A look at recent court cases affecting real estate.
LLC gross receipts tax held unconstitutional
The Franchise Tax Board (FTB) imposed an annual $800 minimum tax and an income tax based on gross receipts of LLCs registered with the state of California. An out-of-state LLC registered with the California Secretary of State but did not conduct any business activities in California. It paid the $800 minimum tax, but did not pay the gross receipts tax. The FTB notified the LLC it owed unpaid taxes for the years it did not pay the gross receipts tax. After paying the amount owed, the LLC sought a refund, claiming the fee was unconstitutional since it did not distinguish between out-of-state earnings and in-state earnings by allowing an apportionment for the level of activity conducted in the state. The FTB claimed the fee was constitutional since it was a fee, not a tax, and did not have to follow constitutional rules regarding the taxation of gross receipts. A San Francisco superior court held the fee was unconstitutional since it was a tax and thus violated constitutional rules through its unapportioned taxation of gross receipts. [Northwest Energetic Services, LLC v. California Franchise Tax Board (2006) CGC-05-437721]
Editor’s note — This ruling is not binding law and the FTB has appealed the decision. However, the decision will likely be upheld in the appellate courts, at which point the decision would become law. For those LLCs which have paid the gross income tax, the statute of limitations for filing a protective refund claim with the FTB is four years from a tax return’s original due date. Any LLC which has paid more than $800 annually in state taxes, whether or not they are doing some or all of their business in California, should file a protective claim as soon as possible.
