NORTHWEST ENERGETIC SERVICES v. CALIFORNIA FRANCHISE TAX BOARD

Filed 1/31/08

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FIVE

In these consolidated appeals, the California Franchise Tax Board (FTB) challenges a judgment awarding respondent Northwest Energetic Services, LLC (Northwest) a refund of amounts paid under Revenue and Taxation Code section 17942^[1]and an order awarding attorney fees. In awarding the refund, the trial court concluded that former section 17942a levy on limited liability companies registered to do business in Californiais unconstitutional because the levy is measured by the limited liability companys total income, regardless of whether the income derived from or is attributable to business within the state. FTB contends this ruling was erroneous. As to the award of attorney fees, FTB urges that section 19717 is the exclusive means of

obtaining attorney fees in a tax refund action, Northwest failed to establish entitlement to a recovery of attorney fees under Code of Civil Procedure section 1021.5 and the common fund doctrine, and the court erred in awarding fees in an amount several times greater than the lodestar.

We hold that former section 17942, as applied to Northwest in the years in question, violated the Commerce Clause of the United States (Commerce Clause), and that Northwest is entitled to a refund. We further hold, however, that the trial courts order does not support an award of attorney fees greater than the lodestar. We therefore reverse the attorney fees order and remand for further consideration of the attorney fees award consistent with this opinion.

I. FACTS AND PROCEDURAL HISTORY

At all times relevant to this appeal, Northwest was a limited liability company (LLC) organized under the laws of the State of Washington, with business locations in Washington and Oregon. It engaged in the business of distributing explosives and explosives-related services to customers in Washington, Montana, Oregon, and Idaho. Northwest had no operations, property, inventory, employees, agents, independent contractors or place of business in California. Nor did it solicit customers in California or make any deliveries to customers in California.

Northwest nonetheless registered as a limited liability company (LLC) with the California Secretary of State pursuant to Corporations Code section 17451 in June 1997. In years following, it filed tax returns with the FTB and untimely paid an $800 minimum tax imposed under section 17941. It did not, however,pay an amount imposed under former section 17942, based on an LLCs total income from all sources reportable to this state for the taxable year. (Former  17942, subd. (a).) The parties agree that this amount (the Levy) is imposed on the LLCs statutorily-defined total income, wherever earned, without apportionment according to the percentage of business or income attributable to activities in California.

FTB subsequently notified Northwest that it owed $27,458.13 for amounts due under the Levy, along with late payment penalties and interest, for tax years 1997, 1999, 2000, and 2001 (Years in Issue). Northwest paid the $27,458.13 and cancelled its registration with the Secretary of State effective June 13, 2002.

Northwest filed a claim for refund, which FTB denied. Northwest thereafter exhausted its administrative remedies, including appealing the FTBs decision to the State Board of Equalization, without success.

Northwest filed this lawsuit in January 2005, seeking a refund of the amounts it paid for the Levy, penalties, and interest. Among other things, Northwest alleged that the Levy was unconstitutional on its face and as applied, because former section 17942 contains no method for apportioning the Levy to the proportionate amount of income earned in California and, therefore, discriminates against interstate commerce and violates due process and equal protection rights.

A court trial was conducted based upon the parties joint stipulation of facts and their stipulation regarding documents that could be admitted into evidence without objection. After the parties submitted trial briefs and the court held oral argument, the court issued a proposed statement of decision. FTB filed objections, to which Northwest replied. In the statement of decision, filed April 13, 2006, the court found that the Levy violated both the Commerce Clause and Due Process Clause of the United States Constitution. Accordingly, the Levy could not be applied to Northwest and Northwest was entitled to a refund of all amounts paid. In May 2006, the court entered judgment ordering a refund of $27,458.13 to Northwest, plus interest and costs to be determined.

FTB filed a notice of appeal from the judgment in July 2006. (Appeal No. A114805.)

