I can just imagine the light bulb appearing over the head of a New York tax department employee: “Hey! All of these franchisees report their sales to their franchisors – they have to because they all pay a percentage royalty on their gross sales. So why not require franchisors to file reported gross sales information with us so we can confirm that franchisees are paying the right amount of sales tax!”
The very first franchisor sales-activity tax-reporting requirement in the nation went into effect in New York over the summer, and the first filing deadline arrived on September 21, 2009. Franchisors across the country scrambled to gather and submit the required information, although many companies simply sought the automatic 90-day extension of time in which to file. And that process had its own online challenges so that some companies couldn’t get the filing or an extension on time. There has been lots of frustration floating through franchisor corridors in the past few weeks.
This franchisor-assisted audit process has two steps. First, the franchisor files a ‘return’ with New York tax authorities containing basic contact information about every franchisee located in New York, gross sales reported for the specific period of the report, the amount of New York state and local sales tax collected by franchisees, the amount of royalty payments made to the franchisor, the royalty percentage of gross sales reported, sales made to each franchise location by the franchisor or an affiliate, and a few other choice tidbits of information that franchisors may or may not have in their possession.
The second step: the franchisor is required to send a ‘statement’ to each franchisee providing the franchisee with the information reported to the state. This is not unlike the federal requirement to file vendor payment information with the IRS and send 1099 forms to the taxpayer.
The New York requirement is a novelty right now, but if it is successful other states could pick up on it and create a patchwork filing regime that will dog franchisors and their franchisees in the years ahead.
Andrew Caffey is one of the nation’s leading franchise legal specialists and he represents franchisors across the United States. Caffey served as General Counsel of the International Franchise Association, a member of the Governing Committee of the ABA Forum on Franchising, and Chair of the ABA Forum on Franchising. He also is a member of the bar in Maryland and the District of Columbia, and a member of the Panel of Neutrals of the American Arbitration Association. Caffey has appeared on numerous franchise programs and is a frequent speaker and author on subjects of franchise and business opportunity regulation.