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California Residents: Your Out of State LLC Will Face Double Taxation

California residents beware! If you own an interest in an out of state LLC and sell it, you will have to pay even more in taxes.

 

The California Office of Tax Appeals (OTA) recently held such in Matter of Buehler, OTA Case No. 21067960, 2-23-OTA-215P (pending precedential) (issued Feb. 28, 2023).

 

In Buehler, Mr. Buehler, a California resident, owned an interest in a Massachusetts LLC. He was also one of the LLC’s three managers. The LLC provided portfolio management services and had an office in Massachusetts.

 

Buehler then sold his interest in the LLC, and paid taxes in Massachusetts. But because Buehler was a California resident, the Golden State wanted their share too.

 

The OTA found that Buehler’s interest in the LLC constituted intangible property. Because it was intangible property, Buehler’s interest was subject to California income tax. In order to avoid this tax, the LLC interest would have to acquire a “business situs” in Massachusetts.

 

The OTA defined having a “business situs” as “being localized in connection with a business, trade, or profession in the state so that its substantial use and value attach to and become an asset of the business, trade or profession in the state.” If a person has a business situs in that state, they can avoid being subject to California income tax.

 

Despite the fact that Buehler was a managing partner of the LLC, and the LLC owned property in Massachusetts, Buehler still did not acquire a “business situs” in Massachusetts.

 

The OTA held that because Buehler’s LLC interest did not acquire a “business situs” in Massachusetts, the sale of the interest is subject to California income tax.

 

This has far-reaching consequences for California residents. If you sell your out-of-state LLC interests, you will face double taxation. This is true, no matter how active or passive that interest may be.

 

 

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