Northwest thereafter filed a motion for attorney fees and costs, seeking $5 million in attorney fees. As explained further post, Northwest contended that it was entitled to attorney fees under the private attorney general doctrine codified in Code of Civil Procedure section 1021.5 and the common fund doctrine, that its reasonable attorney fees amounted to $214,287.50, and that this lodestar amount should be adjusted upward due to numerous factors as well as the significance of the benefit counsel obtained for LLCs. After briefing and oral argument, in August 2006 the court awarded Northwest $3.5 million in attorney fees under Code of Civil Procedure section 1021.5 and the common fund doctrine.

FTB filed notices of appeal from the attorney fees order in October 2006 (appeal Nos. A115841 & A115950).

On December 13, 2006, we granted FTBs motion to consolidate appeal numbers A114805, A115841, and A115950, pursuant to the parties stipulation.^[2]

II. DISCUSSION

The parties raise the following issues: (1) whether the Levy set forth in section 17942 is a tax or a fee; (2) whether the Levy violates the Due Process or Commerce Clauses of the United States Constitution; and (3) whether the trial court erred in its award of attorney fees to Northwest.

A. Is the Section 17942 Levy a Tax or a Fee?

At the outset, the parties strenuously debate whether the Levy constitutes a tax or a fee. We first address the context of the Levy and then, based on its legislative history, conclude that it more closely resembles a tax.^[3]

1. LLCs, Former Section 17942, and the Statutory Scheme

The Levy was enacted in 1994 as part of the Beverly-Killea Limited Liability Company Act (LLC Act). Codified as new Title 2.5 to the Corporations Code (Corp. Code,  17000 et seq.) with conforming amendments to other codes such as the Revenue and Taxation Code, the LLC Act authorized for the first time the formation, operation, and regulation of LLCs within California. Before the enactment, a business entity could form in California only as a corporation, partnership, or sole proprietorship.

An LLC is a hybrid entity that offers certain advantages over corporations and partnerships, by combining aspects of each. Like a corporation, an LLC is a distinct legal entity and its members (owners) have limited liability for the entitys debts and obligations; LLCs thereby provide an advantage over certain partnerships and sole proprietorships. (Corp. Code,  17001, subds. (t), (x), (z), 17101.) Like a partnership, a LLCs members may participate actively in the management of the organization, thus offering an advantage over certain corporations. (See Corp. Code,  17150; see 9 Witkin, Summary of Cal. Law (2001 supp.) Corporations,  43A, p. 346 (Witkin).) Moreover, unless it elects otherwise, an LLC is a pass-through entity for tax purposes, akin to a partnership or S-corporation (but without certain other limits placed on S-corporations). Profits are not taxed at the entity level but are instead passed through to members and taxed on an individual basis, thus avoiding the double-taxation aspect of a C-corporation.

In light of the growing popularity of LLCs, the California Legislature enacted the LLC Act with the aim of expanding Californias competitive business environment. (9 Witkin, supra, at p. 346.) A Senate Rules Committee report for Senate Bill 469, the bill from which the LLC Act derived, stated in part: The bill is intended to conform with the trend in other states to provide a new organizational vehicle for small and medium sized businesses, which would grant their owners limited liability, but at the same time allow them to be treated as partnerships for federal purposes (at considerable tax savings) and to receive preferential tax treatment by the state in comparison with corporate tax treatment. Sponsors argue that the availability of LLC status will improve Californias business climate by facilitating formation of new businesses in California. Sponsors are further concerned that for lack of LLC legislation, the status of activities conducted by foreign LLCs will not be clear, which may reduce their enthusiasm for doing business in California. (Sen. Rules Com., Off. of Sen. Floor Analyses, 3d reading analysis of Sen. Bill No. 469 (1993-1994 Reg. Sess.) as amended Jan. 26, 1994, p. 3.)

The LLC Act, among other things, sets forth: requirements for the formation of LLCs; regulations concerning the allocation of profits and losses, distributions of money and property, withdrawal of membership, assignment of interests, and dissolution of LLCs; requirements for the registration of foreign LLCs with the Secretary of State and penalties for violating the prohibition against transacting business without registration; and (4) filing and tax requirements for LLCs, with conforming changes to existing law.

Under the LLC Act, an LLC forms in California by the filing of articles of incorporation with the Secretary of State. (Corp. Code,  17050, subd. (a).) An LLC organized outside of California (like Northwest), must register with the Secretary of State before transacting intrastate business in California. (Corp. Code,  17451, subd. (a).)

