Relocation Expert Warns California’s Tax Hikes Will Push Out More Businesses

As for business hostility, Vranich cites as an example a wholesaler whom the City of Los Angeles invalidly reclassified as a retailer, assessing two years of back taxes that would cost him $200,000. When he showed up to a meeting to fight the unilateral decision, a Department of Finance employee greeted him with the words, “The enemy has arrived,” eliciting the chuckles of his staff.

But the businessman was not amused. He had to fire two employees to pay the incorrect assessment while hiring a lawyer to restore the correct tax classification. While he “won” the case, the legal fees cost him in the six figures. “The city of L.A. is the worst city within the worst state” in terms of hostility to business, said Vranich, who advises businesses wanting to establish a footprint in California’s large consumer market to consider business-friendlier nearby cities like Burbank.

The top destinations for exiting California businesses are Texas and Arizona, and the reasons are these states exhibit the opposite of California’s negatives. “Taxes are lower, the regulatory environment is more gentle and government agencies more cooperative,” Vranich says.

Other factors besides taxes, regulation and government hostility can play a determining role in business relocation decisions, he says. Lifestyle concerns, such as a preference for four seasons, have impelled some clients to choose Colorado, for example.

And for professional service firms such as financial advisors, lawyers and accountants, the cost of hiring employees tends to be the critical factor. ”A software maker can save between 30 and 40% of the cost of an employee if he hires him outside the borders of the state of California,” Vranich says, citing special rules that make software development costlier in California. “[Non-software] companies can save 20 to 30% in hiring outside of California,” he says, adding that firms may want to keep their headquarters here but staff their back office outside of the state.

The business relocation consultant warns businesses exiting California to be careful about establishing their residency in their new state, citing very aggressive monitoring by California tax authorities.

“If it’s a family-owned company, you can’t just move the company out of California and reduce your tax liability,” Vranich says. “With LLCs and S-corps, all the profits flow to the owner. You’ll get the compliance savings and lower real estate taxes,” he says. But you will also get a tax bill from California if your kids are still attending school in the state or if your phone bills or flight patterns demonstrate a pattern that the state’s Franchise Tax Board regards as proof you live in California more than 50% of the time.