Mississippi: Capital of SMLLCs included in Corporate Franchise Tax Base

The Mississippi Supreme Court recently held that a taxpayer could not exclude the capital of its single-member LLCs from its franchise tax base. The taxpayer at issue was a corporation that owned several single-member LLCs doing business in Mississippi.  During an audit of its 2008 through 2010 tax years, the taxpayer filed amended returns to exclude the capital of its single-member LLCs from its Mississippi franchise tax base, which resulted in a refund.  The auditor denied most of the refund and upon review by the Mississippi Department of Revenue’s Board of Review, the remaining refund amount was denied.  The taxpayer then appealed to the Mississippi Board of Tax Appeals, which upheld the denial of the remaining refund amount.  The decision was then affirmed on appeal to the Chancery Court.

Under Mississippi law, franchise tax is imposed on corporations organized, created, or established under the laws of the state.  The taxpayer argued that its single-member LLCs were not corporations and could not be subject to the franchise tax.  The Department did not argue that the single-member LLCs were corporations subject to the franchise tax, but instead argued that the taxpayer was required to report the activity conducted by its single-members LLC subsidiaries on its franchise tax return.  The Department noted that single-member LLCs that are disregarded for federal income tax purposes do not possess their own tax classification and thus, the capital base of disregarded single-member LLCs must be included in the tax base of the sole member corporation.  The Court agreed with the Department, noting that the taxpayer cannot argue both that its subsidiary single-member LLCs are not corporations subject to the franchise tax and that the state does not have the statutory authority to disregard the single-member LLCs and include their capital within the parent corporation’s franchise-tax base. For more information on The Williams Companies, Inc. v. Mississippi Department of Revenue, please contact Kevin Polli at 404-202-3340 or Greg Aughenbaugh at 813-301-2151.