As the result of registering with the Secretary of State, the LLC Act requires LLCs to pay the annual minimum tax set forth in section 17941. (See Corp. Code,  17050, subd. (d) [domestic LLCs]; Corp. Code,  17451, subd. (d) [foreign LLCs].)^[4] Similarly, section 17941 provides that the annual minimum tax must be paid by LLCs doing business in the state or having had its articles of incorporation accepted or certificate of registration issued by the Secretary of State. ( 17941, subds. (a) & (b).)

An LLC thus subject to the tax imposed by section 17941 is also required to pay the Levy pursuant to former section 17942. Subdivision (a) of former section 17942 reads: In addition to the tax imposed under Section 17941, every limited liability company subject to tax under Section 17941 shall pay annually to this state a fee equal to specified amounts dependent upon the amount of the total income from all sources reportable to this state for the taxable year. Total income is defined as gross income, as defined in [s]ection 24271, plus the cost of goods sold that are paid or incurred in connection with the trade or business of the taxpayer. (See Former  17942, subd. (b)(1).) As mentioned, the parties agree that this definition refers to the LLCs statutorily-defined total income, wherever earned, and without apportionment according to the percentage of business or income attributable to activities within California.^[5] (See FTBs 1997 form 568 booklet [LLCs Total Income from all sources reportable to California . . . means income before taking into consideration any apportionment and allocation.].) Proceeds from the Levy are deposited into the states general fund.

2. The Tax-Fee Distinction

The distinction between a tax and a fee has been well-discussed in Proposition 13 cases. The essence of a tax is that it raises revenue for general governmental purposes and is compulsory rather than imposed in response to a voluntary decision . . . to seek . . . benefits. (Sinclair Paint, supra, 15 Cal.4th at p. 874; see Professional Scientists, supra, 79 Cal.App.4th at p. 944 [Ordinarily, taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or privilege granted and [m]ost taxes are compulsory rather than imposed in response to a voluntary decision to develop or to seek other governmental benefits or privileges.].) A fee, on the other hand, funds a regulatory program or compensates for services or benefits provided by the government. (Sinclair Paint, supra, at pp. 874-875.)

The question, therefore, is whether the Levy is a compulsory payment imposed for the purpose of raising revenues for general governmental purposes, or whether it funds a regulatory program or compensates for government services or benefits voluntarily sought by the LLC. Whether the Levy is a tax or a fee is a question of a law that we decide de novo upon an independent review of the record. (Sinclair Paint, supra, 15 Cal.4th at p. 874.)^[6]

3. Statutory Language

We begin by looking at the words of the statute, giving them their usual and ordinary meaning. (Lennane v. Franchise Tax Bd. (1994) 9 Cal.4th 263, 268.) Former section 17942, subdivision (a) reads: In addition to the tax imposed under Section 17941, every limited liability company subject to tax under Section 17941 shall pay annually to this state a fee equal to specified amounts dependent upon the amount of the total income from all sources reportable to this state for the taxable year. (Italics added.) Although the Legislature plainly labeled the Levy as a fee, the statutory language does not indicate whether the Levy is imposed for purposes of raising general governmental revenue, for funding benefits and services, or for funding a regulatory provision. (Cf. Sinclair Paint, supra, 15 Cal.4th at pp. 871-872; Professional Scientists, supra, 79 Cal.App.4th at p. 940.) Labeling the Levy a fee is not determinative of its nature. (Weekes v. City of Oakland (1978) 21 Cal.3d 386, 392-394 [employee license fee measured by employees gross receipts constituted an occupation tax notwithstanding its label as a fee].)

As for the broader statutory scheme, the LLC Act reflects to some extent an effort to regulate LLCs in California. (See, e.g., Corp. Code,  17000 et seq.) The statutory language does not, however, identify any connection between the Levy and this

regulatory activity or its costs or benefits. (See United Business Com. v. City of San Diego (1979) 91 Cal.App.3d 156, 165 [If revenue is the primary purpose and regulation is merely incidental the imposition is a tax; . . . [but if] regulation is the primary purpose the mere fact that . . . revenue is also obtained does not make the imposition a tax.].) To determine whether the Levy is a tax or a fee, we must turn to its legislative history.

