Ariz. Attorney General’s Office files national lawsuit challenging Calif. business tax

Arizona Attorney General Mark Brnovich announced that his office filed a lawsuit in the United States Supreme Court challenging a California business tax.

The Attorney General’s Office said California courts have ruled the tax illegal, but the state still collects $10 million from Arizonans – even those who do not conduct business in California – every year.

“This is a challenge to California’s extraordinarily aggressive policy of extraterritorial tax assessment and enforcement, which tramples over state borders and flouts well-established constitutional precedents of this Court,” the lawsuit said. “California’s actions violate the Due Process Clause of the Fourteenth Amendment (hereinafter, “Due Process Clause”), the Commerce Clause, and the Fourth Amendment. These constitutional violations inflict substantial harm on Arizona.”

The lawsuit alleges that the tax is unconstitutional, referencing that in upholding the Commerce Clause, the Supreme Court recognizes four requirements for a state to impose taxes on out-of-state business. California’s “doing business” tax violates all four, the Attorney General’s office said.

California’s “doing business” tax imposes a flat, annual tax of $800 on each LLC or corporation doing business in their state. The tax classifies taxpayers as doing business in the state if they satisfy any of these conditions, “ (1) being domiciled in California, exceeding any specified amounts in California for any of (2) gross ‘sales,’ (3) ownership of ‘real property and tangible personal property,’ or (4) paying ‘compensation.’”

Any individual who meets any of the conditions is deemed to be doing business in California and subject to the tax.

The Attorney General’s Office also sites issues with how California collects the taxes.

“If California’s 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,” the Attorney General’s Office said. “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.”

The tax also impacts Arizona’s tax collections, according to the Attorney General’s office.

“Since the ‘doing business’ taxes are deductible expenses, Arizona loses an estimated $484,000 in tax revenue each year due to California’s illegal taxation,” the office said.

“Taxpayer should not be subjected to the CA filing requirements by virtue of his/her status as a member in a manager-managed. Taxpayer had no right to control the conduct of the LLC business, and therefore cannot be said to be “doing business” in CA.,” wrote James I. Barash from audit, tax, and consulting firm RSM US LLC in the lawsuit. “As such, Taxpayer requests that the impounded funds be returned and that Taxpayer be released of any tax liability in the State of California.”

Emily Richardson

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