BILL ANALYSIS Ó
AB 1240
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Date of Hearing: May 2, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1240 (Logue) - As Amended: April 15, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: limited liability companies: annual
fee
SUMMARY : Repeals the annual fee imposed on every limited
liability company (LLC). Specifically, this bill :
1)Eliminates the annual fee imposed on every LLC by repealing
Revenue and Taxation Code Section 17942.
2)Takes effect immediately as a tax levy.
EXISTING LAW imposes an annual tax of $800 and an annual LLC fee
on every LLC organized, registered, or doing business in this
state. The LLC fee applied is determined with reference to the
total income from all sources reportable to this state. The LLC
fee ranges from zero for LLCs with total income from all sources
reportable to this state of less than $250,000, to a maximum of
$11,790 for LLCs with total income from all sources reportable
to this state of $5 million or more. Under the existing
statute, "total income" is defined to include gross income plus
the cost of goods sold, but specifically excludes the LLC's
allocated share of income, distributions from another LLC if
that LLC is also subject to the LLC fee in California.
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates that
this bill will reduce General Fund revenues by $800 million in
fiscal year (FY) 2011-12, $450 million in FY 2012-13, $500
million in 2013-14, and $550 million in FY 2014-15.
COMMENTS :
1)Author's Statement. The author provided the following
statement:
California's economy is in dire need of growth. However,
the hostility toward businesses in both our tax and
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regulatory structures is discouraging businesses from
starting in the state and causing many to either close
their doors or move to friendlier states. It treats them
like the enemy and discourages entrepreneurial effort.
This fee is a perfect example. Instead of taxing a
business based upon net revenue, or profit, it taxes a
business based on gross revenue, or the amount of money
that goes through their hands. This means that even if a
business ends the year having LOST MONEY, they will be
taxed as if they made a profit.
We cannot expect to see long term job growth in California
again until we start treating businesses as they ought to
be treated, like the job creators they are. The creation
of wealth is the only way that an economy grows and jobs
are created, and as such should be encouraged and rewarded.
AB 1240 would make a small step in that direction.
2)Arguments in Favor. Proponents state the following:
"LLC organization is one of the most prevalent ways small
businesses organize. The fact that this tax is imposed only
upon businesses organized as LLCs, and not, for example, upon
corporations, means that it imposes a particular burden on
small business. AB 1240 would correct that.
"The section 17942 tax is especially harmful because it is
imposed without regard to the profitability of the business
being taxed. Thus a start-up business struggling to see its
first profit, or a small business struggling to remain open in
a difficult economy, can be taxed under this law even if it
has no profits at all. This is regressive and economically
harmful."
3)Arguments in Opposition. Opponents state the following:
"The fee was put in place by the legislature in order to
account for the corporation tax loss which occurred when the
state recognized the LLC form. It was originally designed to
be calculated each year in order to provide the state with the
same amount of corporation tax revenue that was lost by
adopting the LLC fee. It was then amended, with bi-partisan
support, to provide the yearly fee at a stable level in order
to make up for revenue loss.
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"With this bill, corporations which re-organize as an LLC will
be able to avoid corporation tax and the additional LLC fee,
which essentially provides a means of tax avoidance just by
the change of the corporate form. Arguably, under the current
fee structure, very large LLC's pay too little, so we would
not be opposed to a study of the equity of the current fee.
However, the bill just eliminates this fee which was designed
to limit tax avoidance, and we oppose such elimination."
4)Other states' information. The FTB provided the following
information on other states:
The states surveyed include Arizona, Florida, Illinois,
Massachusetts, Michigan, Minnesota, Nevada, New York, Oregon,
and Utah. These states were selected due to their geographic
proximity to California or their similarities to California's
economy, business entity types, and tax laws.
Florida, Michigan, Minnesota, Arizona, Illinois, and Utah do
not impose a minimum tax or specific fees on LLCs.
Massachusetts imposes a filing fee of $500 on LLCs.
Nevada does not impose income tax on business entities
conducting business within the state, but does require all
businesses to pay an annual "business license fee" for the
privilege of doing business in the state. For the first year
of doing business, the license fee is $200 and each subsequent
year the fee is $100.
New York imposes a minimum tax of $25 to $4,500 on LLCs based
on their in-state receipts. Oregon imposes a $150 minimum tax
on LLCs.
5)Does the LLC fee discourage business? California is home to
more small businesses per capita than neighboring states,
which impose lower fees and taxes on businesses. A business
in California has access to tens of millions of additional
customers than a business in neighboring states, allowing
businesses the opportunity to attain greater profits from a
potentially larger customer base. Committee staff is not
aware of any studies that show that the LLC fee impedes the
growth and formation of businesses, particularly, since
businesses can always organize as sole proprietorships,
limited liability partnerships, or corporations to avoid
paying the LLC fee. Although the LLC fee may be seen as a
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disadvantage, there are many advantages to organizing as an
LLC. For example, an LLC has the limited liability protection
similar to a corporation, but an LLC is not subject to double
taxation. Furthermore, the annual fee is capped at only
$11,790 for businesses that have a total income of $5 million
or more. Very large profitable businesses organized as LLCs
are reaping large tax savings every year as a result of the
fee cap.
REGISTERED SUPPORT / OPPOSITION :
Support
Small Business Economic Impact Alliance (Sponsor)
Opposition
California Tax Reform Association
California Nurses Association
Analysis Prepared by : Myriam Bouaziz and Oksana Jaffe / REV. &
TAX. / (916) 319-2098