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In a recent case (Northwest Energetic Services, LLC v. California Franchise Tax Board), a California Superior Court ruled that the annual levy (California Revenue and Taxation Code Section 17942) imposed by California on the gross receipts of limited liability companies ("LLCs") is unconstitutional in that case. The Tax Code Section applies to all companies regardless of whether the LLC has income from California sources. Companies with income from other states are required to pay taxes in the other states and in California for the same income. The court ruled that this violated the Commerce Clause and Due Process Clauses of the U.S. Constitution.
The Code Section addressed by the court (and listed above) imposes a levy of up to $11,790 on LLCs that are organized in California, are registered with the Secretary of State to transact business in California, or are doing business in California. The table below lists the amount of the levy based on the bracket of the gross receipts of the LLC.
Total Revenue |
Fee |
Less than $249,9999 |
None |
$250,000 to $499,999 |
$900 |
$500,000 to $999,999 |
$2,500 |
$1,000,000 to $4,999,999 |
$6,000 |
$5,000,000 or more |
$11,790 |
Tax refund claims generally must be filed within four years from the date the return was filed. The return for the 2001 tax year should have been filed by April 15, 2002 so the last day for most LLCs to file a refund claim for the 2001 tax year is April 14, 2006. LLCs must act quickly because if the their "protective" claim is not filed, the claim may be forever barred. As a result of the court's decision, Van De Poel and Levy recommends its clients that are California LLCs and that have paid the annual levy file a "protective" refund claim for the 2001 tax year no later than April 14, 2006.
A protective refund claim is simply a refund claim filed in situations that are still legally uncertain as in this case and to protect the rights that may ultimately exist. The website of the Franchise Tax Board provides a specific procedure for protective refund claims relating to the LLC fee is: www.ftb.ca.gov/forms/misc/3556.html#proclaim. You may also wish to contact your CPA or accountant for assistance.
There is a great deal of uncertainty regarding the scope of the court's ruling and whether it will be upheld on appeal. The company involved in this case had not transacted any business in California. It is possible that the decision will be appealed and narrowed to not apply to LLCs that derive income from California. However, the appellate court could find that the levy is unconstitutional on its face, as to all taxpayers.
Van De Poel, Levy & Allen, LLP provide this information for general awareness of an important legal issue. It is not intended to be legal advise and you should not act without actual involvement of an attorney. If you believe this information applies to you or your business, please contact our office.
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