Arizona Says California's "Doing Business" Tax is Unconstitutional

March 2019 | Article

By Laura Robichaud

On March 11, 2019, Arizona Attorney General Mark Brnovich announced that the State of Arizona had filed a legal action against the State of California. The lawsuit challenges California’s tax assessments and seizures against Arizona businesses and individuals related to “doing business” in California and seeks to invalidate California’s “doing business” tax. This California tax is assessed on Arizona businesses that have a passive or non-managing investment in a California limited liability company.

The Arizona Attorney General’s office estimates that Arizona citizens have paid more than $10 million “doing business” taxes to the State of California annually. The Arizona Attorney General’s lawsuit argues that these “doing business” taxes are unconstitutional under the Due Process and Commerce Clauses of the U.S. Constitution. 

A statement by the Arizona Attorney General’s office noted some prior case law on which their lawsuit is based: “The Supreme Court has held that passive investment in a company located in another state is not sufficient ‘minimum contacts’ to impose taxation under the Due Process Clause (Shaffer v. Heitner, 433 U.S. 186 (1977)). The Supreme Court has also recognized four requirements for states to impose taxes on out-of-state businesses under the Commerce Clause. California’s ‘doing business’ assessments brazenly violate all four.”

The result of the California “doing business” tax doesn’t just affect taxpayers—California’s “doing business” tax is also impacting Arizona’s tax collections. The “doing business” taxes are deductible expenses for Arizona tax purposes; therefore, Arizona is losing an estimated $484,000 in annual tax revenue.  

A response from California to Arizona’s lawsuit is due April 30.

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