California: The Land of Double Taxation for Small Businesses

Just think: You run a business. Your partner embezzles from you and you are reeling – you feel like you’ve been punched in the gut. Next, California’s state government shows up and slaps you around. When you object, Sacramento offers no apology, no comfort. You’re on your own.

Farfetched? Read on to see what happened to a California Limited Liability Company (LLC) that tried to play by the rules.

First, an LLC is a form of business that permits the owner to avoid double taxation. In California, such companies must pay an annual minimum franchise tax of $800, which is the highest of any state (in 40 other states the fee is $100 or less) and may be subject to additional fees based on revenue.

An article by Mike Dazé in Bloomberg BNA – Corporate Close-Up: The Burden of California’s Taxes and Fees on Limited Liability Companies – points out that the State Board of Equalization “illustrates the challenges businesses face when trying to reduce their liability for taxes and fees in California. A company filing two-short period returns in tax year 2010 unsuccessfully protested the imposition of the minimum tax and LLC fee in each short period.”

In short, they objected to double taxation.

The company, Bay Area Gun Vault, LLC, converted from a two-member entity into a single-member LLC after one of the two members was caught embezzling money and was removed. So the company filed two short-period returns for 2010, one as a two-member LLC and the second as a single-member LLC.

In the first return, the company timely paid the annual tax of $800 and an extra LLC fee on profit. In the return for the second period, the company did not pay the LLC annual fee, but did pay the tax.

Despite two tax returns, the company clarified that the income was for the same business with the same tax ID number and assets and was operating in the same location. So the company should owe only $800 in tax and an LLC fee of $6,000.

But the removal of the embezzler caused a “technical termination” of the original LLC because 50 percent or more of the interests changed hands. Hence, the resulting single-member LLC was a “new entity for tax purposes” and owed the minimum tax and LLC fee during the same year.

Mr. Dazé wrote, “The logic of the company’s argument is appealing: LLC taxes and fees should not be imposed twice in the same year on the same business.”

The Board claims there is no statutory support for that position.

Well, if the Board is correct, why did legislators let an unfair law stand? Do Sacramento lawmakers use no foresight in determining whether technical provisions in business-oriented laws might cause future injury?

Actually, I know the answer to my own questions. Here is why the legislature doesn’t care how its actions harm the business community:

  • First, the Franchise Tax Board (California’s version of the Internal Revenue Service) has projected revenue from LLC taxes and fees to be $753 million in fiscal year 2014-2015. Sacramento wants to collect every single penny of that revenue.
  • Next, California’s legislature is packed with people who will use taxpayer funds to support the latest half-baked ideas. But they routinely turn a deaf ear to requests from the business community for fair taxation and regulatory policies.
  • Finally, most Sacramento politicians are clueless about what it takes to run a business.

To amplify on that last point – only “18 percent of the Democrats who control both houses of California’s full-time legislature worked in business, farming or medicine before being elected,” wrote former California Assemblyman Chuck DeVore. “The remainder drew paychecks from government, worked as community organizers, or were attorneys.”

In business-friendly Texas, “Democrats are more than twice as likely as their California counterparts to claim private-sector experience outside the field of law,” continued DeVore, and “75 percent of the Republicans earn a living in business, farming, or medicine….” All of that can be found in his book, The Texas Model: Prosperity in the Lone Star State and Lessons for America.

The analysis was for a couple of years ago, but the makeup of both legislatures remains virtually the same.

California is replete with demands for “environmental justice,” “social justice,” “income justice,” “sexual justice,” “workplace justice” – oh, the list goes on and on. What California needs more of is “entrepreneurial Justice,” “business justice” and “tax justice.”

Gov. Jerry Brown and legislative leaders should reverse tax-confiscatory policies and refund overpayments to that LLC and others in similar positons. If not, California will perpetuate its mean-spiritedness towards corporations – even the one-person kind.

The Irvine-based Principal of Spectrum Location Solutions helps companies plan and select ideal sites for new facilities across the U.S. and internationally.

This article was originally published at Fox and Hounds Daily

VIDEO: Jim Lacy on the Obama administration picking winners and losers in business

ACU Board Member Jim Lacy appeared on Fox Business Network’s Stuart Varney Show on 8/15 to discuss the problems of government “picking and choosing winners and losers” in business in the case of California’s incentive offer to exempt Tesla from environmental regulations – but not the rest of the businesses in the state.

Wynn: ‘Frightened to Death’ for Future of U.S. Business

AT&T, T-Mobile USA Merger Means Jobs

From CA Majority Report:

California’s dismal economic outlook has squelched many job opportunities, including those that would allow employees to organize and demand better conditions. With the jobless rate hovering somewhere around 12% since 2009, one of the highest in the country, nearly two million Californians are looking for work, but are unable to find jobs. On the street, most visibly in the Occupy Wall Street movement, you can sense the frustration.

Californians are impatient with the state of the economy – and afraid that the future may not bring better circumstances.