4. Legislative History Demonstrates the Levys Purpose was to Raise Revenue

The legislative history of the LLC Act demonstrates unequivocally that the Levys purpose was to raise revenue in order to make up for the loss of income tax proceeds that would result if entities were formed and operated as LLCs instead of corporations. To reach this conclusion, one need look no further than the FTBs own analyses of SB 930 and SB 469, which led to the enactment of the LLC Act.

Due to the favorable tax treatment of LLCs, it was believed that fewer businesses would choose to operate as corporations. This would decrease the states revenue from corporate income taxes: a C-corporation at the time was taxed at a rate of 9.3 percent on net income, an S-corporation was taxed at a 1.5 percent rate, but an LLC would have no entity tax on net income. FTB thus projected that if the LLC Act included no new sources of revenue, state tax revenues would decrease in the $690 million range over a five-year period. As confirmed in the FTBs analysis of SB 930 on August 11, 1993, these revenue losses would result from avoidance of the entity-level tax (both measured and minimum tax) and operating loss deductions that would be available to members of LLCs.

The Legislature therefore added two revenue-raising provisionsan $800 minimum tax (see  17941) and the Levy (see former  17942) to the legislation, expressly intending to render it revenue neutralthat is, to replace the projected lost income tax revenues. A letter from the author of SB 469, Senator Beverly, to Governor Wilson, dated August 31, 1994, states: The tax provisions [of SB 469] have been carefully crafted to ensure the measure is revenue neutral. It accomplishes this in two ways: a) by imposing an annual $800 minimum tax (equal to the corporate minimum franchise tax), and b) by imposing a fee based upon the entitys gross income. (Sen. Robert G. Beverly, letter to Gov. Pete Wilson, Aug. 31, 1994.) Similarly, a Senate Rules Committee report on SB 469 quoted the California Chamber of Commerce as follows: As proposed by this bill, there is no revenue loss to the State of California. LLCs would pay the regular $800 corporate or franchise fee and a second LLC fee based on gross receipts. In addition, the investors in the LLC pay taxes at the investor level. The Franchise Tax Board estimates that the measure is revenue neutral. (Sen. Rules Com., Off. of Sen. Floor Analyses, Rep. on Sen. Bill No. 469 (1993-1994 Reg. Sess.) as amended Jan. 26, 1994, p.3.) In fact, the FTBs analysis of SB 469 in February 1994, factoring in the $800 minimum tax and fee, projected a revenue gain of $14 million over the period 1994-1995 through 1997-1998.

To ensure that the Levy and $800 minimum tax would make up for revenue losses, SB 469 also required FTB to analyze annually the revenue impact of the LLC Act and to adjust the amount of the Levy to maintain revenue neutrality. (See METHODOLOGY FOR THE LIMTED LIABILITY COMPANY FEE ADJUSTMENT CALCULATION [] AUGUST 9, 1994.) As stated in Senator Beverlys letter to Governor Wilson: In addition, the measure contains intent language calling for a review by the Franchise Tax Board after the first two years of operation to determine if the initial assumptions used in computing the fees are correct. If, in the out years, revenues drop off and the bill is no longer revenue neutral, the Franchise Tax Board would be authorized to adjust the fees to eliminate any fiscal impact on the state. (Sen. Robert G. Beverly, letter to Gov. Pete Wilson, Aug. 31, 1994.) The FTBs bill analysis for SB 469 read: For taxable years beginning on or after January 1, 1999, the Franchise Tax Board would be required to conduct a study focusing on the tax revenue impact, if any, of recognizing LLCs. The purpose of the study would be to determine if the recognition of LLCs results in an increase or decrease in state tax revenues. (Franchise Tax Board, Analysis of Sen. Bill 469 (1993-1994 Reg. Sess.) Feb. 17, 1994.) To this end, the FTB would: [c]ompare the state tax revenue that would have been generated by business entities (e.g., S corporations, general corporations, limited partnerships, etc.) that convert to LLCs had they not reorganized as LLCs with the revenue generated by the minimum tax [ 17941] and schedule of fees [former  17942] which the entities would be subject to as LLCs; and adjust the schedule of fees to offset any increase or decrease in state income tax revenues discovered as a result of the study.^[7]

