Legal Updates & News
Legal Updates
California’s LLC Tax: Current Litigation and
Retroactive Legislation
March 2007
by Peter B. Kanter
liability companies (“LLC”) registered to do business in the state. Current ly, the levy is
unapportioned, such that an LLC’s liability for the fee is set by its total gross receipts worldwide,
rather than its income attributable to business within California. The San Francisco Superior Court in
Northwest Energetic Services, LLC v. Franchise Tax Board [3] (“Northwest”) found the
unapportioned levy unconstitutional, and awarded Northwest Energetic Services a full refund of the
amounts it had paid under section 17942. While the superior court’s decision in Northwest is legally
binding only for the taxpayer that brought the suit, because California’s Franchise Tax Board (“FTB”)
recently sought review of the trial court’s decision, the case will likely determine the fate of section
17942 on appeal. Similarly, another case challenging the constitutionality of section 17942 under
different facts, Ventas Finance I, LLC v. Franchise Tax Board [4] (“Ventas”), was recently decided
by the San Francisco Superior Court. As in Northwest, the San Francisco Superior Court in Ventas
ruled that section 17942 is unconstitutional because it is not apportioned.
In the wake of the Northwest decision, the California legislature proposed amendments to section
17942 in an attempt to remedy the unconstitutionality of the statute (A.B. 1614). The amended
version of section 17942 would have continued to impose an annual levy on LLCs doing business in
California; however, the amount owed would have been apportioned based on the amount of
business that each taxpayer actually did within the state. Had the proposed amendments become
law, they expressly would have applied retroactively as of 2001. Under the proposed amendments,
some LLCs that paid the unapportioned levy in years 2001-2005 might have been entitled to a full
refund. However, many would have received only a partial refund or no refund at all, depending
upon the extent of the LLC’s business activities in California. However, under the 2005 ruling by the
California Court of Appeal in City of Modesto v. National Med, Inc. [5] (“NMI”), the retroactive
apportionment provision in the proposed amendments may itself have been unconstitutional. [6]
This article describes the challenges to section 17942 raised by the taxpayers in Northwest and
Ventas, and discusses whether the legislature’s proposed amendments to section 17942 would
have been an adequate solution in light of the Court of Appeal's decision in NMI.
Section 17942
The levy imposed by section 17942 is referred to as an “annual fee” by the statute, and it is imposed
on “every limited liability company subject to tax under Section 17941.” [7] The amount of the levy
ranges from a minimum of $900 to a maximum of $11,790 per year. [8]
A
s discussed in detail below, section 17942 is problematic in that it applies to any LLC that either
does business in California or has simply registered to do business in California, and its rate is
applied without regard to the amount of business the taxpayer actually does within the state during a
given year. [9]
Recent Litigation
Related Practices:
zState and Local
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