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California asks Supreme Court to stay out of tax fight with Arizona

May 27, 2019

PHOENIX – California officials are urging the U.S. Supreme Court to butt out of a dispute between that state and Arizona over how it imposes its taxes on some of this state’s residents and businesses.

In new legal filings, Joshua Patashnik, the California deputy solicitor general, defended the way his state’s Franchise Tax Board decides whether certain limited liability companies from Arizona are effectively doing business in his state. That determines whether they are subject to California’s $800 minimum “doing business’’ tax.

But Patashnik told the justices that they need not even decide whether the California statutes are fair and legal as they are applied.

He said anyone unhappy with the assessment has a variety of ways to appeal a decision of the Franchise Tax Board, both before the tax is paid and even afterward.

“Indeed, a number of taxpayers are currently pursuing claims in California comparable to the ones Arizona seeks to assert on behalf of Arizona companies,’’ Patashnik wrote. “And there is no indication that ordinary judicial processes are inadequate to resolve them.’’

The Supreme Court does tend to be the arbiter of disputes between sovereign states. And Arizona Attorney General Mark Brnovich, in asking the justices to intercede, has posed the issue in that way.

Patashnik disagreed.

“Cases like these are not appropriate for the court’s original jurisdiction because they are pecuniary disputes regarding taxation of private parties, not a substitute for the diplomatic settlement of controversies between sovereigns,’’ he wrote.

At the heart of the dispute is the contention by Brnovich that California is assessing its “doing business’’ tax in a way where it reaches companies that are not conducting actual business in the state. The connection being seized upon by California is that these are Arizona limited liability companies that have what Brnovich contends are “purely passive investments in California companies.’’

Brnovich, in his own filings with the Supreme Court, said he is interceding on behalf of the Arizona LLC and their owners because it isn’t worth the time or effort of any one of them to challenge what amounts to an $800 charge.

But the overall effect, he said, is massive.

Brnovich estimates that Arizona investors are paying about $10.6 million a year to California under what he said is that state’s illegal scheme.

And he said Arizona itself is being hurt: Any taxes paid by an Arizona LLC to another state are generally considered deductible business expenses on Arizona income taxes. The result, Brnovich said, is Arizona loses more than $484,000 a year.

Patashnik said that the sheer scope of the claim being made by Brnovich is a good reason for the justices to send him packing. He said if they were to accept the case it would effectively put them in a situation where they would have to “wade through the corporate records and individual circumstances of thousands of businesses to determine which of them might be entitled to a state tax refund.’’

Brnovich also is challenging what he said are orders being filed by California requiring banks in Arizona to take the money directly from a customer’s account when the tax is not paid.

But Patashnik told the justices that Brnovich has no legal right to assert a claim of illegal seizure on behalf of any individual. And even if he did, Patashnik said such orders made on banks do not violate the Fourth Amendment prohibitions against illegal search and seizure if they are supported by probable cause and do not involve any intrusion into the privacy of the taxpayers’ offices.

The justices have set no date to decide whether to intercede.

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