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Calculating the Limited Liability Company fee

After AB 198

Governor Schwarzenegger signed AB 198 into law on October 11. This bill, which takes effect immediately, revises terms used in the statute (California Revenue and Taxation Code (CR&TC) Section 17942). It changes the fee calculation for all Limited Liability Companies (LLCs) doing business within and outside of the state for taxable years beginning on or after January 1, 2007. Specifically, it modifies the fee imposed on LLCs by basing it on total income derived from or attributable to California by utilizing the sales factor numerator assignment rules contained in CR&TC Sections 25135 and 25136 (as modified by the regulations under CR&TC Section 25137, if applicable). The regulations under CR&TC Section 25137 that exclude receipts from the sales factor entirely are not applied in any case. This change does not modify the amount used as total income for businesses wholly within California.

In three cases under current litigation, the taxpayers contend that the LLC fee is unconstitutionally applied because out-of-state income is used to calculate the fee. Before AB 198 was enacted; the annual LLC fee was based on the LLC's total income from all sources reportable to the state. Total income was defined as gross income from whatever source derived, plus cost of goods sold.

AB 198 also adds CR&TC Section 19394 to allow the fee to be recomputed for a taxpayer that files, or has filed, a timely claim for refund due to pending litigation, if the fee is finally adjudged as discriminatory or unfairly apportioned. In that event, we may find it necessary to request further information to determine the total income derived from, or attributable to California by utilizing the sales factor numerator assignment rules. We will not make such a request until there has been a final resolution of the court cases.

The LLC fee will be computed in the same manner as before except that total income, defined as gross income plus cost of goods sold, will include only income from sources derived from or attributable to California. Thus, an LLC that does business inside and outside California will determine its total California income for purposes of calculating its fee using the rules for assigning sales.

Information about these rules will be available in the 2007 568 booklet, LLC Income Worksheet Instructions, which will be available on our Website on December 17, 2007. Before then, you may contact our Tax Practitioner Hotline at (916) 845-7057 for further information.