Challenge to California Taxes on Limited Liability Companies

January 29, 2007

A recent California Superior Court decision found that California’s taxes on the gross receipts of limited liability companies is unconstitutional. The state Franchise Tax Board has appealed the court’s decision so it is unlikely that the state will issue any tax or fee refunds while this appeal is pending. However, LLCs may file protective claims for a refund for tax years 2002-2005 for any year in which their gross receipts exceeded $250,000. Claims for refunds accrue interest.

As a reminder, the gross receipts tax applies as follows:

Tax..................Total Income Reportable to California

$900.................$250,000 - 499,999.99

$2,500..............$500,000 - 999,999.99

$6,000..............$1,000,000 – 4,999,999.99

$11,790............$5,000,000 +

The Franchise Tax Board has issued a release explaining the procedure for LLCs to file protective claims due to the recent court decision. The protective claims are only filed as to the annual fee on gross receipts, not the $800 annual tax for the privilege of doing business in the state of California.

To file a protective claim the LLC’s representative should fax a letter to the Franchise Tax Board at (916) 845-9796 with the following information:

1. LLC name and identification number issued by the Secretary of State;

2. A statement indicating that there is a protective claim;

3. The tax years involved;

4. The amount of the claim, which should match the amount of the annual fee that the LLC paid;

5. A description of the issue, stating that the LLC fee is unconstitutional; and

6. The name of the person to contact with that person’s telephone number and fax number.

The letter must be signed by a representative with the power of attorney or signed by the limited liability company’s managing member. Upon receipt, the Franchise Tax Board will send an immediate confirmation.

The Franchise Tax Board will defer action on all claims pending a final appellate decision. You should retain a copy of the letter for your files.

A possible legislative response is in process. California Assembly Bill AB 1614 sought to make the revised statute retroactive. The governor did veto some legislation in September of last year as the issue is still being litigated in the courts. It is difficult to conceive that a retroactive tax would ever be constitutional.