Unconstitutionality of the LLC fees in California
In 2007, California enacted legislation to address the unconstitutionality of the CA LLC fee based on gross receipts assessed on LLCs doing business in California. The legislation amends CA Rev. & Tax. Code §17942, effective for tax years beginning on or after January 1, 2007, to limit the amount of gross receipts subject to the fee to only those gross receipts generated from CA sources. The legislation also limits the amount of refunds that may be claimed for fees assessed in prior years. Refunds are limited to the amount by which the fee paid, plus any interest assessed, exceeds the amount of the fee that would have been assessed if the fee had been determined under Section 17942, as amended in 2007 (limits refunds to only the excess paid on account of unfair apportionment).
For tax years beginning on or after January 1, 2007, "total income" for purposes of the fee is based on income derived from activity in California rather than worldwide income. If the LLC does business wholly within California, total gross receipts are assigned to California. If the LLC conducts business within and outside the state, the LLC must assign its total income, item by item, to California based on the rules for assigning sales to the numerator of the sales factor in the apportionment formula.
CA Rev. & Tax. Code §19394 retroactively limits the refund of LLC fees previously paid on worldwide gross receipts to only the portion that relates to the receipts that had been unfairly apportioned to the state. The provision applies to refund claims that are filed after October 10, 2007, and claims filed before that date that are not final as of that date. CA Rev. & Tax. Code §19394 results in a retroactive change in the law. The constitutional issues that accompany retroactive taxes have been raised previously in California with mixed success.
The limited refund for the unconstitutional portion of the fee has been slow in coming. Currently, the FTB is processing refund claims only for LLCs that did no business in California but were otherwise required to pay the gross receipts fee. For more information on how and the terms upon which one can file a claim for a refund, visit www.ftb.ca.gov.
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