Tax Revolt by California Entrepreneurs Ends in Victory

A Small Victory for Lower Taxes

(Xconomy)  -  Taxes aren’t usually the stuff of high drama. But a story that began last year when a California state appeals court unexpectedly struck down an old tax incentive for small-business investors—and that unfolded, in part, here in the pages of Xconomy—has, after numerous twists and turns, reached its end.

On Friday California Governor Jerry Brown signed a bill quashing the state tax board’s move to levy up to $120 million in back taxes and penalties on entrepreneurs who’d taken advantage of the investment incentive in past tax years.

“The sense of relief is indescribable,” Brian Overstreet, co-founder of a group lobbying for the bill, said in a statement released Sunday. Members of Overstreet’s group, California Business Defense, spent much of 2013 in Sacramento, meeting with lawmakers to find a way to undo the Franchise Tax Board’s plan. “We thank the Governor for reassuring the state’s innovators and risk-takers that California is still the place where the companies of tomorrow should be built,” Overstreet said.

In a commentary published today on Xconomy, Overstreet says Governor Brown’s office called him at 1:15 pm on Friday to tell him Brown had signed Assembly Bill 1412, a bill hastily carved together to reverse the tax board’s plan after lawmakers introduced amendments that watered down a similar measure, Senate Bill 209. Brown had to choose which of the two bills to sign; in the end, he endorsed the one providing full relief.

In the commentary, Overstreet shares the behind-the-scenes story of the lobbying efforts leading up to the signing. “In short, we succeeded by doing what we do best: being entrepreneurial,” Overstreet writes.

California Business Defense organized a coalition of entrepreneurs, friendly lawmakers, and attorneys familiar with the ways of Sacramento, then approached the effort to reverse the tax ruling as a sales campaign, Overstreet says. “In countless trips to Sacramento, we met with over 50 legislators and other government officials. In each meeting, we identified the problem, presented our solution, elicited feedback, and overcame objections.”

It was Overstreet who first brought the retroactive tax plan to widespread notice, in an op-ed published on Xconomy on Jan. 15.

After selling his previous business in 2012, Overstreet had noticed a little-publicized announcement from the Franchise Tax Board, the state’s equivalent of the IRS. In a lawsuit decided last August, a state appeals court had ruled unconstitutional a portion of the state tax code that allowed investors selling stock in California-based small businesses such as startups to exclude 50 percent of their gains when computing their taxable income.

The tax board’s interpretation of the ruling was that taxpayers who claimed the benefit would have to pay taxes on the formerly excluded income, retroactive to 2008. (Xconomy detailed the complex history of the tax board’s move in a Jan. 24 news analysis.)

That meant entrepreneurs and other investors who had sold their interest in small businesses in the state would soon get bills totaling an estimated $120 million. The tax board refused to revise its ruling, but said in February that it would delay collection of the back taxes, giving California Business Defense time to seek a legislative solution.

Read more at:  Xconomy.com