LLC Gross Receipts Fee May be Unconstitutional

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LLC GROSS RECEIPTS FEE MAY BE UNCONSTITUTIONAL
TAXPAYERS SHOULD FILE PROTECTIVE CLAIM FOR REFUND IMMEDIATELY

The Constitutionality of the LLC gross receipts fee is being challenged in three (3) cases that are pending in California courts. The gross receipts fee applies a fee based on the LLC's total income from all sources reportable to the state of California. Cal. Rev. & Tax. Code § 17492. The gross receipts fee is separate from and does not include the annual $800 tax.

The plaintiffs in these three (3) cases allege that the gross receipts fee discriminates against interstate commerce and violates the Due Process and Equal Protection Clauses of the United States Constitution. The plaintiffs also argue that the fee is an improper exercise of police power. Bakersfield Mall LLC v. California Franchise Tax Board is a class action suit filed on behalf of all LLCs operating in California. Super. Ct. S.F. City and County No. CGC-07-462728. The case was filed on April 25, 2007. It is unlikely that these cases will be resolved soon.

Actions for refund of taxes paid are generally limited to those filed with the four (4) years of the date the tax return was filed, if the return was timely filed. (Cal. Rev. & Tax. Code § 19306). To protect the ability to file a refund claim on LLC gross receipts payments for any currently open tax years, LLC taxpayers should submit a Protective Claim for Refund of those payments. The protective claim will withhold any action on the claim while the litigation is still pending. That way, the claim may be filed at the outcome of the lawsuits even if beyond the four-year time limitation. In the event the gross receipts fee is found to be unconstitutional, the taxpayer will be able to pursue the refund of all protected claims.

To submit a Protective Claim, you may fax a letter to California Franchise Tax Board at (916) 845-9796. The letter must provide the following information:

• LLC Name and identification number issued by the California Secretary of State (typically a twelve-digit number beginning with the year of initial filing);
• Statement that this is a protective claim;
• The taxable years involved;
• Statement of the issue: "The LLC fee is unconstitutional";
• The amount of the claim; and
• Name of the person to contact, phone number and fax number.

The letter must be signed by the LLC's managing member or by a representative with power of attorney. You should receive an immediate faxed receipt from the Franchise Tax Board.