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New California Tax Policy – Retroactive Tax for Five Years WITH Interest

Posted by Cicero on March 26, 2013

Despite unanimous opposition from newspapers up and down the state, the Franchise Tax Board continues to stick by its decision to retroactively tax small businesses owners back five years for investing in California businesses. These are the people who are creating jobs and California is literally chasing them away.

One group of individuals is taking stand against the policy though – California Business Defense. The group will meet in San Diego next week and is specifically looking for more individuals who will be directly impacted by the policy. More information on the group and the status briefing in San Diego is available on the group’s website at www.cabusinessdefense.org.

Since 1993, small business owners and investors have been able to take advantage of a tax incentive that California actively promoted. The policy allowed stockholders who sold their share in a California business to reduce their tax liability by up to 50 percent or even 100 percent if the money from the sale was reinvested in a California business. The policy basically made it attractive for entrepreneurs to invest in small businesses and create jobs because it significantly reduced the tax liability for doing so.

Now though a court decided that this policy violated the commerce clause in the Constitution because it discriminates against out of state businesses. The FTB decided to embrace the court’s decision by retroactively taxing all the small business owners and investors who took advantage of the policy for the last five years. And not only that, but charge the tax WITH interest! The horrendous policy is expected to earn the state an easy $120 million.

But stop to think about what California is doing and the significance of what it means it could do in the future. These investors did exactly what they were asked to do by risking their own capital and investing in businesses in California. California promoted the tax break because it meant people were creating jobs and more people working. After receiving that benefit for two decades, California now wants to retroactively tax the very people that made the job growth possible. Some of those investments worked out and some of them did not but the FTB does not care and the tax will apply to all individuals even if they lost everything taking a risk to create jobs for California.

This policy has is so shocking that it has made national headlines on Fox News and Fortune, but the FTB stands by the decision. It has been likened to California changing the speed limit back down to 55 mph on highways, and then sending speeding tickets to everyone who drove over 55 for the last five years. That is exactly what is happening, and this decision by the FTB is the tipping point for many individuals, who can no longer justify the expense and risk of doing business in California. What message does it send to people considering starting a business if California can decide years down the road to penalize them for doing so?

Fortunately, Assemblyman Jeff Gorell, R-Camarillo and Sen. Ted Lieu, D-Torrance have stepped up in a bi-partisan effort to right the wrongs of the FTB. SB 209 would prohibit the state from charging interest and penalties in similar situations in the future.

At least one member of the FTB recognizes that this is a bad policy. In a letter to State Controller John Chiang, Board of Equalization Chairman Jerome E. Horton, and Director of Finance Ana J. Matosantos, Board Member George Runner urged them to reverse their decision to implement the policy. Despite the missive, no response has been seen from any of them.

California doesn’t need more laws to correct this policy. It needs needs policy makers with common sense. And this is another unfortunate example of exactly what is wrong with this great state.

 

 

3 Responses to “New California Tax Policy – Retroactive Tax for Five Years WITH Interest”

  1. Screech said

    Isn’t this an unconstitutional ex post facto law? If not why not?

  2. nick kump said

    You can find a detailed analysis of the California Court of Appeals’ ruling here: http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Tax/us_tax_multistate_CA_Alert_9-10-2012.pdf

  3. […] Last month OC Political brought you the emerging story of retroactive taxes on entrepreneurs in Cali…. State Senator Ted Lieu (D-Torrance) and Assemblyman Jeff Gorell (R-Camarillo) together authored SB 209, which was supposed to eliminate the Franchise Tax Board’s retroactive tax on individuals who took the California qualified small business stock exemption between 2008 and 2012. […]

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