California: The Land of Double Taxation for Small Businesses

November 26, 2014 By Joseph Vranich 3 Comments

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.

By  

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

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Another Shakedown ADA Lawsuit Against a CA Business Shows the Need for Reform

November 12, 2014 By Tom Scott 4 Comments

Just ask small businessman Jerry Brannon in Stockton.  He recently got sued by Scott Johnson for $38,000 for non-compliance with the Americans With Disability Act. However, instead of settling, Mr. Brannon has decided to fight. He plans to spend up to $50,000 fighting this lawsuit.

According to a television news report, “Scott Johnson has made legal claims against many business owners in the Sacramento area, claiming he’s suffered because his disability won’t allow him to fully access their stores and restaurants.”

Brannon said Johnson has “taken the ADA and made a business out of it.”

According to the news report, Johnson has been linked to thousands of lawsuits. 

I applaud Mr. Brannon on multiple fronts. This is not going to stop until the federal and state governments seriously pass legislation to stop these forms of lawsuit abuse. In 2008, the California State Legislature attempted to deal with the issue with SB 1608, which did not have the desired outcome. In 2012, the California State Legislature again attempted to find a way to stop the abuse with SB 1186 and this has also failed to stem the tide of abuse. The federal government has had a couple of bills related to ADA shakedowns lawsuits, but they have never been passed.

So here we are in 2014 and the lawsuits keep rolling. From Lake Tahoe to the Central Valley, we continue to see ADA lawsuits against small businesses, and there appears to be no end in sight. Interesting fact: there are more than 3.5 million small businesses in the state of California but only 500 Certified Access Specialists. How is every small business supposed to stay up to date when there aren’t enough access specialists?

When a business has to close due to an ADA shakedown lawsuit, no one benefits. Employees lose their jobs and governments lose revenue from employment property taxes. Who benefits from that scenario? Not even the disabled will benefit as everyone will simply have to travel further for those services.

I know there will be ADA legislation in California in the coming year and I am hopeful that with the changes in the U.S. Senate reform may be easier to pass in Washington. We, as a nation, need something to happen to help curb this abuse. It would behoove our legislators to find a reasonable compromise. A 120-day corrective action period at the state and federal level would stop these predators in their tracks. Let’s do it. Enough rearranging of deck chairs – let’s find a real solution.

Tom Scott is Executive Director, California Citizens Against Lawsuit Abuse

This piece was originally published on Fox and Hounds Daily

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Michelle Steel’s Chance

October 23, 2014 By Tyler Warman 2 Comments

After the 2012 presidential election, politicians, pundits and pollsters were obsessing over the staggering 71 percent of the Hispanic vote that President Obama received. What many ignored was the fact that there was an even more incredible figure about a racial group that had, until recently, voted Republican. That group is Asian Americans, giving Obama 73 percent of their vote on Election Day.

In Orange County, Republicans are trying to change that. One of those Republicans trying to change this status quo is Michelle Steel, currently the highest-ranking Republican constitutional officer in California and candidate for Orange County’s Second Supervisorial District.

Born in South Korea, Steel came to the United States and received degrees from Pepperdine and USC. While studying at Pepperdine, she met Shawn Steel while taking tennis lessons at the Ambassador Hotel. He noticed her because “she looked like she could really hit that ball and slam it well.” Soon after that first encounter at the tennis courts, they started dating.  Her now-husband, Shawn Steel is a former Chairman of the California Republican Party and currently serves as California’s Republican National Committeeman. Married in 1981, they settled in Palos Verdes and, then, Orange County with their two children, Cheyenne and Siobhan.

While in college, Steel worked at her mother’s clothing store. She had to support her mother, who didn’t speak English. And because her parents were hard-working small business owners, Steel has “always been about family values, smaller government and not accepting government handouts. I’m a first generation immigrant, and as a first generation immigrant, I had to be a Republican.” These conservative values would be put into great effect as CA government policies often attempt to abuse small business owners.

Steel’s mother encountered these abusive policies and regulations when she owned her clothing shop. The Board of Equalization accused her of cheating the state out of her taxes, and knowing that it would be impossible for her to fight the government and win, Steel explained, “My mom paid the taxes she didn’t owe, along with the penalty and interest on top of it.” Seeing this direct abuse by the government, Steel became actively interested in politics. “I can’t just sit at home and be a housewife. I wanted to be a bridge” between the people and their representatives in government.

At first, Shawn tried to keep her from going into politics, attempting to protect her. But he could not hold back her desire to help small business owners and implement the conservative values her experiences have instilled in her.

Her first political position was an appointment by then-mayor of Los Angeles, Richard Riordan, to the Los Angeles Fire Commission. And in the years following, she secured positions on multiple national boards including the President’s Advisory Commission on Asian Americans and Pacific Islanders.

After she was elected to the Board of Equalization, which is the state agency in charge of taxation, she saved California taxpayers $42 million in 2007 alone. Last year, she returned over $200 million back to the taxpayers through her efforts at BOE. Representing more than 8 million people — a quarter of California’s population — she has stood in defense of the taxpayer when it comes to pocketbook issues and has tried to save the people of California from abusive taxation by the government. Her experience on the BOE would be a worthy asset to her as supervisor because, as Steel points out, she “works with taxpayers. I work with them individually. Looking at the budget, I know how to save.”

