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How Entrepreneurs Overturned California's Retroactive Tax On Startup Founders 105

waderoush writes "Startup founders in California can breathe a little easier today — they won't be getting bills from the state for up to $120 million in back taxes. On Friday California Governor Jerry Brown signed a bill prohibiting the state from levying retroactive taxes on founders and other small-business investors who took advantage of a tax break invalidated last year by a state appeals court. California Business Defense, a coalition of entrepreneurs, spent most of 2013 trying to reverse the California Franchise Tax Board's interpretation of the court ruling, under which it planned to hit Californians with new tax bills on the sale of small-business stock going back to 2008 (a story that Slashdot picked up in January). Two bills on the matter reached Governor Brown's desk in September, one fully restoring the investment incentive through 2016, the other partially restoring it. Brown signed AB1412, the bill granting full relief. 'For a bunch of political greenhorns operating in an environment where political partisanship is at an all-time high, we did all right,' writes Brian Overstreet, one of the co-founders of California Business Defense. 'But it should never have been this hard.'"
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How Entrepreneurs Overturned California's Retroactive Tax On Startup Founders

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  • Sometime soon they will remember that they failed to tax your hindquarters ten years ago and make a tax bill for that, which will require a new round of lobbying for repeal.
    • Alternatively, keep drilling into their testicles with your new power drill, and see if they keep staying.

      People vote with their feet, too, and there are 49, well, about 42 other states and Puerto Rico to go to.

      • BTW, Governor Brown knows this, and understands the difference between rhetoric fed to you for your vote, and the poitical calamity of losing billions in taxes as industries flee the state.

        Heh heh heh I said brown knows.

        • by JustOK ( 667959 )

          snot funny

        • I'm impressed by Brown. He paddles a little on the left, then a little on the right, and he keeps a steady path.

          • Between allowing illegals to get both drivers licenses and practice law, banning lead ammo for hunting, reclassifying any semi-auto rifle with a clip as a assault rifle (including simple .22's) and therefore making it illegal to transfer ownership (even upon death); I would say that Brown paddled to the far left.

    • by Anonymous Coward

      No, they didn't forget -- they still tax your ass off in CA. For instance, you'll still have to pay an $800/year fee to have an LLC, even if it grosses $0 that year. CA would be at or near the top of my list for places to move, despite it generally being overpriced, if not for those sorts of dickish taxes and fees. I'm trying to get my one-man business off the ground, and losing a month's rent each year to fees I don't have to pay in other states that are as nice or nicer than CA just doesn't appeal to me.

    • Sometime soon they will remember that they failed to tax your hindquarters ten years ago and make a tax bill for that, which will require a new round of lobbying for repeal.

      Rich sociopaths don't have to worry about taxes. Only the 99% who can't afford to buy politicians will ever have to pay more than a token percentage of their assets.

  • Courts close loophole...... paid off politician gives amnesty to everyone who used loophole..... and rich people always win.

    Government fails the 99% yet again.
    • Re: (Score:2, Interesting)

      I agree with you, to a certain extent. But in an ostensibly capitalist country it neesd to be ok to be a capitalist, otherwise the people with the capital flee the country. I think if taxes were simplfied rather than remain the incredibly complex morass of laws and regulations we have now, we might have a better chance at collecting them.
      • But in an ostensibly capitalist country it needs to be ok to be a capitalist, otherwise the people with the capital flee the country.

        Don't forget to pay the exit tax [wikipedia.org] on the way out!

      • Funny I didn't notice germany, which has more new millionaires than any other country, hemorrhaging population recently. Or the scandinavias. Or pretty much anywhere that isn't a blatant kleptocracy.

      • But in an ostensibly capitalist country it neesd to be ok to be a capitalist, otherwise the people with the capital flee the country. I think if taxes were simplfied rather than remain the incredibly complex morass of laws and regulations we have now, we might have a better chance at collecting them.

        The rich will flee to where? To Somalia - the land with no taxes!

        The whole argument 'if you tax the rich, they will flee' is nonsense perpetrated by the rich. They are in California, New York or Paris for a reason - these are good environments to be with your wealth.

        Why do the rich Russian oligarchs buy property in London and other Western cities...its not because of their new found love for British monarchy, kidney pie or Shakespeare, its because of the quality of living and the 'rule of law' which

    • by Anonymous Coward on Monday October 07, 2013 @06:07PM (#45064239)

      The concept of "Ex Post Facto" is not a loophole, it's a foundational principle of justice. This same "loophole" prevents the government from declaring whatever you did yesterday a crime and throwing you in the slammer for it.

    • by tdelaney ( 458893 ) on Monday October 07, 2013 @06:31PM (#45064385)

      No - courts close loophole, loophole can't be used anymore.

      Laws that take away freedoms (e.g. making something a crime) or property (e.g. taxes) must not be retroactive. This includes loopholes - if use of the loophole was determined to be legal under the law as it was at the time anything gained from it cannot be taken away.

      I dislike people using loopholes to advance themselves as much as anyone, but not setting precedents of making retroactive legislation is more important.