During the worst economic downturn in a generation, it’s our job to make sure no opportunity to create new jobs and protect existing jobs is left on the table.

(Read Full Article)

Oakland business owners fear they won’t recover

From SF Chronicle:

Kevin Best and Misty Rasche remember when they had waiting lists for a Friday reservation at their bistro in the historic Old Oakland business district.

That was in 2007, before the recession hit and a series of angry protests that would come to define downtown Oakland.

Most recently, business at their B Restaurant & Bar has been harmed further since Occupy Oakland tents went up at City Hall on Oct. 10. Best and Rasche worry that the collateral damage from the protest may be the final blow for their restaurant.

(Read Full Article)

California is becoming ‘post-industrial hell,’ economist says

From California Watch:

Since the recession began, times have been tough in California – everybody knows it. The economy is in a protracted stall.

But it took economists at California Lutheran University’s Center for Economic Research and Forecasting to describe, in hyperbolic language, the depth of the problems that have beset the Golden State since the stock market started to tank in the summer of ’08.

“California,” writes center director Bill Watkins, “is fast becoming a post-industrial hell.”

That’s true “for almost everyone except the gentry class, their best servants and the public sector,” he writes.

(Read Full Article)

McDonald’s CEO: cut taxes to create jobs in America

From The Hill:

McDonald’s Corporation President and CEO Jim Skinner says for things to turn around in the American economy, spending and taxes must be curbed, especially towards business. Jeff Randall writes in the Telegraph on his upcoming interview with Skinner on Sky News Jeff Randall Live:

“‘The question is, how can we get the ox out of the ditch?’ Mr Skinner said. ‘In order to create jobs in America, you’re going to have to cut taxes… particularly in the business community.

‘We pay some of the highest [corporate] taxes around the world. There needs to be some leveling.’

Asked about federal borrowing, he said: ‘It’s not a good story… the government has to spend less. We have to grow the economy, grow GDP… and you have to be able to do it in an organic way and not through borrowings and increasing debt.’”

McDonald’s third-quarter profit gained 8.6 percent, but Skinner has said that the economic environment is still fragile.  ”We are officially out of the recession, but it hardly feels that way,” said Skinner on October 21 in a call with analysts. “Consumers everywhere continue to be cautious and hesitant to spend.”

(Read Full Article)

A tale of two states: California and Wisconsin

Governor Scott Walker took office in Wisconsin on January 2, 2011. He declared Wisconsin “open for business” and initiated numerous business friendly reforms. He was immediately labeled Public Enemy #1. TV screens showed massive labor protests and the Capitol was occupied. Posters of Walker with a Hitler mustache popped up and frightening headlines were everywhere. A Huffington post article by Steven Cohen, Executive Director, Columbia University’s Earth Institute stated, “Governor Scott Walker is attempting to destroy public sector unions in Wisconsin”.

Fast-forward to August 3, 2011 –seven months into Walker’s term. The protesters and signs have disappeared. The headlines have changed. “Wisconsin has added 39,300 private-sector jobs since Governor Walker declared Wisconsin open for business,” said Scott Baumbach, Department of Workforce Development Secretary. Wisconsin has 7.6% unemployment, far below the national average. Wisconsin’s total private sector job growth of 1.7% has been almost twice the national rate.

Compare that to California. Governor Jerry Brown also took office on January 3, 2011. In January, there were 2,246,073 Californians out of work (12.4%). According to the Economic Development Department, 2,183,100 Californians remain out of work (12.1%). Underemployment and those who have given up make the figures much worse. There are no pictures of Brown with Hitler’s mustache. There are no scary headlines of Brown destroying the public sector, nor protestors occupying his Capitol. That is because Brown is seen as an agent of the public employee unions that dominate California politics.

Business is less enthusiastic about Governor Brown. Chief Executive Magazine ranks California as the worst place to do business for seven years. “California, once a business friendly state, continues to conduct a war on its own economy,” the magazine reported. Companies are “disinvesting” in California at a rate five times greater than just two years ago, said Joseph Vranich, a business relocation expert based in Irvine.

In response to announcements that PAYPAL and CARL’S JR. would take their businesses and employees elsewhere, Lt, Governor Gavin Newsome has set out to alter the “perception” that California is anti-business. Lorraine Yapps Cohen, a San Diego Conservative Examiner, responded, “Oh, this is priceless! In hopes that he would get the message that the state of California overtaxes, overburdens, over-

regulates, and overwhelms business, we discover that it is the “perception” of those maladies that need to be changed.  Not the maladies themselves!”

Will California awaken from its slumber and recognize what other states like Wisconsin have learned, or will the Golden State continue its inexorable slide to a future of never ending financial crisis like Greece and Portugal?

 

Robert J Cristiano PhD is the Real Estate Professional in Residence at Chapman University in Orange, CA, Senior Fellow at The Pacific Research Institute and President of the international investment firm, L88 Investments LLC. He has been a successful real estate developer in Newport Beach California for thirty years.