California is in competition with other states. We want the smartest children to come to our colleges. We would like people to buy our oranges rather than Florida's. And we are rightfully proud of Silicon Valley's reputation, Hollywood's entertainment value and our beautiful national parks.
In 1993 California legislators created a tax break to keep California wealth and California business people in the state. It is a capital gains tax break and it has recently been ruled illegal by a state appeals court.
The tax break worked by exempting California small business owners from capital gains tax when a business is sold, as long as the gains are plowed back into another small business of which 80 percent of the property or the business was in California.
The law was challenged by an Orange County man who sold stock in an Internet start-up business (for $2.3 million) and invested it in several other small businesses. He claimed the tax break on his taxes but the Franchise Tax Board did not let the man defer his taxes. The man paid his taxes, penalties and interest in 20007 but sued for a refund. The lawsuit for his refund is the lawsuit which determined that the California capital gains tax break is illegal.
There are other similar "stay in our state" tax breaks that have also been declared illegal by other courts in other states.
Tax laws are always subject to change by either the state or federal government or through case law. If you are in doubt about a tax issue, it is a wise idea to consult with a legal tax professional that is up-to-date on such matters.
Source: SFGate, "California tax break ruled illegal, Bob Egelko, Aug. 29, 2012
At our San Francisco Bay law office, we represent clients with tax issues including tax law changes, tax litigation and capital gains tax issues.