Courts: U.S. Supreme Court Denies Review in Dispute Over California’s Aggressive Tax Enforcement

court feature

The U.S. Supreme Court this week denied Arizona’s motion to review a complaint over California’s taxation of Arizona limited liability companies that invest in California businesses.

The February 24 majority opinion was concise, simply stating that “the motion for leave to file a bill of complaint is denied.”

Justices Clarence Thomas and Samuel Alito dissented from the majority opinion, stating that the Supreme Court does not “have discretion to decline review in cases within our original jurisdiction that arise between two or more States.”

The dissenters added that by denying the request, the court left the complaining state with “no judicial forum in which to seek relief.”

The case was filed by Arizona Attorney General Mark Brnovich, who argued that the Franchise Tax Board’s expansive definition of “doing business” in California “reaches out-of-state companies that do not conduct any actual business in California.”

Brnovich said more than 13,300 Arizona-based LLCs pay approximately $10.6 million per year to California under what he described as an illegal scheme in which taxes are assessed on LLCs that have “purely passive investments in California companies.”

Since taxes paid to California generally are a deductible business expense under Arizona law, the attorney general estimated that Arizona is losing approximately $484,000 per year in tax revenue.

In December, the U.S. Solicitor General filed an amicus brief arguing that this case “is not an appropriate case for the exercise of this Court’s original jurisdiction, which the Court has repeatedly stated should be exercised only ‘sparingly.’”

The solicitor general also argued that while Brnovich lacks standing, the Arizona entities impacted by the disputed California taxes could and should seek to litigate their claims in the California courts. (Sources: U.S. Supreme Court opinions, February 24; Arizona Capitol Times, February 24.)