

    In California, you use the entire village to raise an idiot, and all you've got to show for it is - an idiot. Real men and women can indeed stand on their own. It's a shame that so many idiot can find creative ways to kill themselves - drug overdoses, for instance - but some of us believe that idiots have every right to remove themselves from the gene pool.

    "on your own", you say? And, you say that like it's a bad thing!

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