“I’m moving out of state”: How some Uber and Airbnb employees are trying to avoid California income tax

By Theodore Schleifer

It’s moving day!
Joe Raedle/Getty Images

2019 will create a lot of millionaires in Silicon Valley. It also means it’ll create a lot of ex-Californians.

The highest-taxed state in the country has long motivated the wealthy to look for cheaper states in which to park their fortunes. But the most appealing time to flee is now, just before a historic amount of new money is created in a year expected to be the biggest IPO bonanza since 2000, slated to feature highly valued startups like Uber, Airbnb, Lyft, Slack, Peloton, and Pinterest.

This all raises some vexing ethical questions about the obligations of the wealthy, especially at a time when liberals are calling for higher taxes on the rich: Is there anything unsavory about Silicon Valley’s elite doing everything in their power to not pay a dollar more in taxes than they’re required?

It’s perfectly legal, but is it right?

Places like Incline Village, Nevada — or so-called “Income Village,” nestled alongside Lake Tahoe — should expect to get a little more crowded in the next few months. The rich increasingly flock to these low-tax hideaways, and now some early executives at places like Airbnb and Uber are internally swapping notes with one another on ways to escape California and its strict capital gains taxes.

Escape at least on paper, that is.

It’s the quiet conversation du jour among Silicon Valley’s privileged. And it’s a hidden part of the IPO season that executives are loath to talk about publicly: How can I still live in California and be part of the tech industry while not technically “living” in California?

But California’s authorities are wise to this game.

“California is by far the most aggressive [state] in figuring out how quickly, how cute you are with these changes,” said Vicken Ekmekjian, a top San Francisco wealth adviser, who has had several soon-to-IPO clients recently approach him about residency changes. “They’re relentless. They’ll get you.”

Money managers, tax lawyers, and executives describe a dragnet: California tax collectors will review utility, credit card, cellphone, and even highway-toll collection and doctor’s records to try and determine where someone actually lives, even if they claim to be domiciled in a haven like Austin, Texas, or Miami, Florida.

A post office box or a studio apartment somewhere on the east coast? They’ve seen it before.

Claiming that your significant other and kids live in California — but you don’t? Good luck with that.

And do any of these things too soon before the IPO? Highly suspicious.

If you’re hanging out in California for nine months or more in a year, you’re considered a Californian. But even if you’re there for shorter periods, the state can still consider it your domicile if the fact pattern shows that you’re treating California like your real, true home. And that’s why advisers recommend that the megarich do a ton of sometimes unpleasant things to establish a real domicile elsewhere.

“Sometimes my wish list is longer than they’re willing to do,” said Rob Wood, a tax lawyer who advises San Francisco clients on matters like these. “Anybody who’s likely to get a pile of money — and a pile of money is relative — some people are willing to move heaven and earth to save $50,000, and some people are not willing to do much at all to save $1 million.”

Now, a mass exodus this is not. Coders who want to stay in the Silicon Valley engineering mix can’t exactly move to Alaska. Tax-dodging is more common among executives who worked in operations or finance and have other job prospects — or at least just want to cash out and enjoy the good life for a few years.

Several early executives at Uber and Airbnb say that after years of being hounded by wealth managers from places like Goldman Sachs, they and their networks of former colleagues are staring down decisions about how to keep their money once shares can be sold on the public markets.

“I’m moving out of state,” said one former executive at Airbnb, who has been talking about various strategies with other colleagues. “I’ve talked to a lot of people from Google, and lots of people who stayed in California are upset and lost a lot of money.”

The state of California treats capital gains just like any other income, levying a 13.3 percent state tax on sales of stock. For someone sitting on tens of millions of dollars in private stock — life-changing money for some — it’s not a small concern.

“People don’t see the point unless they love living in California,” said Ekmekjian. “They’re not married to California.”

Members of the original guard at Uber and Airbnb tell Recode that they each personally know a handful of people who are taking the tax-breaking plunge far from the golden coast.

One former Uber executive said it felt like as much as one-quarter of Uber’s earliest team — the so-called OG — had recently moved out of state. Another said she could count 17 people who moved out of the Bay Area in recent years, and seven of those had moved to no-tax states.

“In an extreme circumstance, it could be fraud. So the answer is the move has to be real,” said Wood. “But there are all sort of gradations of how real it is.”

But even if it’s real, is all of this stuff fair?

On the one hand, these executives took an enormous risk when they decided to join young, likely-to-fail startups for the ultimate Silicon Valley currency: equity. Some have spent as long as a decade helping to build billion-dollar businesses while sitting on winnings they couldn’t enjoy. Should California really be taxing newly liquid startup stock just like it’s any other new, risk-free cash? Wouldn’t that discourage innovation?

On the other hand, Silicon Valley money is made in California and draws on California services. Employees commute to work on taxpayer-funded roads and many studied at taxpayer-funded schools. And one extreme example: When a gunman shot four people on the campus of YouTube last spring, it was San Bruno police that responded to the scene.

“All of these are part of what makes the good life in California, make it an attractive place, and they cost money,” said Cristobal Young, a Cornell University expert on millionaire migration. “Trying to avoid taxes on your IPO is kind of like saying ‘California is awesome as long as someone else pays for it.’ The people of California would be right to think, ‘These folks just wanted a free lunch — they skip out on the check, and then call themselves self-made millionaires.’

“If you really don’t need California’s help with your business, actually build your company in Reno — don’t try to pretend you built it there after becoming successful.”

When Facebook went public in 2012, California expected it to bring $2.5 billion to a state that badly needed tax revenue in the midst of a budget crisis (It’s unclear how much it actually raised). Since then, California has increased its personal tax rates (which similarly caused some millionaires to run for the hills); its corporate tax clip remains middle of the pack.

In an IPO year expected to break records, the amount of money that could be walking out the door shouldn’t be trivial to politicians.

“If it was a big trend, yes it could be felt,” said Brian Dombkowski, another wealth adviser in Silicon Valley. “The reality is sometimes people talk about it — but they’ve got kids in a great school, the best health care options in the world, a network, friends, opportunity, community.

“It’s expensive here for a reason.”