      • by yurtinus ( 1590157 ) on Monday October 07, 2013 @06:52PM (#45064501)
        Exactly - you wouldn't want something like the earned income tax credit or mortgage interest deduction to be invalidated and suddenly make you liable for thousands in back taxes.

        As we always clamor: streamline the tax code and get rid of this myriad of deductions and loopholes
        • by GauteL ( 29207 )

          I've used two legal forms of tax "management" in the UK; child care vouchers (vouchers taken before tax to pay for child care costs) and the "salary sacrifice scheme" (where your employer pays your national insurance for you, causing your taxable income to become lower).

          The difference is that these were both understood (and in the case of child care vouchers an actively encouraged benefit) to be legal by all parties; employers, employees and the government.

          If you actively seek out loop holes for yourself in

          • by GauteL ( 29207 )

            Please mod down my post above; I had misunderstood the situation. The "loop hole" in question seems to have been a government encouraged benefit, more or less the same as the child care vouchers. If child care vouchers later turned out to be illegal under some EU regulation which the UK government had misinterpreted, then going after all the users for tax evasion would have been terrible.

      • A synonym for "loophole" is "legal". The law said "if this, then that", and someone decided to meet the predicate so that they could use the result. Blame the politicians for not clearly specifying their intent, not the people who obeyed the law as it was written.

      • By the way, this "loophole" that the businesses exploited is the same sort of loophole as your mortgage interest deduction, or your automatic deductions for dependents.
      • by GauteL ( 29207 )

        Hang on. Courts don't have law making ability (*). That is up to the elected government. If a court closed a loop hole, it just means it was already illegal and the court has simply decided how the law should be interpreted. When assholes use shady loopholes to benefit themselves, they may have believed it to legal, but they run the risk of that loophole turning out to be illegal after all (and ignorance is not a defence). If a court later concludes that the practise was indeed illegal, going after them is

        • by GauteL ( 29207 )

          To clarify. My post is about the principle of retroactive legislation and tax loop holes; not about this current case, which seems rather special in that the businesses followed state accepted (and encouraged rules) for tax management created to stimulate startups. That these rules later turned out to be unconstitutional is not the fault of the businesses, but the fault of the state government creating a poor state law.

          The businesses have thus broken the law, but in this specific case the right thing to do

    • by PPH ( 736903 )

      Almost correct.

      Rich people lobby for loophole and get legislation creating it. After some time, court invalidates it. Rich people ask for and get amnesty for period between creation of loophole and its final invalidation.

      In theory, they could play this game forever. Simply pass the 'same' legislation again with some minor differences making previous court decision not applicable. Case goes back to court, invalidating new loophole. But amnesty is granted for the period between law enactment and court findi

      • I stand corrected.
        • by PPH ( 736903 )

          What's going to be even funnier: The court overruled the original tax loophole. The legislature passes and Gov Brown signs a bill prohibiting levying of retroactive taxes. But the court has not yet spoken on this second piece of legislation. What if the court overturns it as well?

          Two things come to mind. IANAL, so bear (bare?) with me. The Constitutional prohibition against ex post facto laws is a restriction on the powers of Congress. Its not certain that the courts can't say that the law was one way, you

    • by atgaaa ( 1869296 )

      Can you please define "rich people"?

  • by Anonymous Coward

    What probably happened in both places is that businessfolks in IT, particularly entrepreneurs, don't have a lobbying presence in the state capitols like the old-line manufacturing and service business do. So when state government is hurting for cash, and they often are, they know they can't disappoint their friends who just wined and dined them in a skybox at the big game. By contrast, software and IT looks like a big cash cow, ripe for the plucking.

  • A few rich guys who don't want to pay their taxes get together to do something about them. They have the resources to lobby a bill almost full time for nine months. In the end, they get their bill passed but whine that democracy is broken because they had to work really, really hard at it.

    Must be nice. Some of us have day jobs.

    • Re: (Score:2, Insightful)

      by Gavagai80 ( 1275204 )
      This is all true -- but in this one case I'm okay with the rich people having their way because retroactive taxes create too much uncertainty, potentially preventing businesses from reinvesting their profits into new projects for fear of needing that money for unexpected retroactive tax.
    • I don't think that's fair. If the federal government retroactively increased your taxes, I'm pretty sure you'd be pissed too, and probably join / start a class action lawsuit to reverse it.

  • by Anonymous Coward

    are bullshit

  • Anybody who reads the actual story will realize that this is a fight with out-of-state companies, not with the state. They want to extract a bunch of money from California and will probably take this to the courts to try to get it.

    Basically California offered a tax break to in-state entrepreneurs that it did not offer to people who lived out-of-state. For some reason this was declared unconstitutional. The outside groups are now claiming that unless California charges the in-state people retroactively then

  • I compare this to the cable company: "You ordered basic cable and have been paying for it; we mistakenly enabled the super-deluxe package, so you owe us back charges." No. If the service was set up wrong, that's the service's error, not the customer's fault. If the state had a tax rule, and taxpayers were complying with the rules as specified, and then the rules turned out to be invalid, that is not the taxpayers' fault.

    My bigger problem with this kind of thing is that when government makes an error

In the realm of scientific observation, luck is granted only to those who are prepared. - Louis Pasteur