New York Tax Nightmare Enacted

Franchisors must reveal franchisee revenues

New York – The New York State Department of Taxation and Finance issued a letter last week that put franchisors on notice of a recent legislative change that was enacted as part of the state’s 2009 – 2010 budget. “The new legislation will require franchisors to submit annual transaction information pertaining to their franchisees directly to the New York State Department of Taxation and Finance in an electronic format.” The State Department is requesting a list of all New York franchisees from franchisors in an effort to make them aware of the law change, as well as, give them the opportunity to apply for New York’s Voluntary Compliance Program. The program “would give franchisees the opportunity to review and correct any of their tax filings with New York without any penalty or threat of criminal prosecution,” according to the letter.

The schedule for collecting data in the first year, according to the state, is as follows:

For the period March 1, 2009 – August 31, 2009 – Due September 20, 2009

For the period September 1, 2009 – February 28, 2010 – Due March 20, 2010

Bruce S. Schaeffer, Franchise Valuations, Ltd., a firm that offers consulting and testifying expertise for money damages, said the statute will give New York the right to demand gross revenue figures reported by all franchisees to the franchisor. With this right to gather revenue information, it’s just a matter of a very short period of time in which the state will demand it. “That’s an audit in itself,” he states. “Franchisors had better think about what to do and how to prepare for providing all this information pronto.”

But Schaeffer feels taxing royalties is probably the least of the problems raised. He explains, “First, from my experience, franchisors and franchisees rarely have the same numbers – so when the stuff is submitted it will probably assure an audit with its attendant compliance costs. Second, it’s basically requiring the franchisor to make a state specific financial performance representation. Third, it’s my understanding that it even applies to the big franchisors who are otherwise exempt from franchise regulatory filings in New York. Fourth, it’s almost declaring a tax nexus by virtue of franchise registration. Finally, the gross numbers are all they need to make sales tax assessments. So it’s basically having a franchise system commit small scale suicide.”

If that’s not enough to scare the wits out of the franchise community, Schaeffer also adds, “And for those of us of cynical mind consider this: they want the information submitted in an Excel type format. So that means the submission can be manipulated, either by accident (Rosemary Woods) or on purpose.” And he observes that many states share tax information. “It's the kind of misery that results in legal and accounting fees.”