California Legislature Passes Bill Applying Retroactive LLC Fee Formula

On March 24, 2006, we posted a client alert detailing the California Franchise Tax Board’s published procedures for taxpayers wishing to file protective claims in response to Northwest Energetic Services, LLC v. California Franchise Tax Board, which held that the LLC fee codified at Cal. Rev. & Tax. Code § 17942 was an unconstitutional unapportioned "tax" rather than a fee or levy.¹ While that case is still pending in the California Court of Appeal, the state legislature has taken action to amend the LLC fee provisions and limit existing and potential refund claims.

On October 10, 2007, the California Governor signed into law AB 198, amending Cal. Rev. & Tax. Code § 17942. Without admitting that the current LLC fee is unconstitutional, the amendments attempt to remedy the infirmities found by the court in Northwest Energetic and Ventas Finance I, LLC v. Franchise Tax Board by amending Cal. Rev. & Tax. Code § 17942 to require apportioning the LLC’s total income to California.