27 Cal. App. 5th 986
Cal. Ct. App. 5th2018Background
- Bunzl Distribution USA, Inc. (Delaware corp.) is part of a unitary, multinational distribution group that uses multiple single‑member LLCs (disregarded entities for federal/state tax purposes in 2005) to operate U.S. warehouses, including in California.
- Six single‑member LLCs owned by Bunzl or its wholly owned subsidiaries filed California LLC returns under Rev. & Tax. Code § 18633.5 and paid required LLC tax/fee because their owners declined to consent to California tax jurisdiction.
- Bunzl prepared a combined UDITPA apportionment for 2005 but excluded the six LLCs’ California property, payroll, and sales from the apportionment numerators on the ground that those LLCs had paid taxes/fees under § 18633.5.
- The Franchise Tax Board (FTB) rejected that exclusion, included the LLCs’ in‑California factors in the apportionment, and assessed Bunzl for additional California income tax (after crediting the LLC payments).
- Bunzl paid the assessment, sought a refund administratively, then sued; the trial court granted summary adjudication for the FTB and entered judgment for the FTB.
- The Court of Appeal affirmed, holding § 18633.5 does not convert disregarded single‑member LLCs into separate entities for UDITPA apportionment or otherwise exempt their owners from UDITPA apportionment rules.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an LLC that files and pays tax/fee under § 18633.5 becomes a separate stand‑alone entity for UDITPA apportionment | Bunzl: § 18633.5 creates an alternative taxation scheme; LLC payments mean LLC factors should be excluded from owner’s UDITPA apportionment | FTB: § 18633.5 only requires certain returns/payments and does not replace UDITPA; LLCs remain disregarded for apportionment | Held: No — § 18633.5 does not alter UDITPA apportionment; LLC factors included in numerator |
| Whether owners who declined to consent to California jurisdiction lack nexus for UDITPA apportionment | Bunzl: owners did no business in CA aside from the LLCs and thus have no CA apportionment factors | FTB: owners fully own LLCs that do substantial CA business; unitary business rules and nexus satisfied | Held: No merit — substantial nexus exists; unitary status controls |
| Whether inclusion of LLC factors results in unconstitutional double/extraterritorial taxation | Bunzl: inclusion causes double taxation / exceeds Commerce/Due Process limits | FTB: UDITPA and crediting mechanism avoid unconstitutional extraterritorial taxation; Bunzl bears burden to show extraterritorial taxation | Held: Argument not adequately raised and fails on merits; Bunzl did not show extraterritorial taxation |
| Whether ambiguous taxation provisions should be construed for taxpayer to exclude LLCs from UDITPA | Bunzl: ambiguity favors taxpayer | FTB: exemptions/ambiguities construed against taxpayer; statutory text and regs show limited separate‑entity treatment | Held: No ambiguity that alters result; § 18633.5 construed as limited and against taxpayer claim |
Key Cases Cited
- Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (federal constitutional limits on state multistate taxation; burden to show extraterritorial taxation)
- Microsoft Corp. v. Franchise Tax Bd., 39 Cal.4th 750 (UDITPA apportionment structure and unitary business principles)
- City of Los Angeles v. Furman Selz Capital Mgmt., 121 Cal.App.4th 505 (disregarded single‑member LLCs not treated as separate entities for income tax purposes absent express statutory language)
- The Gillette Co. v. Franchise Tax Bd., 62 Cal.4th 468 (UDITPA aims to avoid double taxation)
- Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207 (disallowing ‘‘formalist’’ shifts to escape apportionment)