Advisories & Insights

For your information, the California Superior Court in San Francisco has issued a proposed decision in Northwest Energetic Services, LLC v. California Franchise Tax Board, No. CGC-05-437721 that the LLC fee charged against out-of-state LLCs who conduct no business in California but are required to register with the California Secretary of State is unconstitutional.

This is just the gross receipts fee issue.

Although the issue arose with respect to a company that had no business in California and the decision is not a binding precedent, the observation of practitioners is that because there's no method to divide the statute into two parts the fee is either enforceable or is not enforceable. Therefore, the recommendation is that a protective refund claim for prior open years (2001 and forward) be filed by all California LLCs or out-of-state California LLCs registered to do business in the state. The accountants for LLCs I represent are not being choosy and are filing protective claims for any LLCs in which all or any revenues were subject to the CA gross receipts fee. The FTB has already issued a procedure for a protective claim. See the FTB's website for more information - http://www.ftb.ca.gov.

Generally, taxpayers have four years from the payment of any tax to file a refund claim. The fee for tax year 2001 was due April 15, 2002. Thus, the deadline for filing a refund claim for LLC fees paid in 2001 is April 15, 2006 (per recent FTB informal letter postmarked, not just metered, on 4/17/06). Considering faxing as well.

Of course, in determining whether to file a protective claim, taxpayers should consider additional costs they may incur to preserve their protective claims, if the FTB chooses to deny them.

For more information, please contact Regina Schroder, Chair of the Bullivant. Tax Group. Ms. Schroder can be reached at (916) 442-0400 or at regina.schroder@bullivant.com