The original provision gave preferential treatment to CA residents, which the courts ruled to be unconstitutional: a violation of the Interstate Commerce Clause.
The provisions in California law regarding the 80 percent asset and payroll requirements were found to be unconstitutional in August 2012 by the California Court of Appeal in Cutler v. Franchise Tax Board (FTB). The court's decision made California's entire QSBS statute invalid and unenforceable. As a result, all QSBS gain exclusions and deferrals previously allowed under California law became invalid. It is important to note that the court's decision in Cutler did not change the federal treatment of QSBS. (Source: https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_an...
)
So the California FTB (and the rest of the states participating in the UDITPA Multistate Tax Compact) use the original "loophole" as a means to essentially siphon off a greater portion of the tax revenue from the occurrence of interstate commerce, and to keep it in the respective state. Washington, Oregon, California all participate (Source: http://www.startuplawblog.com/2012/08/17/interstate-business...)
This would be fine all fine and dandy, but for the fact that most of the "startups" or QSBs that benefit/ed from this exception derive/d revenue from multi-state commerce, on the Internet. This has made it and makes it more difficult for those businesses trying to do their "startup" thing out of state to compete with those here who get more tax breaks to re-invest. Interestingly, most of the VC money - over HALF of all venture capital in the USA -- goes to businesses in California. This is kind of messed up. (Source: http://news.cnet.com/8301-13846_3-20010486-62.html)
So looking at the bright side -- this should encourage startups to start places other than CA.
[Edited to include info about UDITPA in response to dragonwriter's comment]
The FTB doesn't write the law, the legislature wrote the law. And it was a California court, not a federal court, that ruled the statute unconstitutional (the "California Court of Appeal" isn't a federal court, its the first-level appellate court in the California state court system.)
The provisions in California law regarding the 80 percent asset and payroll requirements were found to be unconstitutional in August 2012 by the California Court of Appeal in Cutler v. Franchise Tax Board (FTB). The court's decision made California's entire QSBS statute invalid and unenforceable. As a result, all QSBS gain exclusions and deferrals previously allowed under California law became invalid. It is important to note that the court's decision in Cutler did not change the federal treatment of QSBS. (Source: https://www.ftb.ca.gov/law/Qualified_Small_Business_Stock_an... )
So the California FTB (and the rest of the states participating in the UDITPA Multistate Tax Compact) use the original "loophole" as a means to essentially siphon off a greater portion of the tax revenue from the occurrence of interstate commerce, and to keep it in the respective state. Washington, Oregon, California all participate (Source: http://www.startuplawblog.com/2012/08/17/interstate-business...)
This would be fine all fine and dandy, but for the fact that most of the "startups" or QSBs that benefit/ed from this exception derive/d revenue from multi-state commerce, on the Internet. This has made it and makes it more difficult for those businesses trying to do their "startup" thing out of state to compete with those here who get more tax breaks to re-invest. Interestingly, most of the VC money - over HALF of all venture capital in the USA -- goes to businesses in California. This is kind of messed up. (Source: http://news.cnet.com/8301-13846_3-20010486-62.html)
So looking at the bright side -- this should encourage startups to start places other than CA.
[Edited to include info about UDITPA in response to dragonwriter's comment]