Taxable Talk

And it’s a big but.

Thanks to the TaxProfBlog and Roth Tax Updates for giving me the tip on a case decided in San Francisco, Northwest Energetic Services v. Franchise Tax Board. Northwest, a Washington State LLC, sued to recover its LLC Gross Receipts Tax, er, Levy, from the Franchise Tax Board. Northwest had no operations in California, but was registered in the state. The court ruled that the levy is really a tax and that because the tax, er, levy was based on unapportioned income, it violated the due process and interstate commerce clauses of the Constitution.

As Joe Kristan (Roth Tax Updates) notes, the FTB will appeal.

In any case, as I read the decision, the levy (tax) is legal for a California based business with all of its income derived from California. Indeed, if the gross receipts levy is modified so that it is based on an apportionment (similar to Schedule R used on California corporate tax returns), then it would be legal.

If you are a member of an LLC, make sure that your LLC applies for a refund. California has a four-year statute of limitations on refunds (given timely filing); your refund request for tax years 2001 needs to be postmarked by April 15th (certified mail, return receipt requested, of course).

Given that California is still in dire financial straits, don’t expect anything to change. Remember that the California LLC code prohibits professionals from being a member of an LLC in the state. Also remember that this decision will be appealed, and, as Joe Kristan notes, you should continue to pay your LLC levy, er, tax for the foreseeable future.

Hat Tips: TaxProf Blog, Roth Tax Updates

This entry was posted on Thursday, March 9th, 2006 at 11:15 am and is filed under California. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.