BILL NUMBER: AB 198 ENROLLED
BILL TEXT
PASSED THE SENATE SEPTEMBER 11, 2007
PASSED THE ASSEMBLY SEPTEMBER 12, 2007
AMENDED IN SENATE SEPTEMBER 11, 2007
INTRODUCED BY Committee on Budget (Laird (Chair), Arambula, Beall,
Berg, Brownley, Dymally, Feuer, Hayashi, Hernandez, Jones, Mullin,
Ruskin, Swanson, and Wolk)
JANUARY 25, 2007
An act to amend Section 17942 of, and to add Section 19394 to, the
Revenue and Taxation Code, relating to limited liability companies,
to take effect immediately, tax levy.
LEGISLATIVE COUNSEL'S DIGEST
AB 198, Committee on Budget. Income taxes: limited liability
companies: apportionment.
The Personal Income Tax Law requires every limited liability
company subject to a specified tax to pay annually to this state a
fee equal to specified amounts based upon total income from all
sources reportable to this state. That law defines total income as
gross income, as defined, plus the cost of goods sold, as specified.
This bill, for taxable years beginning on and after January 1,
2007, would clarify that total income from all sources reportable to
this state means gross income, as defined, plus the cost of goods
sold, as specified, derived from or attributable to this state within
the meaning of specified provisions of the Corporation Tax Law
relating to apportionment and allocation, as provided. This bill
would make legislative findings and declarations regarding the
necessity for the equitable treatment of limited liability companies.
Existing law provides, for the purposes of specified taxes, that
if any deduction, credit, or exclusion administered under the
Personal Income Tax Law or the Corporation Tax Law is finally
adjudged discriminatory against a national banking association under
a specified federal law, or is for any reason finally adjudged
invalid, or discriminatory under the California Constitution or the
laws or Constitution of the United States, the tax shall be
recomputed by the Franchise Tax Board, as specified.
This bill would provide that if a fee imposed under a specified
section is finally adjudged as discriminatory or unfairly apportioned
under the California Constitution or the laws or the Constitution of
the United States, the fee of a disfavored taxpayer that files, or
has filed, a timely claim for refund asserting discrimination or
unfair apportionment shall be recomputed by the Franchise Tax Board
for the taxable year in question, as of the time of allowance of the
recomputation, only to the extent necessary to remedy the
discrimination or unfair apportionment not otherwise relieved by
existing law, and that the amount of the fee as originally computed
shall be subject to the provisions relating to original computations.
This bill would make findings with regard to actions for refunds
of fees.
This bill would take effect immediately as a tax levy.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. The Legislature finds and declares that the changes
made by this act with respect to Section 17942 of the Revenue and
Taxation Code are necessary to provide for the equitable tax
treatment for limited liability companies in light of the following:
(a) The California Limited Liability Act (Ch. 1200, Stats. 1994)
authorized limited liability companies for the first time to organize
and register in the state. The Legislature was advised that an
increasing number of businesses would organize as limited liability
companies rather than corporations, resulting in a decrease in income
and franchise tax revenue. To offset the loss in tax revenue,
certain limited liability companies are required to pay an annual fee
based on total income from all sources reportable to the state.
(b) The Legislature finds and declares that its intent in adopting
Section 17942 was to ensure that limited liability companies pay a
fair and appropriate amount to the State of California, consistent
with constitutional limits, and the changes made by this act with
respect to Section 17942 serve a public purpose and are in
furtherance of the public interest in the fair taxation of limited
liability companies doing business in the state by applying the
apportionment and allocation provisions to total income for purposes
of determining the amount of the limited liability company fee.
(c) The Legislature further finds and declares that this act
serves a public purpose and sound tax policy by affording equitable
tax treatment to many taxpayers doing business in this state with the
expectation of paying a limited liability company fee that is
relative to the level of activity in the state.
SEC. 2. Section 17942 of the Revenue and Taxation Code is amended
to read:
17942. (a) In addition to the tax imposed under Section 17941,
every limited liability company subject to tax under Section 17941
shall pay annually to this state a fee equal to:
(1) Nine hundred dollars ($900), if the total income from all
sources derived from or attributable to this state for the taxable
year is two hundred fifty thousand dollars ($250,000) or more, but
less than five hundred thousand dollars ($500,000).
