BILL ANALYSIS Ó
AB 1143
Page A
ASSEMBLY THIRD READING
AB 1143 (Skinner)
As Amended April 22, 2013
2/3 vote. Urgency
REVENUE & TAXATION 8-0 APPROPRIATIONS 17-0
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|Ayes:|Bocanegra, Dahle, Gordon, |Ayes:|Gatto, Harkey, Bigelow, |
| |Mullin, Nestande, Pan, V. | |Bocanegra, Bradford, Ian |
| |Manuel Pérez, Ting | |Calderon, Campos, |
| | | |Donnelly, Eggman, Gomez, |
| | | |Hall, Holden, Linder, |
| | | |Pan, Quirk, Wagner, Weber |
| | | | |
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SUMMARY : Provides that a foreign nonqualified limited liability
company (LLC) is subject to contract voidability provisions if
it has failed to file a required tax return with the Franchise
Tax Board (FTB) or pay the amount of state tax due.
Specifically, this bill :
1)Clarifies the existing definition of a "taxpayer" for purposes
of the contract voidability provisions to include a business
entity that is:
a) Organized as an LLC under a statute or law, a state or a
federally recognized Indian Tribe, or another jurisdiction;
or
b) Identified in the FTB regulations as being organized
under the laws of a foreign country as an LLC.
2)Specifies that the contract voidability provisions, with
regard to an LLC, are applicable beginning on January 1, 2014,
or the first day of the taxable years for which the taxpayer
has failed to file a return, whichever is later.
3)Makes other conforming, technical changes.
4)Takes effect immediately as an urgency statute.
EXISTING LAW :
AB 1143
Page B
1)Authorizes the creation of various business entities,
including corporations and LLCs. Provides that all
corporations and LLCs, which are either doing business in
California, or incorporated or registered and qualified by the
Secretary of State (SOS) to do business in California, must
file appropriate income tax returns or information returns and
pay the appropriate tax, penalties, and interest.
2)Requires every domestic and registered foreign LLC and
corporation to file a Statement of Information with the SOS,
within 90 days after the filing of its original Articles of
Organization or Application for Registration, and biennially
thereafter, during the applicable filing period. Imposes a
penalty for failure to file the Statement of Information with
the SOS by the due date.
3)Authorizes FTB to suspend a corporation's and an LLC's powers,
rights, and privileges for non-payment of fees due or
non-filing of tax returns. (Revenue and Taxation Code (R&TC)
Sections 23301 and 23301.5).
4)Subjects corporations and LLCs, other than foreign
nonqualified LLCs, to contract voidability for failure to file
required tax returns or to pay taxes, penalties, fees, or
interest. (R&TC Section 23304.1).
5)Allows business entities that are subject to contract
voidability to obtain relief by paying all the tax due, filing
required tax returns and following certain specified
procedures. (R&TC Section 23305.1).
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual revenue gain of $30,000 in fiscal year (FY)
2013-14, $80,000 in FY 2014-15, and $20,000 in FY 2015-16.
COMMENTS :
1)Author's Statement . The author states that, "When domestic
and foreign qualified (registered with the state) LLCs fail to
pay taxes, penalties, fees, or interest, or when they fail to
file required tax returns, they are subject to "contract
voidability." When an entity is subject to contract
voidability, any contract entered into may be voided by
another party to the contract, which is a significant penalty
AB 1143
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for any business. While domestic and foreign qualified LLCs
are subject to this penalty, foreign nonqualified LLCs were
inadvertently not included.
"AB 1143 closes a loophole for foreign LLCs not registered with
the state, thereby subjecting them to the same contract
voidability laws as other LLCs and as all corporations.
Making this change will provide an additional incentive for
foreign nonqualified LLCs to register with the Secretary of
State and to stay current with their state tax obligations, as
well as provide greater protections to California consumers."
2)Arguments in Support . The proponents of this bill state that
it is important to ensure that "LLCs are registered and paying
their appropriate taxes to California." They believe that
existing law is not sufficiently clear as to whether an
out-of-state LLC may be compelled to register in California
and pay the LLC fees. Thus, the proponents argue that AB 1143
is needed to "close any potential loophole that loses tax
revenue and advantages out-of-state companies."
3)Background: What is an LLC ? SB 469 (Beverly), Chapter 1100,
Statutes of 1994, authorized formation of LLCs in California.
An LLC is a business entity formed by members by filing a
document, usually called "Articles of Organization," with an
officer designated by state law. An LLC combines aspects of
partnerships and corporations, so an LLC is less formal and
more flexible than a typical corporation, yet offers
protection as well as certain advantages that are much the
same. For example, LLC owners have limited liability for the
entity's debts and obligations, similar to the status of
shareholders in a corporation. Their assets are separate from
the assets of the LLC so they cannot be seized. Members of
the LLC may choose for the LLC to be taxed as a regular
corporation or as a partnership, where the income and losses
are normally passed through to the owners. Flow-through
taxation is advantageous since members are only required to
pay taxes on their earnings once, instead of paying both
corporate and individual taxes.
