2007 Legislation - AB 198
While the court cases discussed below continue to work their way through the appellate court, the Governor signed AB 198 into law on October 11, 2007. It takes effect immediately, and is the Legislature's "fix" to statutes which had resulted in the prior unconstitutional lower court rulings as to calculations of what is commonly called California's "gross receipts tax" on LLC receipts, when the LLC has receipts outside the State of California.
The new law applies to LLC taxable years beginning on or after January 1, 2007.
The 2006 Legislature attempted to remedy the situation with AB 1614, but that bill was vetoed by the Governor last year.
FTB's "Tax News" discussion of AB 198 now in effect may be read at http://www.ftb.ca.gov/professionals/taxnews/2007/1107/1107_3.shtml.
Prior Situation
Early in 2006 we notified our LLC clients of a San Francisco Superior Court ruling that the LLC Gross Receipts "Tax" (as commonly called, but termed a "Fee" by the CA Franchise Tax Board) had been ruled to be unconstitutional. This is not your $800/year annual tax, but is a tax on annual gross receipts of the LLC which exceed $250,000.
We had advised our LLC clients who had paid such a tax to file protective claims with the FTB for refunds. (Link to a suggested form for a claim.)
There are now three such cases, the first two were Northwest Energetic Services, LLC. v. California Franchise Tax Board (link to Statement of Decision 4/13/06) and Ventas Finance I, LLC v. California Franchise Tax Board (link to Tentative Decision 11/7/06; Judgment entered 12/11/06). In both cases the taxes paid which were in issue were ordered to be refunded.
Northwest is now in the Court of Appeal, 1st District, Case No. A114805, and Ventas is Case No. A116277. The two cases have been consolidated (along with two other Northwest cases).
By way of background, LLCs registered in California are assessed annually both an $800 tax, plus a "fee" based on "total income" defined as the sum of such company's worldwide gross income plus cost of goods sold (see California Revenue & Tax Code sections 17942(b) and 24271). This Total Income Fee (commonly called the "Gross Receipts Tax") is incurred when the total income for a LLC during the calendar year reaches at least $250,000.
On March 2, 2006, the San Francisco County Superior Court in the Northwest matter, Case No. CGC-05-437721, issued a "Proposed Statement of Decision" that (a) the Total Income Fee was really a tax (not a fee), and (b) that the tax violates both the Commerce Clause and the Due Process Clause of the United States Constitution. The Judge's reasoning wass based on the clear precedents that any state tax levied must be fairly apportioned, which means the tax "must be calibrated to the level of activity in the State." California now levies the tax on LLC "total income" no matter where in the world the gross income was generated. "Simply because the Levy is unapportioned," the Judge wrote, "it violates the Commerce and Due Processes Clauses. As such, the Levy cannot constitutionally be applied to Plaintiff, and Plaintiff is entitled to a full refund [of] all of its payments . . . for the Years at Issue." The final Statement of Decision is linked here.
In the Northwest case, the plaintiff LLC did no business in the State of California. In the Ventas case, approximately 10% of the LLC's business was in the State of California. (The Ventas Tentative Decision is linked here.) Notwithstanding the differing facts, the two Superior Courts in San Francisco held that the Gross Receipts Tax provision (Revenue & Taxation Code section 17942 was a tax (not a fee), and was unconstitutional in violation of the Commerce and Due Process Clauses of the U. S. Constitution. What Ventax added was the holding that the statute cannot be reformed (reformation is a narrow exception to the principle that an unconstitutional statute is unenforceable).
As these cases work their way through the appellate courts, we ask what will the result be if the Total Income Fee/Gross Receipts Tax is indeed ultimately held to be unconstitutional?
(1) The State may be ordered to refund all payments of the Total Income Fee/Gross Receipts Tax, including any penalties and interest payments made. The refunds will also be paid back with interest. This would be consistent with the Proposed Statement of Decision in Northwest Energetic Services, and it might mean the State must issue the refund without any action by the LLC taxpayer.
(2) Alternatively, there may be a later ruling that refunds should be made only if a proper Claim for Refund was timely filed within the statute of limitations period already prescribed by law.
Generally (with some exceptions) a Claim for Refund must be filed within four years of the due date of the return (that usually means from April 15th, as this is without regard to extensions) or within one year from the date the amount was actually paid, whichever is later. (Revenue & Taxation Code section 19306.)
If an LLC which had in the past paid any amount of this Total Income Fee/Gross Receipts Tax, it may want to consider filing a protective Claim for Refund for all prior years, and for every year the LLC continues to pay this tax (where applicable - see above re new legislation effective for taxable years beginning 1/1/07), in order to preserve the statute of limitations in case some later ruling may determine refunds based on claims filed within the statutory period.
An example of a Claim form is linked here. The FTB has asked that the initial claims be faxed to them at (916) 845-9796. The FTB will send you a return fax confirmation. The FTB prefers a fax, but if you are unable to fax, you can mail to the address on the form.
The contents of this publication are for information purposes only and are not meant nor should be construed to be legal advice. Note, also, the date of the document. Laws are constantly changing, and are subject to differing interpretations. We, therefore, urge you to do additional research or to contact your own legal or tax counsel before acting on the information contained herin.
This page: www.taxlawsb.com/resources/BusTax/LLC.htm
Updated November, 2007
|