Franchisors Ask New York for More Time on Unanticipated Rule
WASHINGTON – A trade association representing over a thousand franchising firms has urged the state of New York to postpone a newly created rule that requires national franchise chains to submit the entities of in-state franchise owner-operators and their annual transaction information for tax gathering purposes.
According to New York tax attorney Bruce Schaeffer, president of Franchise Valuations, Ltd., a firm that specializes in franchised business valuations, the newly enacted statute gives New York the right to demand gross revenue figures gathered about a franchisee from their franchisor. Over a month ago Schaeffer warned the franchise industry about the new law. “Franchisors had better think about what to do and how to prepare for providing all this information pronto," he stated in an interview.
On Monday the International Franchise Association wrote a letter (pdf file) to acting commissioner Jamie Woodward of the New York State Department of Taxation and Finance, asking for more time. “We are working with franchisors to help them comply with this law,” the International Franchise Association’s CEO Matt Shay said. “Since this requirement is the first of its kind in the nation, there is significant uncertainty among franchisors about how to comply with this new obligation. Therefore, the IFA requests the initial deadline of Sept. 20, 2009, for the reporting period March 1 through Aug. 31, 2009, be delayed until Dec. 31, 2009.”
Shay said that the requirement of detailed information, such as gross sales, sales to franchisees by suppliers recommended by the franchisor and federal tax identification numbers of the franchise, logistically would be difficult to obtain within such a rushed and short deadline.
New York tax attorney Schaeffer warns that there are ramifications of New York requiring franchisors give up franchisee names and transaction figures. He declares, “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.”
Indeed, in the IFA’s letter to New York, Shay specifically spells out the difficulty of having franchisors' financial figures for a franchise agreeing with the franchise unit’s declared figures for tax purposes. “The value of goods and services sold may vary due to the different tax treatments of goods and services,” writes Shay. “For example, a gross sales figure reported to a franchisor might be different than the figure reported for sales tax purposes if certain goods and service are not taxable in New York.”
Shay ended the letter asking the state tax department to reconsider its new franchise rule. “We urge New York to carefully consider the broad ramifications of this unprecedented law," he pleaded.
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The Zees already report SALES to the State. (Data point, or irony: we report Sales in the 2 states we do business in, and I used to work for the NYS Dept of Taxation & Finance, but NY is NOT a state we presently do business in.) So now the State wants to confirm the Sales figure with the Zor. Looking for the "two sets of books" type of thing.
So does SALES (Gross, Top Line) really get us to an EARNINGS claim? How does the FTC define "earnings"?
GB writes: "So does SALES (Gross, Top Line) really get us to an EARNINGS claim? How does the FTC define "earnings"?"
I thought you said you were an attorney. And you don't know what an Item 19 claim is?
Here you go, from the FTC Guidance on the Franchise Rule.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
GB writes: "So does SALES (Gross, Top Line) really get us to an EARNINGS claim? How does the FTC define "earnings"?"
Sorry, I'm still not seeing that a tax authority requiring gross sales be reported to it, thus requires an Item 19 figure be stated. Zors already know gross sales, it is generally what their royalties are based on. And we all know that most of them don't state Item 19 figures. So what's going to be different now?
I share GB's confusion on this one.
Maybe this relates to a difference with Canadian law, but perhaps Michael Webster could lay out in a bit more detail his reasoning.
Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400
Granville is correct. The issue is not any kind of back-door earnings claim.
Nor, let us be frank, is the issue a comparison of zor figures to those reported on the sales tax returns (although that is the ostensible purpose).
Bruce is correct, although the IFA is loathe to admit it. The real reason why IFA is going to fight this is because just as surely as night leads to dawn the fiscal mess is going to lead states to tax the zors on their earnings from operations within the state.
I know that Bruce is a bit obsessed with nexus, but in the current financial climate he is right to be obsessed.
Back in the day, at least the tax collectors had some shame:
Guest writes: "Granville is correct. The issue is not any kind of back-door earnings claim."
Well, guest you aren't a franchisee attorney. Because no NY franchisee attorney is going to accept a null item 19 disclosure, after this law takes effect.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
In New York, the franchisor of Subway Sandwiches long ago signed an agreement with NY State Dept of Taxation. That agreement means that when a Subway site in NYS is sold, the franchisor will on request provide DTF with the sales reported for the past 36 months. And Subway does not make any earnings claim.
I agree that most franchisors know (or should know) how much their franchisees gross each year, since their royalties are tied to this. In addition, the franchisor generally mandates purchasing sources and therefore knows (or should know) how much raw material has been purchased and therefore (using COGS and a calculator) knows how much the franchised outlet has sold--indeed, this is one of the ways in which franchisors conduct audits.