Aside from the Legislatures plain intent to impose the Levy in order to make up for lost income tax revenues, there are other indications that the Levy constitutes a tax rather than a fee. As with state income tax proceeds, proceeds from the Levy are deposited in the states general fund for general governmental purposes. In addition, the Legislature chose for the Levy to be administered by the FTB according to the states provisions for administering California income taxes, rather than to the State Board of Equalization or to Californias Fee Collection Procedures Law ( 55001 et seq.;  17942, subd. (c) [the Levy shall be collected and refunded in the same manner as the taxes imposed by this part [part 10, Personal Income Tax], and shall be subject to interest and applicable penalties].)

5. FTBs Argument that the Levy is a Fee is Unpersuasive

The FTBs primary argument is that the Levy constitutes a regulatory fee because it was enacted as part of the LLC Act, which allowed for the formation, registration and regulation of LLCs.^[8] (See Professional Scientists, supra, 79 Cal.App.4th at p. 950.) In particular, FTB contends, the Legislature enacted Revenue and Taxation Code section 17942 pursuant to its police power (Cal. Const., art IV,  8) to impose a regulatory fee on entities seeking the benefits of the LLC business form and limited liability protection for their members. The FTB further notes that the LLC Act was enacted as an urgency measure [i]n order to help stem the flow of business and jobs from California, protect the rights of Californians dealing with limited liability companies, and improve Californias business climate and tax base . . . .

The FTBs argument has no merit. A regulatory fee is an imposition that funds a regulatory program. (Professional Scientists, supra, 79 Cal.App.4th at p. 950.) In the matter before us, there is no indication that the Levy funds any regulatory program; to the contrary, the legislative history demonstrates that the Levy was intended to make up for lost income tax revenues, and funds generated by the Levy are placed in the states general fund. Nor is any regulatory program even mentioned in the legislative history or the LLC Act itself. While the LLC Act may set forth rules as to how LLCs may operate in California, it does not include the type of regulatory program described in the cases on which the FTB relies. (See, e.g., Sinclair Paint, supra, 15 Cal.4th at pp. 871-872 [program of evaluation, screening and follow-up for lead contamination supported by fees paid by certain manufacturers]; Professional Scientists, supra, at pp. 939-940 [filing fee imposed to defray costs of managing and protecting fish and wildlife trust resources].)

In addition, the FTB fails to demonstrate any nexus between the Levy and the expense of any regulatory program. [T]o show a fee is a regulatory fee and not a special tax, the government should prove (1) the estimated costs of the service or regulatory activity, and (2) the basis for determining the manner in which the costs are apportioned, so that charges allocated to a payor bear a fair or reasonable relationship to the payors burdens on or benefits from the regulatory activity. (Collier v. City and County of San Francisco (2007) 151 Cal.App.4th 1326, 1346.) Here, FTB has established neither requirement. It offered no evidence as to the estimated cost of any service or regulatory activity attributable to Northwest or LLCs in general. Although FTB claims the Legislature, in setting the amount of the Levy, made determinations regarding the value of the benefits of the LLC Act and evaluated the impact or burden of allowing LLCs to operate in California, FTB has not supported its claims by citations to the record. Nor has FTB shown that charges allocated to a LLC bear a fair or reasonable relationship to the LLCs burdens on or benefits from the regulatory activity. It argues that the four tiers of former section 17942, imposing a different tax depending on the amount of the LLCs total worldwide income, reflects the Legislatures decision to apportion the Levy according to the amount of the LLCs business. But there is no indication of such legislative intent in the legislative history, or any indication why a tax based on the worldwide income of the LLC would reflect a fair apportionment among LLCs for the funding of a California regulatory program.^[9]

