McElroy: "California Can't Chase Away Business Fast Enough"
Wendy McElroy writes of the latest California obscenity at the Future of Freedom Foundation:
Shortly before the Christmas holidays and oh so quietly, the California Franchise Tax Board (FTB) rescinded a tax break that dated back to 1993. The Qualified Small Business Stock (QSBS) exclusion allowed small businesses and investors who met certain conditions to exclude or to defer 50 percent of the profits of sold stock from their personal income taxes. The incentive was intended to lure startup companies of under $50 million into the state.Now those who were ensnared have not only lost that tax break for the future; many are also being taxed retroactively back to 2008. Plus interest. Plus possible penalties.
...But the numbers are less important than the precedent being set. Apparently, those who complied with tax law can still be hounded by a tax agency that reaches back several years to change its own rules and then demands payment or else. The precedent is particularly dangerous, because it came from tax-board staff rather than from elected officials. A massive and arbitrary power rests in the hands of unaccountable bureaucrats.
...The cofounder of one business and a well-known mentor to other startups, Anderson explains the impact of the FTB policy, which may be irreversible even if the retroactive tax is abandoned.
You can't really plan for the future when the rules of the game are changing retroactively. You feel insecure investing in the state, why would you take that additional risk when they've set a precedent now showing that anything could happen anytime?"
And the best part is a bureacratic rule the fines and penalties are automatically imposed, no need for those pesky trial thingies
lujlp at March 4, 2013 12:51 AM
Yet anouther stake is driven through the heart of the Constitution, which very clearly prohibits ex post facto lawmaking.
Cousin Dave at March 4, 2013 5:59 AM
I'm wondering if the thinking involved is to go after those who left the state already.
Joe j at March 4, 2013 6:45 AM
This isn't a new thing. I used to work for a small business whose owner was TOLD by the state tax authority, IN WRITING, that he was a consulting firm, and didn't have to collect a particular tax. (I think it was sales tax, but I'm not sure.)
Ten years later, they showed up and said, "We've changed our minds. You aren't a consulting firm. You sell software. You owe TEN YEARS in BACK TAXES. Plus penalties."
The fact that he gone in headfirst and gotten a written ruling didn't matter. It broke the company. Now a dozen of us don't have jobs.
The tax man can just take your money, and there's nothing you can do about it. SOlution: make no money. Go minimalist.
Lamont Cranston at March 4, 2013 7:06 AM
Deer tax board goobers,
Please make note of these sections of the US Constitution: clause 3 of Article I, Section 9; and clause 1 of Article I, Section 10.
The first binds Congress from passing ex post facto legislation, the second binds the states from the same. Surely there is a smart lawyer some where out there that can properly educate this tax board?
And by 'educate' I mean 'beat them up and take their lunch money'.
I R A Darth Aggie at March 4, 2013 7:44 AM
"I'm wondering if the thinking involved is to go after those who left the state already."
That's an interesting point that I had not thought of. If you state government can't raise the revenue it wants, then hey, why not tax other states? It would be interesting to see California try to extradite someone from, say, Texas for non-payment of retroactive taxes.
Cousin Dave at March 4, 2013 1:10 PM
The CA FTB did this because a court ruled that a law which enabled the tax break was unconstitutional and therefore never existed.
I have no great love for CA or FTB but in this case, you can not hold the FTB responsible.
Philip Ngai at March 4, 2013 1:30 PM
Yes, you can.
The FTB could have easily sent out a letter that said the the court ruling invalidated this rule effective from 8/29/20. We are not going to collect on past due to 2008 but be aware your tax situation has changed for 2012 and beyond. We're sorry for the late notice.
Yes, it probably would hurt some businesses this year, but they could probably deal with it. But making it retroactive to 2008 was entirely an FTB decision.
So they can go to hell as far as I'm concerned.
Jim P. at March 4, 2013 7:09 PM
No, Jim, the FTB did not have that option.
The tax break was unconstitutional and therefore never existed.
Philip Ngai at March 6, 2013 11:35 AM
If the California governments (local and state) can provide seemingly random tax exemptions for companies that jump through the proper environmental hoops or are in whatever politically-correct industry the state wants to reward (Google "Twitter and San Francisco payroll taxes") without worrying about the Constitution - then the state can waive penalties, fees, and back taxes for companies who acted in good faith and were caught by this ruling.
Conan the Grammarian at March 6, 2013 2:46 PM
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