California Annual Fee Imposed on LLCs

Even though forming a business as an LLC has been current popular practice due to their limited liability and flow through tax treatment, LLCs have attracted the attention of California revenuers and forced users to re-examine the California LLC fee structure.

California imposes a fee for domestic and foreign entities on all of their sales regardless of the source from which they were generated. Until additional information is received, you may wish to advise affected clients to file and pay the current California LLC fee and to file a protective claim by April 15, 2006, for all open years.

Based on recent court cases, including Northwest Energetic Services, LLC, challenging the constitutionality of newly imposed LLC fees, the representative or LLC is able to fax a letter to the California Franchise Tax Board (FTB) to file a protective claim. In this way, should the fee ultimately be deemed unconstitutional, the entity may have some measure of financial protection.

Any taxpayer who paid an LLC fee may follow the corporation franchise and income tax protective claim procedures provided by the California Franchise Tax Board. Considering the Superior Court's proposed decision in Northwest Energetic Services, LLC, taxpayers may fax their protective claims to the FTB at 916-845-9796.

The fax should include LLC name and identification number issued by the Secretary of State (unregistered LLCs may use the identification number issued by the Franchise Tax Board); a statement indicating that this is a protective claim; the tax year(s) involved; the amount(s) of the claim that should match the amount(s) of the annual fee that the LLC paid; a description of the issue (i.e., to state that the LLC fee is unconstitutional is enough); and the name of person to contact including 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. The FTB will send an immediate fax confirmation receipt (it cannot email information because the letter will contain confidential information).

You may also mail them or file an amended return with the FTB. Protective claims or amended returns should be mailed to the FTB at P.O. Box 942867, Sacramento, CA 942867-8888.

This notice is made to alert readers to the issue. It is a brief summary of recent tax developments in California that may affect you or your clients. It is not intended to provide tax or legal advice or as a substitute for your own research and professional judgment. You should decide if and how these developments affect your specific situation. The appropriate taxing authority should be consulted for additional guidance. The advice of a tax or legal practitioner licensed in California may also be advisable.

You may access the California Franchise Tax Board Web site directly at http://www.ftb.ca.gov/forms/misc/3556.html.
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