Professional Scientists, on which FTB relies for its regulatory fee argument, confirms that the Levy is not a valid regulatory fee. The court in Professional Scientists stated: A regulatory fee may be imposed under the police power when the fee constitutes an amount necessary to carry out the purposes and provisions of the regulation. (Professional Scientists, supra, 79 Cal.App.4th at p. 945, italics added.) In the matter before us, there is no indication that the fee constitutes an amount necessary to carry out whatever regulation is afforded by the LLC Act. To the contrary, the revenue generated by the Levy appears to far exceed any reasonable cost of regulating or providing services to LLCs. Based on evidence provided by Northwest, comparing the LLC fees collected in each of the calendar years 1997-2002 with the fiscal year budgets of the Secretary of State for fiscal years 1996-1997 through 2001-2002, the Levys proceeds were more than half of or exceeded the entire budget of the Secretary of State. The Secretary of State, of course, does more than regulate LLCs. (See Gov. Code,  12159 et seq. [describing duties of the Secretary of State].) Indeed, under the heading FISCAL IMPACT, the FTBs analysis of SB 469 indicated that [t]he costs associated with implementing and administering this bill are not expected to be substantial. Under Professional Scientists, even if the Levy did constitute a regulatory fee, it would be invalid because it surpasses the costs of the regulatory program they purportedly support.

In a related but conceptually different argument, the FTB contends that the Levy constitutes a fee because it is imposed in exchange for benefits LLCs obtain upon voluntarily registering in California. (See Professional Scientists, supra, 79 Cal.App.4th at p. 944 [noting distinction between regulatory fees and fees imposed in exchange for benefits].) For example, the FTB argues: The Legislature determined that the value of the above benefits [what a LLC can do in California] to a business entity, and the LLC fee the entity would pay for these benefits, would be measured by the size of the business as expressed by the amount of its total income. . . . Similarly, the Legislature determined that the benefits to LLCs and their members would increase proportionally with the size of the business, and the resulting fee was apportioned among LLCs based on the size of the business. Again, however, there is no indication in the legislative history, or anything else in the record, suggesting that the LLC fees are necessary for the state to be able to provide services or benefits to LLCs in California.^[10]

FTB attempts to explain away the fact that the proceeds of the Levy are deposited into the general fund, arguing that the existence of a special fund is not dispositive of whether the Levy constitutes a tax or a fee. (Citing Professional Scientists, supra, 79 Cal.App.4th at p. 942 [The fact that Fish and Game does not operate an independent regulatory program with a correlative accounting system does not detract from its regulatory role.].) FTBs reliance on Professional Scientists in this regard is misplaced. The proceeds in that case were deposited in the Department of Fish and Games preservation fund to defray a portion of that departments costs incurred for its environmental review required by state law. (Professional Scientists, supra, at p. 951.) The fees were set to cover the departments costs and were annually reviewed and adjusted to ensure the costs were fully covered. (Id. at p. 941.)

The FTB also argues that the Levy goes into the general fund rather than a special fund because the benefits provided to LLCs under the LLC Act are public services and facilities that are paid from the general fund and administered by several different government agencies. In addition to regulation by the Secretary of State, the FTB posits, services are provided by the FTB (processing an LLCs form 568 income tax return, auditing form 568, sending notices indicating when an assessment is not paid and taking collection actions, and providing reports to the Legislature as required) and agencies involved in refund lawsuits (the State Board of Equalization (SBE), the attorney generals office, and the superior court).

FTBs argument is unconvincing. It provides no evidence of the costs of these activities or how the costs relate to the amount of the Levy. Furthermore, agencies cited by the FTB, such as the Attorney General and the superior court, do not confer benefits directly upon Northwest or incur costs specific to LLCs. Instead, the costs they incur are part of their provision of services to the general public. There is no indication that these services or costs will increase due to the formation of LLCs under the LLC Act.

Story continues as Part II..

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^[1] Revenue and Taxation Code section 17942 was amended in 2007. (Stats. 2007, ch. 381,  2; see post, fn. 21.) For clarity, we refer to the version of the statute at issue in this appeal as former section 17942. Unless otherwise indicated, all further section references are to the Revenue and Taxation Code.

