Whether your LLC was formed in California or is registered to do business in California, the California LLC fee was ruled unconstitutional in two separate decisions issued by the California Superior Court.
In the face of these two decisions, the California Franchise Tax Board has a steep uphill battle to avoid loss of fees that eventually could cause lost future revenues for California in the hundreds of millions of dollars and possibly force billions of dollars of refunds.
In Northwest Energetic Services, LLC v. California Franchise Tax Board, Cal. Super. Ct., No. CGC-05-437721, 4/13/06, the Court decided that the annual fee (starting at a minimum of $800), based on gross income worldwide violated the fair apportionment requirements of the Due Process and Commerce Clauses of the US Constitution. Northwest Energetic had NO business activity in California during the years in question.
If you are a member of an LLC, you should consider filing a protective claim for refund with the California FTB if the LLC does business outside of California and has paid the annual fee based on gross income earned both inside and outside California. The refund claim would be for the fee paid on gross income earned from outside California. Contact a California tax attorney to pursue your claim.
In a second California Superior Court case called Ventas Finance I, LLC v. California Franchise Tax Board, the Court again decided the annual LLC fee was unconstitutional. This case involved a real estate investment trust based outside California but registered to do business as an LLC in the state. The LLC apparently did less than ten percent of its business activity in California during the years in question. The Court held that this LLC tax was unconstitutional because it was not fairly apportioned and was based on worldwide gross receipts rather than its in-state activities.
These two decisions indicate that the LLC fee is unconstitutional regardless of whether the LLC has all of its activities or a part of its activities outside of California. In the end, the LLC fee may be found to be unconstitutional even with respect to California-based LLCs that have no activities outside of California.
Since no California appellate court has reviewed either of the lower Court decisions, the propriety of collecting the fee remains up in the air. You can continue to pay the fee and at the same time file a protective claim for refund so that you do not incur penalties and interest for nonpayment and so you can avoid suspension by the California Secretary of State’s office.
If you would like to consult on this topic or obtain other tax help, call Mitchell A. Port at 310.559.5259.