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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 92698
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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My accountant is telling me that my LLC fee is based on the

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My accountant is telling me that my LLC fee is based on the goods I sold in California however, he says that you do not subtract the cost of the goods to me from that number. In other words this first number is XXXXX my profit/income but rather what I collected from a client before I paid the vendor. This would mean I am being taxed on an arbitrary number that has nothing to do w/ my income/profit. Please tell me he is wrong? Maggie
Submitted: 5 years ago.
Category: Business Law
Expert:  Law Educator, Esq. replied 5 years ago.

Your accountant is correct to some degree. The LLC franchise tax is based on your GROSS revenue, this is before deductions of costs and expenses. However there have been some recent CA court cases that would suggest this is unconstitutional and you need to sit with your LLC’s attorney to discuss challenging the franchise tax board.

First, in Northwest Energetic Services, LLC v. California Franchise Tax Board, Cal. Super. Ct., No. CGC-05-437721, 4/13/06, the Court decided that the annual fee (starting at a minimum of $800), based on gross income worldwide violated the fair apportionment requirements of the Due Process and Commerce Clauses of the US Constitution.

Second California Superior Court case called Ventas Finance I, LLC v. California Franchise Tax Board, the Court again decided the annual LLC fee was unconstitutional. This case involved a real estate investment trust based outside California but registered to do business as an LLC in the state. The LLC apparently did less than ten percent of its business activity in California during the years in question. The Court held that this LLC tax was unconstitutional because it was not fairly apportioned and was based on worldwide gross receipts rather than its in-state activities.

These two decisions indicate that the LLC fee is unconstitutional regardless of whether the LLC has all of its activities or a part of its activities outside of California. In the end, the LLC fee may be found to be unconstitutional even with respect to California-based LLCs that have no activities outside of California.


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Customer: replied 5 years ago.
I do not think you understand my question. I am not talking about deducting costs and expenses, rather I am talking about interior design business whereby I purchase from a wholesaler and sell to the client for about 10% profit. Why would I be charged for what my client paid to me (which is what my accountant called cost of good sold ) when I had to pay 90% of that money to the wholesaler. It says income should be calculated according to RTC sections 25120 , does this calculate income this way
Expert:  Law Educator, Esq. replied 5 years ago.
I believe I did understand, the franchise tax is based upon GROSS income, which is what you bring in without any deductions of your costs or expenses. Your personal tax for your K-1 is based upon your net income/losses. This is why the two cases I cited to you above are significant in your case, because CA has not yet changed the law, but the courts are ruling the tax calculation method to be unconstitutional.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 92698
Experience: All corporate law, including non-profits and charitable fraternal organizations.
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