A California appeals court has once again held that the California limited liability company (LLC) fee is unconstitutional because it is not apportioned based on California activity of an LLC (Ventas Finance I LLC v. Franchise Tax Bd., No. A116277 (Cal. Ct. App. 8/11/08)). However, the court held that California did not have to refund the entire amount of the fee to the LLC involved in the case.
The California Court of Appeal had issued a similar decision in January in Northwest Energetic Servs. v. Franchise Tax Bd. , 71 Cal. Rptr. 3d 642 (Cal. Ct. App. 2008) (see Wright, “A New Dimension for LLCs in California,” 39 The Tax Adviser 384 (June 2008)). However, the NES case had involved an LLC with no activities in California. Ventas involved an LLC with activity (and income) from both inside and outside the state.
The court upheld the NES decision on the unconstitutionality of the fee but did not find that a refund of the entire amount was required either by the Due Process Clause of the U.S. Constitution or by “any principle of California law.” Instead, the court said that California can refund a portion of the fee, based on the LLC’s activity outside California, “using a method of fair apportionment.” The case was remanded to the trial court to determine what the amount of that refund should be.
The court did not address the question of whether the recent legislative changes to the LLC fee can be applied retroactively (see CA Rev. & Tax. Code §17942).