The California Office of Tax Appeals (OTA) reversed the Franchise Tax Board’s (FTB) determination that an out-of-state limited liability company (LLC) had taxable nexus with California solely because it held an ownership interest in an LLC operating in the state that ranged from 1.12% to 4.75%. California imposes an annual $800 tax on LLCs “doing business” in the state, with “doing business” defined by statute to mean “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” Cal. Rev. & Tax. Code § 23101(a). Relying on a Court of Appeal decision which held an out-of-state corporation with a 0.2% ownership interest in a California LLC investment fund was not “doing business” under the same definition, the FTB argued “0.2% is deemed to be the threshold between actively doing business and passively doing business” and because the out-of-state member’s interest in the LLC doing business in California was “well beyond the 0.2% … limit,” it too was doing business in the state. The OTA rejected the FTB’s “bright line” test and instead engaged in a more thorough inquiry of the relationship between the out-of-state member and the in-state LLC. The OTA concluded the out-of-state LLC did not have any ability or authority to influence or participate in the management or operation of the LLC doing business in the state based on such facts as: the LLC doing business in California was manager-managed; the out-of-state company had no power to manage the LLC or bind or act on its behalf in any way, and the out-of-state company had no interest in any specific property in the LLC. Accordingly, the OTA held the out-of-state LLC was not “doing business” in California.

Appeal of Jali, LLC, OTA Case No. 18073414 (July 8, 2019) (pending precedential).