This contrasts with her opponent, Assemblyman Allan Mansoor, who Steel claims “has always been about public offices and never really worked in the private sector.” Because of her prior experience, Steel knows “how the private sector is trying to survive” under the weight of California’s massive amount of taxes and regulation. Assemblyman Mansoor, who has held elective office for the past 12 years, “was the one who raised taxes” on his fellow Californians according to Steel.

As the country’s highest-ranking Korean American elected official and the highest-ranking Republican woman in California, Steel knows how to reach out to both women and minorities, two groups with which Republicans need to make serious inroads. “The Republican Party is changing. We need to learn how to relay our message because we are not really good at that,” as exhibited in recent elections. Her endorsements from countless Republican officials, conservative organizations, and community leaders demonstrate the confidence people have in her and what she is capable of accomplishing for her constituents.

Steel’s life story, her conservative beliefs, and her appeal to both women and minorities represent a bright light in, what could be, a fading future for the Republican Party. Hopefully, voters will see that and elect Michelle Steel, the taxpayer’s advocate, as Orange County Supervisor.

Tyler Warman is a junior attending Hillsdale College, where he studies politics and classical education. Tyler can be reached at twarman@hillsdale.edu.

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Jerry Brown hating on small businesses

August 3, 2011 By Michael Levin Leave a Comment

Jerry Brown hates me.

Hates me.

We’ve never met.  It’s not like I ever caused him any personal harm or grief.  It’s not like I hit on Linda Ronstadt or anything.

But the guy just hates my guts.  I think he wants to destroy me.

I’m not paranoid.

I’m just a California business owner.

On some level, Jerry Brown must hate all of us.

I call it payroll envy.  It’s the feeling that people who have spent most if not all of their lives in government have about people who actually start a business, work really hard, hire people, and meet a payroll every two months.

People in government feel as though they’re missing out on that experience, which I consider one of the most important life experiences an individual can have.

It’s not just that we business owners get to create our own destiny, make all the money we can, and bring about wonderful lives for ourselves, those we love, our employees and their families, our communities, and the charitable organizations we support.

It’s the sense of building something.

It’s the sense of creating something that actually serves people and makes money at the same time.

This isn’t to say that government has never done anything for the people.  If it weren’t for our government, we wouldn’t have a military, although why we are busily defending borders thousands of miles from our nation instead of eighty miles from my home in Orange County is a mystery to me.

If it weren’t for government, we wouldn’t have freeways, although when you look at the state they’re in, you start to wonder whether government is the best guarantor of our nation’s infrastructure.

If it weren’t for state government, we wouldn’t have the UC system, perhaps the finest public education system ever created in the history of man.

What’s wrong with a little California-style hyperbole?  Anyway, it’s probably true.  The problem is that when government exceeds its responsibilities to protect us, help us get from point A to point B in our cars, and educate our kids effectively, it gets into trouble.

Pretty much every single time.

It rewards people who do not deserve to be rewarded, like teachers who are not dedicated to teaching, unions that are more interested in protecting pensions than serving the state, and all of the other shenanigans that we know all too well.  When government lacks sufficient resources to take care of its own citizens and yet opens its borders, its schools, its hospitals, and other expensive and vital resources to anyone old enough to break into the country, something’s wrong.

That’s why I think Jerry Brown must hate me.  All I’m doing is running a business, meeting a payroll, and wondering what obstacle government will throw up in my path next.

Governor Brown has lived in a state where Hollywood is located, so maybe he’s been influenced too much by what he sees on TV and at the movies.  The number one villain, year in year out, on the small screen and the big screen, isn’t terrorists, or foreign agents, or any other murderous bad guys.

It’s business people.

Hollywood loves, loves, loves to make movies and TV shows about larcenous business owners, thieving corporate executives, and greedy Wall Street types.

Of course there is excess and chicanery in the business world.  We live in the real world, and in the real world, sometimes people do bad things.

But business can’t be all bad.  The governor, and the legislators in Sacramento, like the cars they drive (or are driven in), the five-star hotels where they stay, the expensive restaurants where they dine, the movies they view, the basketball games they attend from luxury of their business-related donors all these goods and services are the products of businesses, and most all of this happens on our dime as taxpayers.

The point is that you can take all the potshots you want at business, but at the end of the day, Governor, you need us.  You need us to create things.  You need us to create jobs.  You need us to create tax revenue.

And we’re not stupid.  We can read balance sheets—both ours and yours.  Don’t tell us that the California budget is so complicated that only a few people can understand it and that we taxpayers are too dumb to figure it out.  We know when you are spending more than you’re taking in.  We know when you’re pandering to the unions, to illegals, and to other shortsighted special interest groups that are more interested in the question of “Where is mine?” than the question of “What’s right?”

Governor Brown, stop hating me just because I own a business and I make a payroll.

And if you’re going to tell me that you don’t hate me, that’s terrific.  But let your actions demonstrate that you’re not trying to choke business owners like me.

Without us, there won’t be any tax revenues for you to distribute to your friends and supporters.

And unlike your friend in Washington, you can’t just print more money to solve your problem.

Governor Brown, you don’t have to love me.  All I ask is that you leave me alone.

(New York Times bestselling author Michael Levin runs BusinessGhost.com, which provides books for business owners to distinguish themselves in their crowded marketplaces.)

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