Brian Overstreet is more familiar with starting a business than lobbying the Legislature, but a retroactive state tax bill has him crying foul and calling for relief.
Overstreet, 41, a Healdsburg business owner, has emerged as a leader in a statewide effort to stop California from presenting small business owners with retroactive tax bills totaling up to $150 million.
The entrepreneurs, some of whom expect to individually be billed for more than a half-million dollars in back taxes, maintain they already paid what they legally owed as long as five years ago.
Officials for the state Franchise Tax Board insist they had no choice but to seek the extra money from roughly 2,500 taxpayers.
The regulators settled on that path after an appellate court last year struck down parts of a law offering tax incentives linked to the creation of new businesses in California. After the defeat, tax officials maintained they must go as far back as allowed by the statute of limitations and collect the full amount owed without the disputed tax break.
The business owners respond that it's wrong for the state to adopt new rules after the fact. Doing so, they said, sends a chilling message to entrepreneurs thinking of starting a business in the Golden State.
"This is just patently unfair," said Overstreet, CEO and a majority owner of AdverseEvents, a health care information company based in Healdsburg.
Overstreet faces more than $100,000 in retroactive taxes and interest as a result of the decision.
The state Senate this week will hold its first hearing on legislation that would negate the extra taxes and eventually renew the tax incentive for people who start or invest in small businesses. Already 38 legislators from both parties have shown support by signing a letter calling on the state Franchise Tax Board to drop its efforts to collect the extra taxes.
Sen. Ted Lieu, D-Torrance, the author of the proposed law, said the tax board's approach could discourage new business in California because entrepreneurs may conclude they can't trust the state's tax law.
The appellate court decision, said Lieu, "doesn't mean the state should be able to go back retroactively for five years and penalize people for following the law."
Overstreet's political journey began in late December when his attorney sent out an update with a small item noting that the state planned to retroactively collect taxes from people who had claimed the Qualified Small Business Stock exemption.
The exemption allowed business owners to pay only half the normal rate of capital gains tax - or in some cases to defer taxes - on the sale of stock in qualified small businesses.
However, the state Court of Appeal last year struck down two criteria the state had used to exclude some investors from the tax break. In the case, Cutler v. Franchise Tax Board, the court ruled those criteria violated the commerce clause of the U.S. Constitution because they discouraged companies from expanding operations outside California.
In response, the Franchise Tax Board said it would retroactively deny the tax break for anyone who had claimed it all the way back to the 2008 tax year - the longest such period allowed by the statute of limitations. The state subsequently suggested that an average bill would amount to an extra $60,000.
Overstreet realized he had taken the same tax exemption last year due to the sale of Sagient Research, a company he helped found in 1999 in San Diego.
"Of course," he said, "I freaked out because I figured out exactly how much that was going to mean for me."
Early this year he wrote a blog post about the retroactive tax and had it published on the business information site Exconomy. Within days he was hearing from other entrepreneurs.
Eventually he teamed up with other affected owners to put together a coalition, California Business Defense.
"If somebody didn't take the lead on this," he said, "nothing was going to happen."
The group wants to revive the tax incentive for future investors and owners. Its leaders said the state needs to encourage business startups, pointing to an economist's report that such firms have created all the net job gains in California in the past few decades.
Even so, it is the retroactive tax that clearly animates the business people.
"I think that's the part that's really going to ruin trust in the state of California, said Jim Fowler, founder and CEO of the crowdsource business information site InfoArmy. "You can't do this to entrepreneurs. Entrepreneurs will stop coming here."
Fowler's accountant told him the retroactive tax will cost him $612,000, including $82,000 in accrued interest. It stems from the 2010 sale of Jigsaw, a San Mateo information company that was purchased for $175 million. Ten of the company's 150 employees made $1 million or more on the sale, Fowler said.
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