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New California Law Changes Property Tax Law and Closes Contract Voidability Penalty Loophole

A new law important to certain foreign LLCs went into effect in California on September 15, 2014. According to the Imperial Valley News, Governor Brown signed the law that day, and it includes a clause that indicates that the law takes effect immediately. Known as AB 1143, the law applies to taxes that must now be paid by some businesses who were previously exempt, and changes California property tax law.

Change to Property Tax Law

First, the bill changed property tax law. Prior to the enactment of the new law, California property tax laws required that, “when valuing property by comparison with sales of other properties, that the properties be sufficiently near, and be sufficiently alike the property being valued.” The new law changes that definition. Now the definition says:

“When valuing property by comparison with sales of other properties, in order to be considered comparable, the sales shall be sufficiently near in time to the valuation date, and the properties sold shall be located sufficiently near the property being valued, and shall be sufficiently alike in respect to character, size, situation, usability, zoning, or other legal restriction as to use unless rebutted pursuant to Section 402.1, to make it clear that the properties sold and the properties being valued are comparable in value and that the cash equivalent price realized for the properties sold may fairly be considered as shedding light on the value of the property being valued. ‘Near in time to the valuation date’ does not include any sale more than 90 days after the valuation date.”

Change to Corporation Tax Law in Conjunction with Federal Changes

The second thing the bill did was change corporation tax law due to changes in federal law. Prior to its enactment, California law imposed a tax on every corporation for each taxable year based on its net income. The classification of a business as a corporation was based on regulations of the Franchise Tax Board that were supposed to be consistent with federal regulations that went into effect in 1997. The existing law required that the state classification of eligible businesses be the same as the business’s federal classification for tax purposes. The new law requires that state regulations be consistent with federal regulations that went into effect in May of this year.

Changes for Certain LLCs and Corporations

Finally, the new law also affected specific limited liability companies (LLCs). Under existing law, LLCs and corporations that are suspended or forfeited for failure to file a tax return or for failure to pay taxes or associated fees face certain consequences, like contract voidability. The law subjects nonregistered LLCs to that same sort of contract voidability if the foreign nonregistered LLC is subject to suspension for those same reasons. This closes a loophole and places foreign LLCs on equal footing with local LLCs and corporations.

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