California Modifies “Gross Receipts Tax” for LLCs
October, 2007
For years, limited liability companies ("LLC"s) organized in California were required to pay an annual fee based on the amount of their total income, regardless of whether some or a majority of this income was derived from business outside of California. This annual fee is commonly referred to as the "gross receipts tax."
Effective October 10, 2007, Assembly Bill No. 198 (AB 198)[1] amends California law to provide that this annual fee will be calculated solely on the "total income derived from or attributable to" California, and will exclude from this calculation such income derived from or attributable to other states. This law provides an important tax break for LLCs who do business in multiple states and makes a fair and equitable application of the fee to all LLCs doing business within and outside of California.
Under the new law, "total income from all sources derived from or attributable to" California will be calculated using existing rules that determine how sales (which also include services) are assigned between California and other states in arriving at a "sales factor" that is then used in allocating income to California. AB 198, however, prohibits the application of those existing rules that exclude certain receipts from the sales factor. Once a company's "total income" from California is determined, the following chart may be used to calculate the amount of the LLC fee:
|
LLC Fee |
California "Total Income" |
|
$900 |
$250,000 or more, but less than $500,000 |
|
$2,500 |
$500,000 or more, but less than $1,000,000 |
|
$6,000 |
$1,000,000 or more, but less than $5,000,000 |
|
$11,790 |
$5,000,000 or more |
AB 198 is effective immediately and applies to taxable years beginning on or after January 1, 2007.
There are currently two cases pending before the California Court of Appeals on the issue of whether the annual LLC fee, as a whole, is unconstitutional because it is discriminatory or unfairly apportioned. AB 198 creates a refund mechanism to be used by taxpayers should the LLC fee be finally adjudged to be unconstitutional. Any refund will be limited to the refund amount needed to remedy the discrimination or unfair apportionment.
LLCs should consult an attorney or accountant to determine which portions of their income are "derived from or attributable to California," as that term is defined under the new law and related tax provisions. Additionally, if the LLC fee is ultimately declared unconstitutional by the courts, LLCs should consult an attorney to determine if they qualify for a refund from the Franchise Tax Board.
[1] AB 198 is codified at California Revenue and Taxation Code Section 17942.