Arizona attorney general takes case against a California tax to U.S. Supreme Court

PHOENIX — Arizona Attorney General Mark Brnovich is asking the U.S. Supreme Court to rule that California is illegally imposing its taxes on Arizona residents and businesses.

In a new filing, Brnovich contends California is illegally declaring that investors in certain types of limited liability companies are “doing business” in that state. The state is imposing a minimum $800 tax on those Arizona entities.

It’s not just the levy that Brnovich wants the nation’s high court to void.

He also said that when Arizonans refuse to pay, California is filing orders requiring banks in Arizona to make the payments from the customers’ accounts. And then California adds various fees and charges.

Brnovich estimates that Arizona investors are paying about $10.6 million a year to California under this system.

But any money paid by an Arizona-based LLC is generally considered a deductible business expense under Arizona law. And he figures that loses this state more than $484,000 a year.

A representative from the California Attorney General’s Office said the agency was reviewing the complaint.

Technically speaking, Brnovich has not filed suit. Instead, he is asking the U.S. Supreme Court for permission to do so — and directly to the high court. Brnovich said that no other court, state or federal, has the authority to litigate complaints like this between states.

The legal papers say it would be one thing if California were assessing its “doing business” tax solely against entities actually conducting business in that state.

“Instead, California assesses the ‘doing business’ tax so expansively that it reaches out-of-state companies that do not conduct any actual business in California,” the lawsuit claims. The only connection, Brnovich said, is that it may have “purely passive investments in California companies.”

Part of the reason Brnovich said he interceded is that the affected businesses, with only $800 a year at stake for each, are unlikely to spend the resources to challenge on an individual basis.

He is taking particular aim at the California Tax Board taking the assets of the Arizona investors through “seizure orders.” These are notices to financial institutions demanding that they surrender the amounts sought.

Brnovich said there is no requirement for the California board to get any court order.

“California law also does not require any finding of probable cause before the Tax Board may issue a Seizure Order,” the lawsuit states. “Instead, the Tax Board may issue Seizure Orders electronically ‘in its sole discretion.’ ”

And then there are the other costs.

Brnovich cited the case of PWS5, a limited liability company organized under Arizona law. That LLC has a 10 percent ownership in Innutra, another LLC that did business in California.

Based on that, the Tax Board send a demand letter in 2015 which assessed not only the $800 tax but also a $200 “demand penalty,” a $432 late filing penalty, a $79 filing fee and $63.40 in interest.

There were future assessments.

When PWS5 did not pay, the Tax Board issued a series of seizure orders to Wells Fargo bank totaling more than $12,600. Each time Wells Fargo received a seizure order, it charged PWS5 a $125 fee.

The lawsuit cites similar examples from other Arizona LLCs.

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