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Common Sense, Fairness and California's Retroactive Tax on Entrepreneurs

Mike Kemp | Rubberball | Getty Images

$250,000. Plus interest.

That's how much I suddenly owe the state of California in retroactive tax.

In 2012, I sold my company Sagient Research. At that time, I qualified for a 50 percent tax exclusion through California's Qualified Small Business ("QSB") incentive.

Established in 1993, the QSB program encouraged small-business owners to start, grow, and, most importantly, keep their businesses in the state. Then in August 2012, the California appellate court ruled one of the QSB's provisions unconstitutional. The Franchise Tax Board responded in December by cancelling the incentive and revoking it retroactively back to 2008.

Suddenly, 2,500 California start-up founders were on the hook for more than $120 million in taxes, plus interest.

In January, I wrote about this issue on the website Xconomy. It incited a whirlwind of activity as the story gathered state-wide traction and national attention. Other affected small-business owners contacted me, and we collectively formed a coalition to fight this unfair, retroactive tax.

Coalition: California Business Defense

Since February, our coalition, the California Business Defense, has accomplished much. The FTB agreed to delay collection pending legislation, and we've worked with legislators on both sides of the aisle to craft a lasting fix. Senator Ted Lieu (D-Torrance) and Assembly members Jeff Gorrell (R-Ventura) and Bob Wieckowski (D-Fremont) spearheaded a package of bills (SB 209, AB 901, and AB1203), which would nullify the retroactive tax and provide a framework to reinstate this critical business incentive.

I was honored to stand beside Senator Lieu and Assembly members Gorrell and Wieckowski, when they publicly announced their efforts on April 30 and to testify before two Senate committees in support of SB 209. We won our first committee vote 6-1. But that victory is only the first step in a long, arduous process, and our success is not guaranteed.

The Senate Appropriations committee is scheduled to vote on SB 209 this Thursday.

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As weeks drag into months, I've reflected on how I got here and what compels me to fight.

The easy answer is that I have a lot of money at stake. But the scope of this issue overshadows my personal pocketbook. In fact, 2,500 entrepreneurs have a lot of money at stake, yet only a fraction of us have taken action. Some are apathetic, some are afraid to voice their opposition publicly, and some are simply fed up and plan to leave.

California's Entrepreneur Migration

But rather than run and hide, I am compelled to fight for California. I am a product of my state, and I feel a responsibility to preserve its status. California must remain a leading center of entrepreneurship for the next generation of business owners. Unfortunately, our position as the epicenter of enterprise, creativity, and new business development has declined during the last decade.

California's increasingly difficult regulatory environment coupled with the emergence of alternative tech centers such as Austin, New York, Denver (plus many more internationally) has eroded our monopoly. California once attracted and retained top notch entrepreneurs and fostered the companies they created. But now, more than ever before, talent and capital are transportable. People no longer need to live or work in California to benefit from an exciting entrepreneurial community or to attract investment capital. The migration out of California has already started. But Sacramento remains strangely unaware or unwilling to stop it.

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'The Last Straw'

I am also compelled to fight for something bigger: a return to a political process formulated on the basic tenets of common sense and fairness. The series of actions and decisions that led to California's retroactive tax on entrepreneurs is emblematic of a system devoid of both. For me, it is the last straw.

I'm not smart enough to know how we got to the point where only the loudest and most extreme voices are heard in our political process. But I know it's time for a change. I'm tired of Red State vs. Blue State and the artificial, polarizing, and binary world view perpetuated by the cable news channels.

As a recipient of an unfair, punitive, 5-year retroactive tax, it would be easy for me to cry foul, point fingers, and claim to be a victim of a massive systemic conspiracy. But that would only serve to perpetuate everything that is wrong in our country today. Instead, I hope to find the means to use this insanity to pull those of us that inhabit the political middle ground—call us the silent super majority—back into the process.

Maybe I'm naïve. Maybe I'm crazy. But I do know our history and it wouldn't be the first time that an ill-conceived tax sparked major changes in this country.

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Brian Overstreet is president of AdverseEvents, a health-care information company in Healdsburg, Calif., and founder of the California Business Defense coalition.

Follow him on Twitter @BrianOverstreet.

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