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Arizona sues California over business taxes

Is California taking unfair -- and illegal -- advantage of Arizona businesses who invest in its state?

The Arizona attorney general (AG) thinks so. As a result, his office has asked permission to bring a lawsuit before the U.S. Supreme Court to settle the issue.

According to the suit, numerous small business investors and limited liability corporations are being taxed, to the tune of about $800 each per year. The AG contends that the taxation is illegal because the businesses are merely investors and not conducting any actual business in California.

The lawsuit contends that California's own laws make the taxation illegal. In addition and that the taxation is, in fact, unconstitutional -- specifically, a violation of the Due Process and Commerce Clauses. Further, the Supreme Court has ruled in the past that passive investment by a company shouldn't make it subject to state taxation.

Most of the impacted businesses get hit with the minimum $800 in taxes imposed by the Golden State. However, some pay substantially more. The AG estimates that investors are paying approximately $10.6 million yearly. If they refuse to pay the taxes voluntarily, California merely gets a "seizure order" forcing their banks to transfer over the funds.

Since those taxes are deductible from a company's business expenses, the end result is that Arizona is losing out on tax revenue -- a total of over $484,000 each year. This lawsuit could have far-reaching implications (and benefits) for Arizona businesses.

Business disputes of all kinds have the capacity to affect your bottom line. If you have a legal problem involving your business, talk with an experienced attorney.

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