California Delays Collecting ‘Surreal’ Back Taxes

Photograph by Matthew Micah Wright/Getty Images

Last month, my colleague John Tozzi highlighted a Los Angeles Times story about outrage over California’s decision to seek more than $120 million in back taxes from those who profited from selling stakes in small companies from 2008 to 2011. The levies in question, which arose after an appeals court ruling overturned a 20-year-old tax incentive, had small business owners describing a “surreal situation” in which they were being punished despite following the letter of the law.

Now, affected small business owners and investors are singing a sweeter tune, after tax collectors said they would delay sending tax bills while the state legislature seeks to resolve the matter.

The tax break, known as the Qualified Small Business Stock Incentive, halved the capital gains tax on the sale of shares in businesses with less than $50 million in gross assets and at least 80 percent of payroll costs and assets located within the state—an incentive which largely benefited high-tech entrepreneurs, according to the Silicon Valley Business Journal. But a California appeals court in August struck down the law on the grounds that it interfered with interstate commerce, and the state’s Franchise Tax Board prepared to retroactively collect savings accrued under the overturned law.

The FTB was thought to be preparing to send out tax bills, or notices of proposed assessments, ahead of April 15, when the state’s ability to go after revenue from the 2008 tax year expired. Last week, however, the FTB announced on its website that it would hold off on sending tax bills to parties that sign a waiver extending the statute of limitations.

“With the waivers in place and no NPAs mailed, no one will actually owe any money and there are no collection or appeal actions needed,” Brian Overstreet, a software entrepreneur who’s leading a business group founded to fight the tax ruling, wrote in a recent e-mail. “This saves us all the time, money, and stress of having to deal with catastrophic, retroactive tax bills hanging over our heads while we try to work with our partners to craft a solution.”

Which isn’t to say the problem is solved. Until the state government finds a permanent solution, small business owners and investors are “still very much on the hook,” Overstreet wrote—and one legislative impasse from becoming outraged again.

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