^[2] On April 23, 2007, the FTB filed a request for judicial notice of a corrected declaration filed in Ventas Finance I, LLC v. FTB, San Francisco Superior Court No. 05-440001 (Ventas Finance), pertaining to the estimated revenue losses likely resulting from the trial courts decision in this case, and the FTB analysis of Assembly Bill (AB) 1614 (estimating the revenue impact of apportioning the Levy) issued on April 19, 2007. We deferred our ruling on the request. We now grant it. On October 18, 2007, the FTB filed a request for judicial notice of legislative history purportedly relevant to its contention that the trial court erroneously awarded attorney fees. Northwest objected to the request, moved to strike part of FTBs reply brief for introducing new issues, and alternatively sought leave to file an additional brief to address arguments raised in the reply brief. We deferred our ruling. We now grant the FTBs October 18 request for judicial notice and deny Northwests motion to strike and request to file an additional brief.

^[3] In arguing whether the Levy constitutes a fee or a tax, the parties rely primarily on cases decided under Proposition 13 (Cal. Const., art. XIII A). (See, e.g., Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866, 869, 872-873 (Sinclair); California Assn. of Prof. Scientists v. Department of Fish & Game (2000) 79 Cal.App.4th 935, 939 (Professional Scientists).) In those cases, the distinction between fees and taxes was critical, because a special tax within the meaning of Proposition 13 requires passage by a two-thirds vote. (Sinclair, supra, at pp. 872-873; Professional Scientists, supra, at p. 939.) Here, for reasons we discuss post, whether the Levy is a tax or a regulatory fee is less significant. We nonetheless address the issue for clarity of our analysis and in light of FTBs further contention that a different constitutional test applies to fees. We do not determine whether the Levy might constitute a tax or a fee in any context other than the one squarely raised by this appeal.

^[4] LLCs also have the option to elect to be treated for tax purposes as a corporation. We discuss this matter post.

^[5] Because of the parties agreement on this point, we do not decide whether the statutory phrase all sources reportable to this state should be interpreted to imply apportionment to California activities. As will be seen in our discussion post, such an interpretation would appear inconsistent with legislative history, as well as the parties positions.

^[6] The parties refer us to a number of cases pertaining to the burden of proof, albeit in disparate contexts. (Consolidated Accessories Corp. v. Franchise Tax Board (1984) 161 Cal.App.3d 1036, 1039 [taxpayer bears the overall burden of proof in a tax refund lawsuit]; Professional Scientists, supra, 79 Cal.App.4th at p. 945 [in Proposition 13 case, the government bears the burden of proving whether the assessment is a fee or a tax]; Mission Housing Development Co. v. City and County of San Francisco (1997) 59 Cal.App.4th 55, 78-79 [The party challenging the constitutionality of a statute bears the burden of proving it unconstitutional.].) Regardless of the how we assign the burden of proof in this case, we would reach the same conclusions.

^[7] The requirement of the FTB to conduct an annual study to adjust the LLC fees to the extent they would fully offset the revenue loss of allowing LLCs to operate in California was codified in former section 17943. (Stats. 1996, ch. 952,  19.) In 2001, the section was repealed. (Stats. 2001, ch. 391,  2.)

^[8] Other types of fees recognized by California courts include special assessments, based on the value of benefits conferred on property, and development fees, which compensate the state for permits or governmental privileges. (Sinclair, supra, 15 Cal.4th at p. 875.)

^[9] In an earlier version of SB 469, the Levy did provide for apportionment, in the sense that the fee would be imposed only on receipts derived from or attributable to sources within this state. It is not altogether clear from the record how or why this language was changed. Given the oft-stated legislative desire to maintain revenue neutrality, a reasonable inference is that legislators were concerned that the revenue generated from a fee based only on receipts derived from or attributable to sources within this state would not be sufficient. In other words, California would lose money unless the fee was imposed on non-California business.

^[10] The FTB also argues: In order to fiscally be able to offer the LLC business form to those entities seeking it, the Legislature enacted revenue neutral legislation to regulate LLCs and protect California citizens. It is unclear whether the FTB means by this argument that the Levy is a regulatory fee because it funds a regulatory program, the Levy is a fee because it reflects the cost of services or benefits obtained by LLCs in exchange for registration, or simply that the Levy makes up for revenue by entities forming as LLCs rather than corporations. The first two alternatives are meritless for reasons discussed in the text. The latter alternative confirms that the Levy is a tax.