We have seen recently how the comments of a single franchisee can impact an entire franchise system, for good and bad. How does a franchisor maintain consistency in it’s messaging when social media presents an instant and far reaching outlet for franchisees? How does a franchisor protect itself legally? Here is an interesting piece from the “Wall Street Journal” on social media policy.
Monthly Archives: November 2012
An Applebees franchisee and Papa John’s are contemplating adjustments to their workforce and plans for expansion now that the Patient Protection and Affordable Care Act is certain to be implemented. As we await the release of guidance and regulations outlining the details of the law, if you haven’t done so already, Franchisors must assess the impact the law will have upon their systems and their franchisees and plan proactively.
The outcomes of the 2012 U.S. Presidential and Senate elections have virtually guaranteed that the Business Activity Tax Simplification Act (BATSA) will not become law, at least not in the foreseeable future. BATSA is a proposed Federal law designed to impose uniform standards on the ability of state and local taxing authorities to levy taxes on out-of-state businesses. The proposed legislations is an attempt to curtail the zeal of individual state revenue departments who are energetically expanding their efforts to tax out-of-state businesses. Businesses of all types have been looking forward to passage of BATSA because many have already received what they believe to be unjustified tax bills.
Historically, taxing authorities imposed taxes upon businesses that established a nexus with the taxing jurisdiction. That nexus was typically a physical presence within the state imposing the tax. However, in recent years, states have been expanding the definition of nexus to capture additional tax dollars. Franchisors who collect royalties and/or license trademarks to franchisees in other states are often targets of the tax collector in the state where the franchisee is located.
For example, Iowa imposed tax upon KFC, Corp., an out-of-state franchisor who had no physical presence in Iowa, based upon its receipt of royalties from franchisees located within the state of Iowa. South Carolina imposed taxes upon an out-of-state licensor based upon its licensing of intangible property to an affiliate operating in the state. In separate challenges brought by the tax payers, both practices were upheld by the respective Supreme Courts of Iowa and South Carolina.
Without federal legislation like BATSA, the continued efforts of states to expand their ability to tax out-of-state businesses will continue, and likely, intensify. So how can you protect your business? Get proactive and plan.
To protect your business, there are 5 steps you can take right now:
1) conduct a thorough review of your operations and assess which states
may claim sufficient nexus to tax your business;
2) once you determine the jurisdictions where you may have exposure to tax, ascertain the amount of tax that you may be required to pay;
3) retain a legal professional to work with your business, one who has specific experience in this area, including the knowledge to identify and mitigate exposure;
4) compose a strategy to avoid unintentionally establishing nexus in a foreign state and to manage tax obligations in jurisdictions that claim nexus; and
5) get engaged in the effort to stop taxing authorities from abusing their power and damaging our climate for business.
BATSA was an effort to restore basic principles of taxation and to provide certainty and uniformity for tax paying businesses. Without such legislation or a decision by the United States Supreme Court weighing in on this issue, business owners, including franchisors, will curtail or eliminate plans to expand into new territories. Unless BATSA receives bipartisan support, which has been absent in Washington in recent memory, there appears to be no hope for much needed tax reform on this issue.
With apology to popular comedian, Jeff Foxworthy, for mimicking his style of delivery – we write this piece to those of you who are “unintentional franchisors” to dramatize the situation you’re really in. Many business people delude themselves into thinking they are not franchisors when they really are.
If you allow other businesses to use your name or trademark . . . you may be a franchisor!
If you allow other businesses to use your business model . . . you may be a franchisor!
If you charge people a fee before they can open a business like yours . . . you may be a franchisor!
If you collect a royalty from businesses like yours, but owned by other people . . . you may be a franchisor!
If you can demand that businesses use your specs in operation of their business . . . you may be a franchisor!
If you call your business model, licensing . . . you may be a franchisor!
If people can’t change or modify their business unless they clear it with you first . . . you may be a franchisor!
If you compel businesses like yours to operate only within a certain territory . . . you may be a franchisor!
If you compel businesses like yours to buy their goods and materials from you exclusively . . . you may be a franchisor!
Federal law broadly defines a franchise as a commercial relationship in which one grants permission to operate a business in conjunction with a trademark; the owner of the trademark provides some level of support or control; and there is a payment made to the owner for use of the mark.
Pretending your operation is not a franchise, and therefore not having the proper legal documents, and registrations, puts you and your business at risk for lawsuits, fines, and regulatory actions by state and Federal agencies. Is it worth taking the risk?