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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