California Annual LLC Tax Applied to Non-California Investment Groups based on their Distributive Shares of California Property
California Annual LLC Tax Applied to Non-California Investment Groups based on their Distributive Shares of California Property
On May 13, 2021, the California Office of Tax Appeals (the “OTA”) issued a decision that a non-California limited liability company can be treated as “doing business” in California, and can thereby become subject to California’s annual $800 LLC tax, if it is investing in California real and tangible property through a lower tier-company and if its distributive share of the California real and tangible property exceeds the statutory “doing business” threshold set forth under California law.[1]
The taxpayers in this case -- LA Hotel Investments #3, LLC (“Hotel #3”) and LA Hotel Investments #2, LLC (“Hotel #2”) -- are limited liability companies organized under the laws of the state of Louisiana. These companies were not registered to do business in California. However, they were organized to invest in companies that did conduct business in California. In 2013, Hotel #3 owned a 5.41% interest in a California limited liability company that owned approximately $25 million in buildings and other depreciable assets. Hotel #2 owned a 2.56% interest in a different California limited liability company in 2013, and a 5.13% interest in 2014 and 2015, which owned approximately $51 million in land, buildings and depreciable assets. It was undisputed that all of the property owned by the underlying California limited liability companies was located in California.
An LLC that is “doing business” in California must pay an annual LLC tax of $800. An LLC is “doing business” in California: (1) if the LLC is actively engaging in any transaction in California for the purpose of financial or pecuniary gain or profit; or (2) if the LLC satisfies one of the bright-line “nexus” tests set forth in the California Revenue and Taxation Code. One bright-line “nexus” test is that the value of the LLC’s real and tangible personal property in California exceeds the lesser of $50,000[2] or 25 percent of the taxpayer’s total real property and tangible personal property. An LLC need only meet one of these “doing business” tests to be subject to the annual LLC tax.
The OTA determined that both Hotel #3 and Hotel #2 were doing business in California for the tax years at issue. Based on the percentage interests held by both Hotel #3 and Hotel #2 in the lower-tier LLC entities, the OTA determined that each of Hotel #3 and Hotel #2 had a distributive share of California real and tangible property in excess of the $50,000 “nexus” threshold. The “nexus” test applied even though Hotel #3 and Hotel #2 were “passive” investors in the respective lower-tier LLCs and neither was actually conducting business in California. Accordingly, both Hotel #3 and Hotel #2 were liable for the annual LLC tax for the tax years at issue.
This decision is an important reminder to non-California companies contemplating indirect investments in California property that even passive investments may subject them to California “doing business” taxes. If you have questions regarding this case, or if you would like to learn more about the requirements for doing business in California, please do not hesitate to reach out to us.