Arizona takes California to court over taxation

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 that California is illegally declaring that investors in certain types of limited liability companies are “doing business” in that state. More to the point, 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 customer’s account. And then California adds various fees and charges.

And there’s something else.

Brnovich estimates that Arizona investors are paying about $10.6 million a year to California under the illegal scheme.

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 actually 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, are unlikely to spend the resources to challenge on an individual bases.

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

More significant, Brnovich said, there is no requirement for the California board to get any sort of 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 actually did business in California.

Based on that, the Tax Board sent 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. And each time Wells Fargo received a seizure order it charged PWS5 a $125 fee.

The lawsuit cites similar examples from other Arizona LLCs.

In his legal papers asking the justices to accept this case, Brnovich also told the Supreme Court justices of other efforts by California to impose its rules on out-of-state operations. That includes the state authorizing its agriculture inspectors to go into other states to investigate whether companies that intend to sell eggs in California are complying with California egg-production standards.

Brnovich said it does no good for the affected Arizona companies who have had their assets seized to seek refunds through Arizona courts.

“Requiring individual companies to file suit in California state courts – when the thrust of their challenge is that California can neither impose the ‘doing business’ tax on them nor haul them into California state courts without violating due process – would effectively force those individuals to surrender their due process rights and acquiesce in California’s exercise of jurisdiction of them as a precondition of adjudicating those due process rights,” the lawsuit states.