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A Pinch of SALT for the Franchise World

As seen in Pillars of Franchising

Both franchisors and franchisees are presented with a host of complicated issues to decipher and plan for when it comes to their business operations. These considerations may include intellectual property issues, rights and obligations of the parties enumerated in the Franchise Disclosure Document, financial terms, and various purchasing terms and quality standards. A topic that may not come up as often is that of state and local tax (SALT).

As states and localities seek additional revenues and begin to craft new laws and guidance to do so, both Congress and the U.S. Supreme Court have been reluctant to impose any type of uniformity requirements upon states and cities. The result is a hodgepodge of rules and ambiguous guidance that often deviate and conflict among different taxing jurisdictions.


For franchisors, one of the most common SALT topics that comes up is nexus or jurisdiction to be subject to tax. Nexus refers to a particular business’s presence in or connection with a state or locality that allows the state or city in question to impose a tax, whether that tax is a net income tax, gross receipts tax, franchise tax or sales and use tax. Maintaining property and payroll in a state, in addition to entering into a state for any business purpose could give rise to nexus. This may include the use of subcontractors as well. In addition to physical nexus, there is a concept referred to as economic nexus, which refers to maintaining enough of an economic presence with a state or locality to permit imposition of SALT.

As applied to franchisors, there is a history of case law and various statutes and regulations across the country which have implicitly approved of the concept of applying economic nexus to their businesses. Specifically, when a franchisor provides a franchisee with the right to operate a store, business, or other commercial activity, that franchisor should have nexus in any location where the franchisee(s) operate. This is based on the notion that the franchisor’s specific franchise (and other associated intellectual property, such as trade name, good will, and patents) are being utilized in the state where a franchisee is operating.

The concept of economic nexus has been applied to franchisors in the context of net income tax, gross receipts or franchise tax, and sales tax. In 2018, the U.S. Supreme Court approved of a state’s sales tax nexus law which was conditioned on generating $100,000 in sales or 200 separate transactions from the state in question, even without any physical presence. This “bright-line” nexus concept has been duplicated in about half the states for sales tax purposes and partially-adopted in more than a dozen states for net income, gross receipt or franchise tax purposes.

In the income, gross receipts, and franchise tax world, another confounding issue when thinking about SALT is the proper sourcing of revenue for apportioning income or gross receipts. What this means in practice is that when a company pays business taxes (whether net income, franchise, or gross receipts tax) to multiple states, there are various apportionment formulas utilized to allocate income to various jurisdictions to prevent duplicative taxation.

A key component (and sometimes the sole component) of an apportionment formula is the receipts factor—this is essentially a ratio computed by dividing a business’s in-state sales by the business’s sales undertaken/delivered everywhere. The receipts factor is computed based on sourcing rules which also deviate by state. For example, one state may look to the location of the franchisee, another may look to where the franchisor’s intellectual property is managed, while another may look to where costs were incurred in generating, managing, and servicing the franchises.

Finally, there is also sales and use tax considerations to contend with in this arena. While the granting of a franchise generally does not implicate sales or use tax, many franchise agreements require purchasing or leasing of various goods, equipment, and services from a franchisor who may have various vendor relationships and economies of scale that could benefit pricing. The franchisor in this case would need to consider a host of different issues, not limited to:

  • Does the franchisor have nexus in the state or locality in question?
  • Is the product or service being provided taxable?
  • If sales tax needs to be collected, how does one register, collect, remit, and report it?
  • When purchasing a product or service for resale, is the appropriate resale certificate being completed and presented to vendors to avoid duplicative tax on the purchase and subsequent sale?
  • If the franchisor is purchasing items on behalf of franchisees, what is the proper way to account for and report this for sales tax purposes?


Franchisees face many of the same issues as franchisors, however, the activities of an unrelated franchisor in another state should generally not create nexus for any SALT for a franchisee in that state if it does not have independent nexus on its own. Therefore, franchisees will also have to consider the locations where they maintain property and payroll, have regular economic activity, or generate sales when thinking about subjectivity to various business taxes.

However, franchisees who sell tangible personal property have an extra nexus protection when it comes to net income tax. That protection is referred to as P.L. 86-272, a federal statute which prohibits a state from imposing a net income tax on a business which limits its activities to sales of tangible personal property and solicitation for those sales in that state. This nexus shield is only applicable to net income tax and not gross receipts or franchise tax and can be completely eliminated by conducting other non-deminimis activities in a state or locality.

Franchisees who sell tangible personal property generally source revenue based on the location of delivery, while other types of revenue may be sourced based on location of performance, intangible use, customer facilities, company employees or where costs of performance and maintenance are incurred.

Finally, when it comes to sales tax—franchisees will have to collect sales if making taxable sales and if there is nexus in the state or locality at issue. In the context of franchise agreements, there could be opportunities for savings for franchisees by closely examining the items or services purchases and determining exactly where delivered or used. The savings could come into play if sales tax may be collected on a product which is not taxable or may be sourced to another location where not taxable. These opportunities arise when services have an interstate element to them and/or when software, information services and various digital products are under consideration.

Subscribers can also view the full article from Pillars of Franchising here:

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