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CALIFORNIA LLC TAX FATALLY FLAWED?

November 14, 2006

It looks like another California court is on the verge of ruling California's tax on LLCs unconstitutional. California imposes a tax on LLCs based on their size - a tax that can reach over $11,000 for a moderately-sized business that so much as sneezes in California. The tax isn't apportioned based on business activity inside and outside of California.

From CCH Tax News:

A tentative decision issued by a San Francisco Superior Court would hold that California's limited liability company (LLC) fee scheme amounts to an unfairly apportioned tax in violation of the U.S. Constitution's Commerce and Due Process Clauses and that it cannot be reformed. Consequently, the court decision would require a full refund of the LLC fees paid by the LLC for the tax years at issue, plus interest and costs. The proposed decision will become final unless, within 15 days, either party specifies additional issues or makes new proposals.

Similar to the decision in Northwest Energetic Services, LLC v. California Franchise Tax Board issued by another superior court in San Francisco (see TAXDAY 2006/04/19, S.4), the court's tentative decision finds that the LLC fee is actually a tax as its purpose is to raise revenues and it is deposited in the general fund, rather than dedicated to regulating LLCs in California. Furthermore, because it is applied against the taxpayer's worldwide income rather than its California-source income it is an unapportioned tax in violation of the U.S. Constitution's Commerce and Due Process Clauses. The decision in the instant case goes further than the decision in Northwest , however, in holding that the governing statute cannot be reformed.

California has published a standard procedure for claiming refunds of the tax. The procedure can be found by scrolling down at this link, or you can find the relevant part reproduced below in the extended entry.

Prior Tax Update Coverage:

CLAIMING CALIFORNIA LLC REFUNDS

CALIFORNIA, HERE WE COME (WITH OUR REFUND CLAIMS)

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