Nevada Business Law Blog Launch

Introducing our Nevada Business Law Blog, launched today. The first post concerns Nevada's new single-member LLC law, and may be of interest to California residents and businesses, as well as Nevadans.

The blawg can be found at www.NVBizLawBlog.com

California companies continue to flee state over taxes, regulatory environment

CNN ran another article on businesses leaving California for more favorable tax and regulatory climates. Lieutenant Governor Gavin Newsom is promising an economic development plan soon, but the bad news for most of my clients and for the state's economic prospects is that they are unlikely to be assisted by it, in that it appears it wiltarget only specific industries and even then likely primarily larger and more politically connected companies:

Newsom's plan will focus on California's premier industries, including biotechnology, agriculture and digital media. It will highlight the state's strengths in innovation and research and cultivate more manufacturing and exports. It also will examine how to address executives' concerns about regulation, taxes and layers of bureaucracy.

See also:

Amazon sales tax battle centers on jobs, LA Times, July 12, 2011

CEOs rank California 51st in the nation

California scheming

August 2011 Update: Lt. Governor Newsom released his short-on-specifics economic agenda for California, to a mixed response on July 29, 2011.

California Tax Burden Among Worst in Nation

According to an article published last year, California ranks among the worst of the states in terms of its tax burdens on businesses and individual residents. The article points to last year's election results in which California voters approved additional taxes, as adding to the state's already high tax burden:

California may be back on its way to becoming Taxifornia – and that's before voters give their verdicts on Propositions 86 (cigarette tax), 87 (oil tax), 88 (property tax) and 89 (corporation tax). California was rated as having the 45th-worst tax climate among the 50 states in 2007, down from 42nd in 2005, according to the Tax Foundation's State Business Tax Climate Index, released this week.

The index measures five tax rates: corporate, individual income, sales, unemployment and property. The best states are, in order, Wyoming, South Dakota, Alaska, Nevada and Florida. After California, the worst states are Vermont, New York, New Jersey, Ohio and, worst of the worst: Rhode Island.

Curtis S. Dubay, an economist at the foundation and co-author of the report, told us that California's drop in the listings was not major, down just three spots, and was due to slight improvements in other states more than any worsening in California, where tax rates pretty much held steady the past year, except for the passing of some local school bonds. "It's possible to drop in the rankings just by standing still," he said. "The states tightly clump up at the bottom of the rankings. So any small change could make a difference."

The bottom line is that California's ranking was low, and remains low. Most jolting for Californians should be the comparison with neighboring states. In the overall tax index, Nevada ranks fourth, Oregon, 10th; Washington state, 11th; Utah, 16th; and Arizona, 28th.

The study offers an example from 2005 of how businesses make decisions based on tax rates: When Intel decided "to build a multibillion-dollar chip-making facility in Arizona due to its favorable income tax system. California struggles to retain businesses within its borders because Nevada provides a low-tax alternative." The study concludes that "taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of tax-friendly tax climates."

Taxifornia, Here We Come, Orange County Register (California), October 26, 2006

Likewise, California-based Countrywide Financial's CEO told shareholders employees that don't need to be in California will increasingly be hired in or relocated to Arizona instead, as a result of the tax and regulatory environment in California, which he characterized as out of control.

For most California small businesses, however, it makes little sense to form a corporation or LLC out of state (e.g., in Nevada or Delaware), which in most instances ends up costing more in initial and ongoing legal and accounting expenses, and saving nothing in taxes. If the business' owners are willing to relocate, then indeed California is, as the article points out, due to its political climate, among the least attractive for businesses, and Nevada is certainly preferable. But for those Californians not willing to move out of state and take their business with them (as many have in recent years), California remains the logical choice for incorporating a California business in most instances.