Good Morning Gentle Readers,
Don't EVEN get excited because this ruling is not going to help you unless you are an out of state LLC qualified and doing business in Californicate AND you have business income from other states.
Briefly, unlike most other civilized states and even the IRS, LLC's are taxed on their gross income whenever it exceeds $250,000.00. The state calls this a fee, but it isn't and the courts have made that determination as well. Worse, the LLC remains a pass-through entity and ALL of the net income is taxed at the partner/member/individual level.
What has been found to be unconstitutional is that the LLC fee isn't apportioned and doesn't apply just to Californicate income. It is applied on worldwide income to any LLC registered and qualified to do business in California irrespective of whether the LLC is actually generating any California source income. Meaning, even if the LLC does zero business in California it is subject to the fee based on income from doing business in other states.
Like a two year old, screaming MINE, California has a long history of attaching its tentacles to wallets that are far from its borders. It typically takes a court case to make them stop.
In two recent decisions--Northwest Energetic Services, LLC (NES) v. Franchise Tax Board (FTB), Case No. CGC-05-437721 (4/13/06), and Ventas Finance I, LLC (Ventas) v. FTB, Case No. CGC-05-440001 (11/7/06)--the San Francisco County Superior Court held that the limited liability company (LLC) "fee" imposed by California Revenue and Taxation Code (CRTC) Section 17942 is unconstitutional. Although California law requires the FTB to continue imposing the fee until a final decision has been rendered by an appellate court, LLCs registered or doing business in California should consider filing protective refund claims, particularly if the statute of limitations for any year is about to close.
Whole tale of woe is here.
TWC 🍷Photo Credit (unless otherwise noted): ©TWC, all rights reserved