The Legislature feared that the federal tax benefits conferred
by LLC status would lead many businesses to change to the LLC
form and would provide an incentive for new businesses to
choose LLC status, thereby diminishing the state's corporate
AB 1143
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tax base without a commensurate LLC entity-level tax. In
recognition of the expected revenue loss as LLCs replaced
corporations as the form of choice for business entities, SB
469 contained both an annual tax (in an amount equal to the
minimum franchise tax and the limited partnership tax) and an
annual fee (based on total income received by the LLC). In
addition to the $800 annual tax, every LLC must pay a fee if
the total California annual income is equal to or greater than
$250,000. It was thought that the fee would ensure that
allowing LLCs to do business in California had a neutral
effect to the state's revenues. Currently, the LLC fees vary
from $900 for income ranging between $250,000 and $499,999 to
$11,790 for income of $5 million or more.
4)Tax Filing Requirements for LLCs . All LLCs classified as
partnerships or disregarded entities that organize in
California, register in California, or conduct business in
California, must file California Form 568 Limited Liability
Company Return of Income. California Form 568 must be filed
by the 15th day of the 4th month after the close of the LLC's
taxable year. An LLC required to file Form 568 must pay an
annual tax of $800 and may be subject to an LLC fee based on
its total income derived from, or attributable to, the state
of California. The annual tax is due by the 15th day of the
4th month of the taxable year.
All LLCs classified as corporations that organize in
California, register in California, conduct business in
California, or receive California source income, must file
California Form 100. The California Form 100 must be filed by
the 15th day of the 3rd month after the close of the LLC's
taxable year. The LLC will be taxed at the corporate tax rate
of 8.84% and will be subject to a minimum franchise tax of
$800.
5)Suspension or Forfeiture and Contract Voidability: Disparate
Treatment for Different Entities ? Under existing law, a
domestic LLC as well as a foreign qualified LLC, i.e., an LLC
that is registered with the California SOS, may be subject to
suspension or forfeiture for failure to file a tax return or
for failure to pay delinquent taxes, penalties, fees, or
interest within 60 days of the FTB mailing a final notice.
Similar rules apply to domestic corporations, foreign
qualified corporations, and foreign nonqualified corporations
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that have an FTB-assigned account number.<1>
One of the consequences of suspension or forfeiture for an LLC
or a corporation is a possibility that the LLC's or
corporation's contracts could be voided. Any contract entered
into by that LLC or corporation may be voided by another party
to the contract during the suspension or forfeiture period.
The third party may exercise the right to declare a contract
void by filing a lawsuit, and a court will not issue a final
judgment rescinding the contract unless the taxpayer is
provided with a reasonable opportunity to cure the
voidability. In no event may a court order a contract
rescinded without providing full restitution to the taxpayer
of the benefits provided by the taxpayer under the contract.
Existing law allows all business entities subject to contract
voidability to obtain relief from contract voidability by
filing an application, as prescribed, submitting all
delinquent tax returns, and paying any tax as well as
interest, fees and penalties due.
A foreign nonqualified LLC, i.e., an LLC that is not registered
with the California SOS, is the only type of business entity
that is excluded from the contract voidability provisions.
When SB 469 authorized formation of LLCs in California in
1994, LLCs were specifically included in the definition of
"taxpayer" and the FTB was authorized to submit LLCs for
suspension to the SOS for non-payment of taxes or for failure
to file required tax returns. This definition applies for
purposes of those provisions that relate to suspension,
forfeiture and revivor of corporate powers as well as
voidability of corporate contracts. (R&TC, Article 7, Chapter
2 of Part 11). However, the existing definition of "taxpayer"
only refers to an LLC, foreign or domestic, that is organized
in California or registered with the SOS. Thus, an LLC that
is neither organized nor registered in California with the SOS
(i.e., a nonqualified foreign LLC) is not subject to contract
voidability.
By subjecting those LLCs to the same provisions that currently
apply to domestic and qualified foreign LLCs, as well as
---------------------------
<1> A foreign nonqualified corporation that does not have an
FTB-assigned account number is subject to contract voidability
on the first day of the taxable year for which the taxpayer has
failed to file a required tax return with the FTB.
AB 1143
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domestic and foreign corporations, this bill would rectify the
inequity of treating similarly-situated taxpayers differently.
6)The Period of Contract Voidability . This bill specifies that
contracts of an LLC would be subject to contract voidability
beginning on the later of :
a) The first day of the tax year for which the LLC failed
to file a required tax return; or
b) On January 1, 2014.
According to the FTB, the contract voidability provisions
would apply to foreign nonqualified LLCs differently,
depending on whether or not the LLC has an FTB-assigned
account number. Similarly to the treatment of foreign
nonqualified corporations, a foreign nonqualified LLC with an
FTB-assigned account number would be subject to contract
voidability if it fails to file a tax return or pay delinquent
taxes, penalties, fees or interest within 60 days of the FTB
mailing a final notice. The LLC will be able to obtain relief
from contract voidability by either filing an application with
the FTB or qualifying with the SOS.
A foreign nonqualified LLC without an FTB-assigned account
number would be subject to contract voidability beginning on
the first day of the tax year for which the LLC failed to file
a required tax return (or January 1, 2014, whichever is later)
and ending on the date the LLC qualifies with the SOS or
obtains an FTB account number.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0000471