IPOs Bring Tax Jackpot for California; Can Lawmakers Resist?
nytimes.com
nytimes.com
I have many friends that work in late stage startups who are planning to move to secondary offices in Seattle or Austin just to escape an eventual California taxation once they can convert their options because of an IPO or an acquisition.
This by itself it's not a big problem, but California is so damn expensive that it starts looking pretty unattractive to future prospective entrepreneurs that can opt for other less expensive states to run their business.
California non-resident taxes seem to be quite aggressive. Any income from "California sources" for non-residents is considered taxable, but "California sources" includes any income made while you're physically in California. So if you are a salaried employee and vacation in California and work in a coffee shop for a few hours, or if you go to a conference in California and don't take vacation days, you're technically supposed to file California taxes and pay for any income on those days, at least as I understand it. Yet I know many coworkers who have gone to conferences for a full week in California and not known about this at all, and definitely never filed or paid California state income tax. And they have never been informed of this, let alone gotten fined or served prison time or otherwise been punished in any way.
The apparent impossibility of enforcement makes me think that any non-residents paying California taxes who aren't uber rich enough to attract the attention of journalists are just fools. Or am I just misunderstanding the policy?
Merely attending a conference is generally not "CA work" whether or not you take vacation days. If the CA FTB were to even think of deciding as such the Legislature would smack them down immediately because a silly rule like that would devastate CA's convention tourism industry. However, presenting at a conference is work.
Working in CA remotely while on vacation is technically CA source income, but unless your employer or you report it, CA has no way of knowing.
In many situations, there's also thresholds that have to be hit for CA taxation to apply.
Are you sure? A quote from the CA FTB website [1]:
> A nonresident’s income from California sources includes income from a business, trade, or profession carried on in California. If the nonresident’s business, trade, or profession is carried on both within and outside California and the part outside California is separate and distinct from the part within California, only income from the part conducted within California is California source income.
If you're a salaried employee and you're attending a conference in California and being paid for those days when you're attending, why wouldn't that be considered California source income?
> However, presenting at a conference is work.
You mean if you are getting paid for said presentation? I agree that that one is 100% clearly taxable by California and would probably have been reported to the FTB by the conference organizers. I'm talking about situations where you don't make any additional income beyond your normal salary paid by your employer. If you meant salary received during unpaid presentations too, I'm curious what you think would differentiate that from merely attending the conference for work.
[1] https://www.ftb.ca.gov/individuals/fileRtn/Nonresidents-Part...
If you're in doubt you can just call the FTB. Despite what others are saying in these comments, they are actually quite responsive and helpful.
Right, I'm talking about professional conferences related to one's work, otherwise presumably you'd be taking vacation days to attend them.
And what defines "work" if it's not whatever I'm getting paid for? Like, if I spent a work day sitting on my ass eating snacks and watching YouTube, that's definitely not "work" in the colloquial sense, but I doubt FTB would be happy if I tried to avoid paying taxes on my salary for that day because I wasn't "working". I'd think going to a conference is a far clearer cut case in the "work" column than that.
I don't have the bandwidth to try and explain why attending a professional conference as a non-presenter isn't work but sitting all day watching Youtube at your office is for out-of-state tax purposes.
I will say this: of the literally hundreds of millions of people that have attended professional conferences in CA as non-presenters, the CA FTB has never tried to tax them. If that's not sufficient evidence for you to accept what I'm saying, nothing is short of you hiring a tax lawyer to explain it to you in detail.
I don't think your statement paints a full accurate description of the situation though. They don't tax on you on capital gains that happen once you become a resident of a different state. So even though you have to pay the AMT for the vested - exercised options, you don't have to pay taxes to California at the time of selling your shares (this is, in theory, the only thing that really matters because it's the event that allows you to convert your shares into cash).
I might be wrong, so for anyone curious just read the document linked above.
Ordinary income tax is due at exercise of a non qualified option (NQSO), which CA will tax.
Same is true with RSU releases.
At a certain point that stops being feasible if the cost of living keeps increasing and additionally you're taxed at the highest rates.
Also from an economic perspective, people will move close to where the jobs are. You hear a lot about startups hiring in the Bay Area but almost never hear the big incumbent businesses expanding there. Quite the opposite.
As with any macro-economic trend, it would pass years until you see the effects of these things, but I do believe that this doesn't play well for California's economy in the long-term.
Fortunately for California, there is more than Bay Area, so it's also possible that this is just a phenomenon applicable to the economic behavior and impact of the tech industry and tech employees.
shehasapoint
Until I saw it in action (2001, 2008) I hadn't realized that a tax regime could meaningfully be too progressive. But this statistic quoted in the article results in a tax receipts whipsaw in hard times. If you have a lot of money and your income declines dramatically for a couple of years you don't need to lose sleep over it -- it'll come back and meanwhile you can live of your assets. The same doesn't apply to entities that need to live off their tax receipts: such a time calls for increased spending just when the money isn't coming in.
My point here, what's the practical impact of this number? It's a scary number that's thrown out a lot, but is this number going to break the budget, or will pension spending as a fraction of the total budget be fairly stable?
How much of it will actually be spent on stuff? How much of it will be spent in court fighting people over nothing in order to do things?
Changing that would be very important, but it's a political will issue, not a money issue. SB50 would be a decent first reform.
The more tax-friendly stance of tech wealth means that tech money funds much of the state, while those who hoard land reap many unearned profits from rent seeking and increased property values, which directly pushes our so many of those with lower incomes.
Meanwhile the general attitude of the state is that tech is the source of the problems, rather than the conservatives who are unwilling to share their neighborhoods with new residents. It's quite an upside down view of the world.
What it actually is, is a tax cut for businesses (they don’t generally sell property, and so don’t ever pay tax on the actual property value), and land owners who rent/lease out property (because they can increase revenue in line with market value, while only paying taxes on increasingly far from market value properties). Given property taxes are generally used to fund a lot of public services (police, fire, schools, roads, etc) and a lot of those have costs determined by market value of property (eg cost of rent/mortgage is a significant determining factor for income), you end up necessarily pushing those costs on to individual tax payers. Businesses can easily incorporate out of state and so choose yet another cheap tax rate, pushing all of the costs into individuals.
Prop 13 must be revoked.
It might be easier, politically, to add carve-outs.
Not your primary residence? Assessed value rises with CPI. Renting it out? Assessed value increases capped to e.g. 5% per year. Businesses with more than X in revenues or Y in employees? No price protection. Home value more than Z? No price protection. Et cetera.
You'd need a CPA to figure out your annual property tax, and the exemptions would make tax evasion much easier.
If you own a a second residence, are a landlord, are a large business or own an ultra-high value home, you probably need a CPA (or would be fine with this level of mechanical complexity).
Yes, complexity makes evasion easier. But that still beats the status quo where everyone is underpaying. Given how concentrated homeownership is in California, at least by value, it wouldn't be difficult to prioritise prosecution to yield a good bang for buck.