Northwest Energetic Services, LLC v. California Franchise Tax Board

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 and an order awarding attorney fees. In awarding the refund, the trial court concluded that former section 17942—a levy on limited liability companies registered to do business in California—is unconstitutional because the levy is measured by the limited liability company’s 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 Constitution (Commerce…