Only in California!

If that sounds like a declaration of war on entrepreneurs in the Golden State, you wouldn’t be far off as far as Brian Overstreet is concerned.

Overstreet is the tech entrepreneur widely credited with having broken the story on a holiday season decision by the California Franchise Tax Board (FTB) to retroactively rescind a tax program that had incentivized companies to stay and grow in the state. The FTB about face was driven by a court decision that said the tax incentive was inappropriately granted only to companies with 80% of their assets in California.

So, the FTB dumped the whole program retroactively back to 2008.

{mosads}“On December 27th of last year, I got an email from our law firm saying the Qualified Small Business tax incentive program had been retroactively canceled,” Overstreet recalls in the accompanying video. “I assumed our counsel was wrong because it just seemed insane. But the lawyers were correct, the state was retroactively canceling the program and we, along with thousands of other entrepreneurs and investors would now owe a lot more money in taxes.”

Overstreet continues: “I tried to make calls, but it was the holidays. I expected to hear anuproar after the first of the year, but there was silence. So, I started calling reporters I knew, and one of them asked me to submit a blog post on the situation”

That blog appeared in the widely read Xconomy news service and website, and lit a firestorm of media and business interest in the topic.  Among the outlets covering the year-end tax announcement: the San Diego Union Tribune, San Francisco Business Times, Reason, Xconomy (again), and major service firms such as Manatt Phelps and Deloitte.

“If you followed the law, did nothing wrong, and created jobs in California, you received a legal reduction in the state tax on capital gains you paid when you sold your company.” Overstreet explained to me. “Now, five years later, you get a bill for new taxes plus interest for up to five years.”

Here’s his story as he explained in his original blog:

In 1999, I co-founded Sagient Research Systems, an enterprise-focused data company in San Diego. Over the ensuing 13 years we tinkered, triumphed, failed, and even tempted bankruptcy. But through it all, we worked hard, we worked fairly, and we grew. Slowly, we evolved into a successful business employing nearly 40 people, all in California. In mid-2012, we sold Sagient Research in a transaction that was a good exit for everyone involved.

One of the very few benefits entrepreneurs and early-stage investors can look forward to in California is the partial state income tax exclusion on sales of stock of a Qualified Small Business (“QSB”). This exclusion incentivizes people to start businesses in California and to keep them here. As the law was written, founders and early investors in QSBs can exclude 50 percent of the taxable gain on the sale of their stock—meaning that they pay only half the regular California tax rate on the gain (about 4.5 percent instead of 9 percent).

 “Whether it is legally wrong, or politically wrong, the bottom line is that it is still wrong. It is a ridiculous, retroactive sucker punch from the state of California,” Overstreet says.

Only in California!

Hon. Phillip Bond is former Undersecretary of Commerce for Technology,
and former CEO of TechAmerica, an tech trade association. Today he is 
CEO of Petrizzo Bond, Inc. a technology and health care lobby firm
with offices in Washington and Silicon Valley.