(2) Two thousand five hundred dollars ($2,500), if the total
income from all sources derived from or attributable to this state
for the taxable year is five hundred thousand dollars ($500,000) or
more, but less than one million dollars ($1,000,000).
(3) Six thousand dollars ($6,000), if the total income from all
sources derived from or attributable to this state for the taxable
year is one million dollars ($1,000,000) or more, but less than five
million dollars ($5,000,000).
(4) Eleven thousand seven hundred ninety dollars ($11,790), if the
total income from all sources derived from or attributable to this
state for the taxable year is five million dollars ($5,000,000) or
more.
(b) (1) (A) For purposes of this section, "total income from all
sources derived from or attributable to this state" means gross
income, as defined in Section 24271, plus the cost of goods sold that
are paid or incurred in connection with the trade or business of the
taxpayer. However, "total income from all sources derived from or
attributable to this state" shall not include allocation or
attribution of income or gain or distributions made to a limited
liability company in its capacity as a member of, or holder of an
economic interest in, another limited liability company if the
allocation or attribution of income or gain or distributions are
directly or indirectly attributable to income that is subject to the
payment of the fee described in this section.
(B) For purposes of this section, "total income from all sources
derived from or attributable to this state" shall be determined using
the rules for assigning sales under Sections 25135 and 25136 and the
regulations thereunder, as modified by regulations under Section
25137, other than those provisions that exclude receipts from the
sales factor.
(2) In the event a taxpayer is a commonly controlled limited
liability company, the total income from all sources derived from or
attributable to this state, taking into account any election under
Section 25110, may be determined by the Franchise Tax Board to be the
total income of all the commonly controlled limited liability
company members if it determines that multiple limited liability
companies were formed for the primary purpose of reducing fees
payable under this section. A determination by the Franchise Tax
Board under this subdivision may only be made with respect to one
limited liability company in a commonly controlled group. However,
each commonly controlled limited liability company shall be jointly
and severally liable for the fee. For purposes of this section,
commonly controlled limited liability companies shall include the
taxpayer and any other partnership or limited liability company doing
business (as defined in Section 23101) in this state and required to
file a return under Section 18633 or 18633.5, in which the same
persons own, directly or indirectly, more than 50 percent of the
capital interests or profits interests.
(c) The fee assessed under this section shall be due and payable
on the date the return of the limited liability company is required
to be filed under Section 18633.5, shall be collected and refunded in
the same manner as the taxes imposed by this part, and shall be
subject to interest and applicable penalties.
SEC. 3. Section 19394 is added to the Revenue and Taxation Code,
to read:
19394. If the fee provided under Section 17942 is finally
adjudged to be discriminatory or unfairly apportioned under the
California Constitution, or the laws or the Constitution of the
United States, the fee of a disfavored taxpayer that files, or has
filed, a timely claim for refund within the period allowed by this
part asserting discrimination or unfair apportionment shall be
recomputed by the Franchise Tax Board for the taxable year in
question, as of the time of allowance of the recomputation, only to
the extent necessary to remedy the discrimination or unfair
apportionment that is not otherwise relieved by Section 19393 and the
amount of the fee, as originally computed, shall be subject to the
provisions hereof relating to original computations.
SEC. 4. (a) The Legislature is aware of pending litigation
challenging the validity of the fee imposed pursuant to Section 17942
of the Revenue and Taxation Code.
(b) The amendments made by Section 2 of this act to Section 17942
of the Revenue and Taxation Code, if enacted, shall apply to taxable
years beginning on and after January 1, 2007.
(c) Section 19394 of the Revenue and Taxation Code, as added by
Section 3 of this act, shall apply to suits for refunds filed on or
after the date of enactment of this act and suits for refunds filed
before that date that are not final as of that date.
(d) Refunds of fees payable as a result of the litigation
described in subdivision (a) shall be limited to the amount by which
the fee paid, and any interest assessed thereon, exceeds the amount
that would have been assessed if the fee had been computed in
accordance with subparagraph (B) of paragraph (1) of subdivision (b)
of Section 17942 of the Revenue and Taxation Code, as added by the
amendments to that section made by Section 2 of this act.
(e) It is the intent of the Legislature that no inference be drawn
in connection with the amendments made by this act to Section 17942
of the Revenue and Taxation Code for any taxable year beginning
before January 1, 2007.
SEC. 5. This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.