California LLC Fee Update – Apportioned Based on Sales Factor Beginning with 2007 Fee 
SALT Tax Alert, December 2007


Recent legislative amendments in California have revised the calculation of the California annual fee paid by a limited liability company (“LLC”) for taxable years beginning after 2006. The fee is imposed on any LLC organized, doing business, or registered in California. The fee will be determined on the basis of the LLC’s total income from all sources derived from or attributed to the state. “Total income from all sources derived from or attributable to the state” will be determined by applying the existing allocation and apportionment rules for assigning sales within and outside the state under California corporation tax law. The fee was previously based on income from all sources without any allocation or apportionment. The Legislature stated its intent that no inference will be drawn in connection with the legislative amendments for any taxable year beginning before 2007.

Pending Litigation for Years Before 2007

In Northwest Energetic Services, LLC v. Franchise Tax Board, California Superior Court for San Francisco County, No. CGC-05-437721, April 13, 2006, and Ventas Finance I, LLC v. Franchise Tax Board, California Superior Court for San Francisco County, No. CGC-05-440001, November 7, 2006, the County Superior Court held that the LLC fee was an unapportioned tax that violated the Commerce Clause of the U.S. Constitution and the Due Process Clauses of the California and U.S. Constitutions. The California Franchise Tax Board has appealed both of these decisions. In addition, in Bakersfield Mall, LLC v. Franchise Tax Board, San Francisco Superior Court, No. CGC07462728, filed April 25, 2007, another challenge to the validity of the LLC fee was filed. Because the legislative amendment applies prospectively only beginning with 2007, it will not interfere with any of the pending litigation.

If the LLC fee is finally adjudged to be discriminatory or unfairly apportioned and a protective refund claim was filed, the fee refunded will be limited to the amount by which the fee paid exceeds the amount that would have been paid under the new sales allocation provision. Protective refund claims can still be filed for any taxable years beginning prior to 2007 if filed within the statute of limitations period, which is generally four years from the later of the date the return was originally due, or if filed under a valid extension, the date the return was filed.

Plante & Moran's SALT Group can assist you with the issues surrounding the California LLC fee. Please contact us if you have questions and for more information.


The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.