{"id":12026,"date":"2019-03-11T11:49:12","date_gmt":"2019-03-11T18:49:12","guid":{"rendered":"https:\/\/www.keytlaw.com\/azllclaw\/?p=12026"},"modified":"2019-07-15T11:57:42","modified_gmt":"2019-07-15T18:57:42","slug":"az-ca","status":"publish","type":"post","link":"https:\/\/www.keytlaw.com\/azllclaw\/2019\/03\/az-ca\/","title":{"rendered":"Arizona Sues California Over California’s $800\/Year LLC Rip Off Tax"},"content":{"rendered":"

Arizona Attorney General Mark Brnovich announced today [March 11, 2019] that his office recently filed suit in the U.S. Supreme Court against the State of California seeking to invalidate California\u2019s extraterritorial tax assessments and seizures, which result from an unconstitutional \u201cdoing business\u201d tax against businesses and individuals that don\u2019t actually conduct any business in California.<\/p>\n

Every year, California assesses an $800 \u201cdoing business\u201d taxes against Arizona businesses that conduct no actual business in California.\u00a0Instead, their only connection to California is a mere passive, non-managing investment in a California limited liability company.\u00a0California continues to assess these \u201cdoing business\u201d taxes even though both its state courts and tax appeals agency have held that the taxes are illegal under California law.<\/p>\n

The lawsuit filed by Arizona alleges that these taxes are plainly unconstitutional under the Due Process and Commerce Clauses of the U.S. Constitution. The Supreme Court has held that passive investment in a company located in another state is not sufficient \u201cminimum contacts\u201d to impose taxation under the Due Process Clause (Shaffer v. Heitner, 433 U.S. 186 (1977)). The Supreme Court has also recognized four requirements for states to impose taxes on out-of-state businesses under the Commerce Clause.\u00a0 California\u2019s \u201cdoing business\u201d assessments brazenly violate all four.<\/p>\n

The amounts collected by these \u201cdoing business\u201d assessments are substantial. Arizona estimates that its citizens pay over $10 million\u00a0in these unconstitutional taxes to the State of California every year.<\/p>\n

These taxes also impact Arizona\u2019s tax collections.\u00a0Since the \u201cdoing business\u201d taxes are deductible expenses, Arizona loses an estimated $484,000 in tax revenue each year due to California\u2019s illegal taxation.<\/p>\n

These figures are further compounded since the tax applies to all individuals in other states who invest in California businesses.<\/p>\n

Extraterritorial Seizures<\/strong><\/p>\n

Making matters worse, if California\u2019s tax assessments are not paid voluntarily, California frequently further tramples on the sovereignty of other states by issuing orders to interstate banks, demanding that they transfer funds in Arizona-based accounts for back payment. Those seizure orders threaten the banks that, if they do not transfer the funds, California will take the taxes and penalties owed from the banks instead.\u00a0Not surprisingly, the banks almost uniformly consent to California\u2019s strong-arm tactics.<\/p>\n

Exhibit G in the filing provides an example where California demanded that Wells Fargo not only transfer the $800 tax, but also a $200 \u201cdemand penalty,\u201d a $432 \u201clate filing penalty,\u201d a $79 \u201cfiling enforcement fee,\u201d and $63.40 in interest, for a \u201cTotal Tax, Penalties, Interest and Fees\u201d of $1574.40.<\/p>\n

The lawsuit alleges that these seizure orders violate both the Due Process Clause (by exercising jurisdiction over out-of-state funds without the requisite \u201cminimum contacts\u201d); and, the Fourth Amendment (by effectuating seizures without a warrant, probable cause, or involvement of any court). Those seizure orders further preclude the banks from filing any court challenge.<\/p>\n

Arizona\u2019s suit seeks to end California\u2019s unconstitutional tax encroachments.<\/p>\n