If I earn RSUs in a private company while living in California, and am no longer employed with the company at IPO, do I owe California taxes?

Question

I'm employed at a private company in San Francisco. Part of my compensation is in RSUs, which are subject to the standard two vesting conditions for startup company stock: time, and the occurrence of a liquidity event. That means the stock doesn't actually vest until an IPO or acquisition. At the time of IPO, when the RSUs are converted to shares in the company, I will owe income tax on the total number of RSUs vested times the opening share price.

If I move out of California and terminate my employment with the company before the IPO, will I owe income tax to California since the RSUs were granted while I was working in California? Or will I owe income tax to my new home state, since the actual taxable income occurs while I am living in the new state?

I found a similar situation, described in https://www.ftb.ca.gov/law/ccr/2013_02.pdf

The difference is that in this case, the person was still employed at the time of IPO.

Answer 1

Yes, you will owe income tax to California. It doesn't matter if you quit your job prior to the IPO; your RSUs still came from a CA source, and they were granted and vested while you were/are a CA resident. The fact that the shares aren't delivered until N months post-IPO doesn't matter, either. That link you referenced describes the situation quite thoroughly.

You may owe money to your new state but then be able to claim that as a credit on CA taxes or vice versa, so effectively you are still only paying taxes once, but the mechanics of this is almost certainly state-dependent, so you'll want to look into the specific laws of wherever it is you're planning to move.

Also, if you move out of CA and you don't quit your job, then you might have RSUs which vest while you're a resident of your new state, in which case you will have income from a CA source that CA will want a chunk of, but you'll have income received while a resident of your new state, who will also want a chunk of it. If you find yourself in this situation, you should talk to your tax preparer, because this scenario can become rather complicated very quickly.

Disclaimer: I am not an accountant, nor am I a lawyer. I am, however, in exactly the same position you are. AFAIK, there is no way to avoid giving this state its pound of flesh, even after you are long gone.