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LLC Fee Constitutionality Comes Into Question

In a recent superior court case, Northwest Energetic Services, LLC v. FTB (San Francisco Superior Court Case No. CGC-05-437721), the court issued a Proposed Statement of Decision ruling California's LLC fee is unconstitutional because it is an unapportioned tax on income. The Court determined the LLC fee violates the Commerce and Due Process clauses. The LLC fee, which is imposed by R&TC �17942, computes the fee based on worldwide income.

Please note the Northwest decision does not address the $800 annual tax levied under R&TC � 17941. Protective claims based on the Northwest decision should only be filed for payment of the annual fee under R&TC � 17942.

LLCs may want to file a protective claim pending the final outcome of the litigation over the LLC fee. In order to file a protective claim the statute of limitations must be open for the tax year and the fee must have been paid. The normal statute of limitations for filing a claim for refund is the later of:

  • Four years from the date the return was filed, but only if the return is filed by the due date or extended due date;
  • Four years from the original due date, without extensions; or
  • One year from the date of overpayment (R&TC �19306)

To file a protective claim, the representative or LLC should fax a letter to Franchise Tax Board at (916) 845-9796 with the following information:

  • LLC name and identification number issued by the Secretary of State. Unregistered LLCs use the identification number issued by the Franchise Tax Board.
  • A statement indicating that this is a protective claim.
  • The tax years involved.
  • The amount of the claim, which should match the amount of the annual fee that the LLC paid.
  • A description of the issue (stating that the LLC fee is unconstitutional is sufficient).
  • Name of person to contact, phone number, and fax number.

The letter must be signed by a representative with power of attorney or signed by the LLC's managing member. Upon receipt, FTB will send an immediate fax confirmation. Although a fax is preferred, taxpayers may also mail their protective claims or an amended return to:

Franchise Tax Board
PO Box 942867
Sacramento, Ca 94267-8888

FTB will defer action on all claims pending a final appellate decision. You should retain a copy of the original claim, as well as the confirmation, for your files.