Arizona Asks Supreme Court to Stop California From Imposing California Tax on Passive LLC Investments

We’ve highlighted this issue before. Suppose you are an Arizona resident, and you form Primary LLC in Arizona. Its main purpose is owning a warehouse in Phoenix. But you have some extra money in the LLC, so you invest in Secondary LLC, a Nevada LLC. Secondary invests in various things, including Tertiary LLC, a California LLC. Would the Franchise Tax Board, California’s income tax agency, allege that Primary LLC is doing business in California? You bet. Would they come after you for California’s minimum $800 a year LLC tax? Absolutely. Would they then assess late filing penalties, filing fees, and interest if you don’t pay, and issue payment demands through banks? Of course they have and will do so.

Arizona’s Attorney General, Mark Brnovich, doesn’t like this. He alleges that California is illegally going after Arizona LLCs, and illegally demanding payments from Arizona banks. Mr. Brnovich is asking the US Supreme Court to allow Arizona to sue California at the Supreme Court, as there’s no other venue for such a lawsuit. The Supreme Court will likely rule on the first issue–whether the lawsuit can proceed–before the end of June. If the Supreme Court allows the lawsuit, it would likely be heard next fall or winter in Washington.

By the way, those entities who have fought the FTB in California courts have won their cases. The problem, though, is it costs just $800 to pay the LLC tax; it costs thousands of dollars to fight the FTB. Mr. Brnovich is absolutely correct that it doesn’t make sense for most companies to fight California.

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