California Takes Aggressive Stance on Registration Policies.

The California Franchise Tax Board (FTB) is aggressively contacting out-of-state franchisors (OS Franchisors) in an effort to get such entities to become California taxpayers. The FTB is telling OS Franchisors that they must either register to do business in California or have their California based franchisees withhold 7% of royalty payments to the franchisor. The FTB is citing Cal. Code Regs. §18662-2 (Income Subject to Withholding and Requirements for Withholding) as the State's authority to require the withholding of royalty payments. That section provides, in part, that withholding is required "in the case of rentals or royalties for the use of, or for the privilege of using in [California], patents, copyrights, secret processes and formulas, good will, trademarks, brands, franchises, and other like property of such intangible property having a business or taxable sites" in California. Alternatively, if an OS Franchisor registers to do business in California, it must file a California tax return and, at a minimum, pay tax equal to $800. Currently, California's top corporate tax rate is 8.84%.

The ability for California to require an OS Franchisor to register with the State or have the franchisee withhold on royalty payments is unclear. The United States Supreme Court requires a physical presence within a state in order for a taxpayer to be required to collect sales and use taxes on sales within the taxing state. Quill v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904 (1992). The Court, however, has yet to adopt a physical presence standard for income based taxes. As a result, a number of states have taken the position that a physical presence is not required for income tax nexus and have asserted tax against taxpayers on an "economic nexus" theory. For example, Arizona has ruled that an out-of-state franchisor-corporation that licensed the use of trademarks, trade names, manuals, and software to three Arizona franchisee-corporations had sufficient nexus with Arizona and could, therefore, be taxed on royalty and licensing fees received from its Arizona franchisees.

Given the complexity of the nexus issue and the ramifications of registering to do business in California, we strongly suggest OS Franchisors contact their tax advisors to determine the appropriate actions to be taken if contacted by the FTB.

For more information on this matter, please contact Aaron Chaitovsky, Soula Tsambiras or Stephen Hellner at 212-697-1000. We will be happy to assist you.

---

Amended New York Law Affects All Franchisors

Effective August 7, the International Franchise Association (IFA) issued a press release stating that for the first reporting period originally due September 20. Please note that this deadline has been extended to September 21, and New York State will offer a 90-day automatic extension to file the initial return.

Click here to read the full press release issued by the IFA
New legislation has been enacted by New York State that imposes tax filing requirements on every franchisor with franchisees that do business in New York. The legislation requires franchisors to electronically provide sales and use tax information on New York State franchisees, and imposes penalties on franchisors for failing to provide any required information.

How this affects you

Franchisors must file their information return electronically on the New York State Tax Department website (http://www.nystax.gov/sbc/thirdpty.htm) by September 21, 2009. Information regarding the electronic return- including a spreadsheet template to get you started on gathering franchise information- is available on the New York State Department website. Also included on the website is a 90-day extension form that must be applied for electronically on or before September 21, 2009 to extend the due date of the return to December 21, 2009.

Overview

The recent legislation (Subpart G of Part V-1 of Chapter 57 of the Laws of 2009) was enacted in January 2009 and became effective as of April 7, 2009. Franchisors required to file the information returns under the new law include every franchisor that has at least one franchisee that is required to be registered as a New York State sales tax vendor. In addition, the franchisor is also required to provide each franchisee with a statement including the information that was reported to New York State.

Filing Requirements

The New York State Department of Taxation and Finance issued a technical bulletin (TSB-M-09(9)S) detailing the franchisee information to be included in the returns. The required information includes, but is not limited to, the following:

• General information about the franchisees (legal name, DBA, name of owners, phone number, address of each location)
• Federal employer identification number and NYS sales tax certificate of authority for the franchisee
• Franchise agreement date
• Gross sales for each franchisee location as reported to the franchisor
• Royalty payments made by each franchisee location
• Amount of sales made by the franchisor of their affiliate to each franchise location
• Amount of sales made to each franchise location by supplier designated by franchisor

Filing Deadlines

The first information returns required under the new law are due on or before September 21, 2009 and will cover the period from March 1, 2009 through August 31, 2009. The next information return will be due on or before March 20, 2010 and will cover the period from September 1, 2009 through February 28, 2010. Subsequently, annual information returns will be due on or before March 20th of each year, and will cover the period from March 1 of the previous year through February 28th (29th) of the current year.
The franchisor may apply for a 90-day extension of time to file the return. The extension must be applied for electronically on or before September 21, 2009 to extend the due date of the return to December 21, 2009.

Penalties

Franchisors face costly penalties for failure to provide any of the required information for each affected franchisee, or for including inaccurate for false information on the return.

Franchisors are subject to a potential penalty of $500 for 10 or fewer reporting failures, and potentially up to $50 for each additional reporting failure. Additionally, a penalty of no less than $500 but up to $2,000 will be levied on franchisors that fail to file the return by the deadlines described above. The penalties cannot exceed a total of $10,000 for any filing period.

Additional note

This New York State law is still in the very early stages. Therefore, there are still many unanswered questions as to the actual reporting requirement. As with anything tax related, this alert is meant as a general update on the tax changes. Speak with your tax advisor to address your particular situation, or contact us at 212-697-1000. We will be happy to assist you.

Mike Zyborowicz
Audit Manager, Franchise Division
mzyborowicz@citrincooperman.com

Aaron Chaitovsky
Partner-in-Charge, Franchise Division
achaitovsky@citrincooperman.com

Steven Winchester
Tax Partner
swinchester@citrincooperman.com

To read more about our services in the franchise industry, click here.

---

Email this article to a friend

---

Index

Opportunities in the Apparel Marketplace
Ever Think About Investing In A Vineyard?
Retirement Planning Does Not Stop When You Retire
Economic Shifts Bring New Pitfalls And Prizes