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.”
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Well, not quite.
But from some of the florid language resulting from this recent legislation, one might think so. The latest is a DLA Piper news alert titled: New York Enlists Franchisors As Revenue Agents.
No, they have not. Many organizations ranging from banks to colleges to employers to purchasing departments to apartment coops have statutory reporting requirements. That hardly "enlists" them "as Revenue Agents."
Of more value is the DLA Piper discussion as to what this portends for the nexus battle. While they reiterate much of what Bruce Shaeffer said back when the law first passed, their solution of writing a testy note citing to the US Constitution is not rendered less childish by calling it "anti-waiver language."
Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400
LOUISVILLE, Ky. - Franchisors are beginning to respond to New York State Department of Taxation and Finance's new law requiring them to give out names and revenue transaction figures from its New York franchised establishments. Blue MauMau has received documents from an undisclosed source that the New York State Department of Taxation and Finance last week sent Papa John's Pizza world headquarters in Louisville, Kentucky a form letter (pdf). The New York department wanted the Kentucky-based company to hand over a list of all of Papa John's New York franchises. New York State wrote:
The form letter from the department is an indicator that franchisors throughout the country are now being contacted by New York State to give up their lists of franchise owners in the state. This new law does not apply to non-franchised small businesses.
Papa John's International responded yesterday by sending an email alerting New York franchisees and telling them, "PJI will comply with this new law." A memo from the company also stated, "Presumably, the franchisees who are fully complying with New York's tax laws will have no reason for concern."
Don I don't have the qualifications to comment on the tax implications and I won't comment on the implications to franchising in New York State. What I can comment on is the possibility of discrepancies between the figures produced by franchisees and franchisors. Or should I say probability.
If they are not on an integrated system then there is a high likelihood of them being more than a tad out. If they are on a poorly designed program then they will probably be out. If they have a well designed system but it is designed to feed franchisor relevant data only without what will now be required they will have a problem.
I am a great believer in good software to protect the interests of franchisors. I am not an advocate of so many systems that charge franchisees exorbitant fees for the good stuff and what benefits both parties - or for the crap that only benefits the franchisor and often does a poor job of that.
You are right to be concerned when any franchisor is to introduce new software especially when they have a State justification. I don't understand them not having it already because we know every franchisor has a keen interest in the profitability of franchisees. Did I say that?
But you are a very smart man - it will happen - New York IT will get hammered.
Why there are discrepancies when there shouldn't be is another question fraught with complexity and quite often the biggest problem can be laid at the feet of franchisees. Shonky franchisors will have trouble sleeping and might leave town quickly.
We are all right to be concerned when any franchisor is to introduce anything new if it isn't in the reasonable interests of moving forward with a worthwhile payback for all parties and at a cost that reflects the legitimate buying power of a legitimate franchise system.
Great observation. It seems to me that yours is quite the question to contemplate for franchisors, franchise buyers and franchise owners. I've bumped into many, many franchise systems in which franchisees weren't required to provide monthly financial statements to their franchisor. Since they didn't have to submit statements, being busy people, they typically didn't compile financial statements for themselves on a monthly basis. Those franchisees did business the millenia old way of looking at cash in hand to see if they were good for another day / week / month.
Would a quality buyer want to be in such a system - to buy a franchise where the franchisor didn't show much interest or knowledge of a franchises' profitability?
That's not to say that there is gold at the end of the BI rainbow. Although a good BI system helps owners drive improvements in the quality of management decision-making, apparently, finding a pot of gold solutions is rare. For example, I just read that almost 90% of business respondents were not satisfied that their business intelligence implementations met their objectives. (OK. I admit the survey was in Britain. It was in 2007. And maybe some were in a foul mood having just lost Manchester United's David Beckham and wife Posh Spice to the United States. But still...)
That can't be good.
Don I've seen systems, and the lack of, that are beyond ... there isn't a word. I've seen franchisees that considered their performance on the basis of their bank account balance. I've seen franchisees in good systems that are suspicious when a franchisor wants to address an area of poor financial performance. I've also seen some amazing fees for siht software and I've seen some amazing software at the right price.
Any franchisor who doesn't take a keen interest in the profitability of franchisees is a fool and while they are those that usually focus on the selling of franchises to any fellow fool there is a time when a fundamental lack of interest will come home to roost. Profitable franchisees sell franchises for as long as the result is there - it ain't rocket science.
Another subject to consider in this little minefield is the world of program writers [and maintainers] who speak another language because that language perpetuates the bullsiht that this siht is still difficult. Then throw in legitimate business specific branded software. But then throw in a few franchisors who don't know diddly about the technology and someone pays - guess who. Throw in a scam franchisor and an entrepreneur geek from another planet and you get franchisees paying through the nose for what should have been minimal or otherwise brilliant.
