Partner is Subject to California $800 LLC Fee Based on Flow-Through of Partnership Factors

December 14, 2020


When determining if a limited liability company is doing business in California and owes the $800 LLC Tax, it must take into account its share of any California property, payroll, and sales from a pass-through entity of which it is a member.

By: Betsy Tuck, SALT Manager

We have previously addressed whether a limited liability company (LLC) doing business in California is therefore subject to the state’s annual $800 LLC Tax, based on owning a minority membership interest in another entity that is doing business in California.[1]

Here, we look at this issue based on a recent California Office of Tax Appeals decision addressing a taxpayer’s 2016 claim for refund of the $800 LLC tax.

Some of the key facts in this case are as follows:

  1. Taxpayer is an LLC formed in Delaware and based in New York.
  2. Taxpayer was not registered to do business in California for 2016.
  3. Taxpayer held 0.78%, non-managing interest in 1155 Island Avenue, LLC (“Island”). Island is formed in Delaware and doing business in California during 2016 through ownership and management of property in California.
  4. Island’s California property was valued at $64,239,943 and $65,524,741 based on real property assessments as of January 1, 2016, and January 1, 2017, respectively.
  5. Taxpayer’s only connection to California during 2016 was its Island ownership interest.

Appellant filed and paid the $800 LLC tax on its 2016 California Form 565 and later filed an amended return requesting an $800 refund, claiming no business was done in California.

The California Franchise Tax board (FTB) denied the claim and the taxpayer appealed to the Office of Tax Appeals (OTA). The OTA ultimately determined that the Appellant was doing business in California and subject to the LLC Tax since it met the bright-line nexus property threshold of $54,771 for the 2016 year.

For tax years beginning on or after January 1, 2011, a taxpayer is considered doing business in California and subject to the LLC Tax if (a) the taxpayer is actively engaging in any transaction for the purpose of financial or pecuniary gain or profit OR (b) if any of the following apply:

  • Taxpayer is organized or commercially domiciled in California;
  • Taxpayer’s California sales exceed the lesser of $500,000 or 25% of taxpayer’s total sales;
  • Taxpayer’s California property exceeds the lesser of $50,000 or 25% of taxpayer’s total property; or,
  • Taxpayer’s California payroll exceeds the lesser of $50,000 or 25% of taxpayer’s total payroll.[2]

For purposes of determining the sales, property, and payroll thresholds, a taxpayer must include its pro-rata share from pass-through entities.[3]

The taxpayer did not argue that its share of property well-exceeded the $54,771 threshold. Instead, the taxpayer argued that based on the Swart decision that it was not actively doing business due to its minority, non-managing interest in Island.[4] The OTA disagreed, noting that the tax year in question in the Swart decision was 2010, which was prior to the enactment of the bright-line nexus thresholds.

This case makes clear that there are two tests determining if an LLC is subject to the LLC Tax as described in (a) and (b) above, and that the Swart decision and analysis applies only to the “actively engaged” test under (a). If a taxpayer meets any of the factors listed above under (b), then whether it is “actively engaged” in business in California under Swart and the subsequent cases is not relevant.

If your LLC owns a non-managing, minority interest in a pass-through entity that is doing business in California, it is important to analyze whether you should be filing and paying the California LLC Tax. Aprio’s SALT team has experience with these rules and can assist you to determine the most appropriate course of action, which could include a refund claim. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Betsy Tuck, SALT Manager at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the November/December 2020 SALT Newsletter.

[1] See our February 2017 and October 2019 SALT Newsletters

[2] Cal. Rev. & Tax Code §23101(a) and (b).  The sales, property, and payroll threshold are indexed each year.  You can obtain the thresholds for recent years by clicking here.

[3] Cal. Rev. & Tax Code §23101(d).

[4] Swart Enterprises, Inc. v. Franchise Tax Bd. (2017) 7 Cal.App.5th 497

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.