AZ AG Sues California For “Doing Business” Tax In U.S. Supreme Court

The Arizona Attorney General Office has filed a lawsuit in the U.S. Supreme Court against the State of California for its tax against businesses and individuals that don’t actually conduct any business in California.

The lawsuit seeks to invalidate California’s “doing business” tax, which is assessed on Arizona businesses that have a passive, non-managing investment in a California limited liability company, according to the Arizona Attorney General Office.

California assesses the $800 “doing business” taxes even though both its state courts and tax appeals agency have held that the taxes are illegal under California law.

The Attorney General’s Office “alleges that these taxes are plainly unconstitutional under the Due Process and Commerce Clauses of the U.S. Constitution. 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.”

According to the Attorney General’s Office, Arizona estimates that its citizens pay over $10 million in the “doing business” taxes to the State of California every year.

The bottom line for the State is that California’s “doing business” tax also impacts Arizona’s tax collections. Since the “doing business” taxes are deductible expenses, Arizona loses an estimated $484,000 in tax revenue each year due to California’s illegal taxation.

The lawsuit alleges that these seizure orders violate both the Due Process Clause (by exercising jurisdiction over out-of-state funds without the requisite “minimum contacts”); and, the Fourth Amendment (by effectuating seizures without a warrant, probable cause, or involvement of any court). Those seizure orders further preclude the banks from filing any court challenge.

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