The technology is there and it can positively influence everyone's business. I looked at one the other week, operating, that even had access to online training videos. I did get excited. As you would.
Will this prompt a boom in shredder sales?
on the telephone and ask if your company is doing business in their state. Franchisors usually don't register as foreign companies in the states in which their franchisees operate.
Not knowing who the caller is, the francisor says yes. The call is then followed up with a tax form and a demand letter.
States are always looking for ways to raise more money. By comparison, Texas is heaven.
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Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
us something we didn't already know about Richard.
C'mon - give us a contribution to this topic. I'll tell you what; you don't have a name - so I will Christen you Richard II in return - but seenin dat we can be good frienz an all I'll jus call you dick. Give us your words of wisdom or if you are stuck in neutral just make something up.
I actually didn't really know that Richard invented the web - I suspected - but you bein a succulent little feeder I s'pose you'd know. You are the people that BMM warns about. G'nite dick.
Now you have a name - Bruce - congrats. It would seem you missed something in your ‘expert' article. I actually said I wasn't a tax spurt. And I try really hard to keep my mouth shut unless I know what I'm talking about. Thanks; I've learnt something here - and so have you.
I am not clear as to what Ray's "shredder" remark meant.
As to Richard's remark, he is speaking of something entirely different from the gist of what Bruce is speaking of, and what the New York statute is about.
While Bruce does raise the issue of the prospect of the state trying to create nexus in the future, this is not the immediate issue--indeed, the state is clear that it will be targeting franchisees.
Richard references phone calls from unnamed state officials to unnamed franchisors at unspecified times followed up with "a tax form and a demand letter." The vagueness of this comment makes it impossible to intelligently discuss the comment, and I hope that Richard will clarify.
Bruce is speaking of a New York statute which has quickly raised significant concern among franchisors around the country.
His concern about computer matching leading to audits is not unfounded to any of us here in New York who have experienced dealing with the NYS Labor Department as they win judgments against shelf entities (which never had any employees nor revenue) for failure to maintain worker's comp, or who have experienced being shown reams of spreadsheets "proving" non-payment of unemployment insurance for workers who don't exist. Moreover, officials of the DTF have been quietly speaking to CPAs around the state over the past year or so and indicating an intention to seek legislative approval for more intrusive automatic monitoring including bank deposit data.
P.S.: indeed Bruce is an expert, albeit at times a thin-skinned one.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400
Isn't this New York law indirectly requiring that the Franchisor provide an item 19 earnings claim, at least for existing locations?
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Michael; I am a novice at US regulation [that would overstate my knowledge] but that was my original thought on this but then I wondered if it really was a 'claim' if this was about 'actuals' rather than 'claims'? Then I wondered about any value to prospective franchisees. Would I be right; they would not have access to that information?
I admit I am an amateur on this subject but it seems that this is very simply a tax grab without an upside for anyone in the industry?
I suppose if you have a scam franchisor who is about to fall in a hole then that could be considered a plus. They are my thoughts so if I'm way out I would appreciate some clarity.
move in that direction.
How the information is collected would probably not be the way it is kept, used or reported. Even governmental mentalities could see the need for anonymization.
On the other hand, with recent public release of sensitive "intelligence" information, and the ready availability of military grade weapons on Internet commercial sites, one could hardly take solace in any expectation of government competence in using or keeping this information.
And if such information were in fact made publicly available by a governmental agency in a format usable as an Item 19 business plan enabler, wouldn't that exonerate every such franchisor from all liability for anyone's use of or reliance upon it?
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Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Quite a while back word was bruited about - not as an official IFA communique - that states' money hunger was resulting in the practice I described.
Franchisors always wanting to seem like they were omnipresent would always say they were doing business in any state asked about - not knowing it was the Gombeen man calling.
As most states were not then (or now) franchise registration states, franchisors wouldn't be on their "books" as it were. The demand then would be for tax on royalties derived from franchisees in that state (according to what we were then told).
It is not my fault that sdome people simply do not qualify for the Muldoonian Sibship. Ponces not admitted.
http://www.seamusmuldoon.com/the_muldoonian_sibship.htm
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Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
What is not used gets sick. Some people are not very adept at intimacy with others, and have to make do with intimacy for one. Better than than prostate cancer.
If you are truly interested in the subject, I refer you to my tutorial on the subject, entitled "Practice Makes Perfect".
http://www.seamusmuldoon.com/practice_makes_perfect.htm
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Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
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