However, the fact that data is available does not mean that it must be disclosed. In my opinion, the disclosure of financial data in the "pro forma" is a much more solid claim if one is going to take the position that a zor is disclosing financial data as an inducement to consummate a franchise sale while at the same time dodging the Item 19 disclosure. Compared to that, disclosure of mere gross sales data to a tax authority bound by confidentiality restrictions is hardly something to disturb the universe.
And the fact that a franchisor is statutorily required to disclose gross unit sales to a taxing authority does not mean that a franchisor will choose to disclose that information in an FDD. Tax authorities (and labor departments) have long been able to issue subpoenas and more informal "requests" of franchisors for data in connection with an audit of a franchisee. The disclosure of that information (voluntarily or pursuant to subpoena) by a franchisor has never been deemed to be an "earnings claim" under the UFOC regime and I don't see that has changed.
I take it that Michael's position is that once franchisees find out that a franchisor has information about gross unit sales that franchisees will suddenly refuse to buy a franchise which does not have an Item 19 disclosure. That might be a nice wish, but it has not been the historical experience anywhere in the US.
The majority of franchisors do not disclose financial performance data in the FDD (the cocktail napkin is another story) and I don't see that this law or any law requiring gross sales disclosure to the government will change that.
Franchisees certainly have the option not to purchase where the zor declines to provide an Item 19. Franchisees can get up off their butts and advocate for mandatory statutory disclosure.
Or...franchisees can continue to buy without an Item 19, and my guess is that this will continue to be the case.
Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400
Paul writes: "I take it that Michael's position is that once franchisees find out that a franchisor has information about gross unit sales that franchisees will suddenly refuse to buy a franchise which does not have an Item 19 disclosure. "
In Ontario, we have a basket clause requiring all material facts to be disclosed to the franchisee. Once earnings claims are demanded by attorneys in Ontario as a matter of course, then it will be hard to stop the flow of information at the border.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
It provides in essence that a franchisor will not omit to state information needed to make what is said not misleading in the light of the circumstances under which it is said. By Muldoonian extension one might posit that a claim that a franchise is a proven system by a franchisor with knowledge of gross unit sales history would then be required to state that sales history in Item 19 to avoid becoming a basket case.
Yet no USA franchise lawyer, including Muldoon his own self, would ever decide that reporting to state tax authorities, or by way of further extension to any census information collector, would result in a requirement that the information be disclosed in Item 19.
There are franchises in which including that information in its format as reported to the state could be itself misleading if there were significant differences in regionality, seasonality, length of time in business, or other factors that might be misleading if applied to someone contemplating an investment in the franchise in a given locale. The head of the audit committee of Long John Silver once testified that the provision of raw sales data without segregating it by those categories would in fact - in his opinion - be misleading. (On cross examination it was pointed out that Long John Silver did not report that same information in accordance with his version of probity.) HEHEHEHE....
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
The Ontario clause refers to all material information, including but not limited to the regulated disclosure items.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
And, it should be noted that the great majority of franchisors choose not to disclose earnings claims in Item 19 because this permits them NOT to disclose any unit performance statistics concerning success or failure or profitability, etc.. in either the written FDD or the actual contract --- and the unilateral contract protects them for their "inducements" made before the contractf is signed.
Why would any franchisors disclose low profitability and failure rates if they don't have to and the government allows them to sell pigs and dogs under cover of regulation? The FTC and State FDD legitimize the franchisors and the SBA guarantees the loans on pigs and dogs as long as the buyer of the franchise acknowledges that he/she hasn't been promised success or profits by the franchisor.
The franchisors are comfortable in their majority of non-disclosure and the prospective franchisees will continue to not understand the implications of non-disclosure in Item 19 and won't know that they "should get up off their butts and advocate for mandatory statutory disclosure." The existing franchisees know it is too late for them because they are already caught in the malicious legal trap and are concentrating their efforts on survival.
I agree! It will probably be business as ususal until enough of the public understand what has been going on in franchising and how the moral hazard of ineffective regulation works against the prospective franchisee who invests without the risk being disclosed while the franchisors are encouraged to take risks with other people's money and hard labor that they wouldn't take if they were putting their own money at risk.
Carol Cross Eblen -
Why is it that you are not advocating due diligence by propsective franchisees telling them to only consider franchises that Item 19 FPRs?
I think I know why! You don't want anyone to buy a franchise. If you were successful in making Item 19 FPRs mandatory you would then rail against the standards for the FPRs. I think you are a franchisee advocacy fraud that is hellbent on revenge.
Ty
Obviously, Tyrone Malcom III, if prospective franchisees understood that the FDD and Item 19 non-disclosure was just a RED HERRING to obscure the risk in terms of UNIT performance of the system, they would not buy from franchisors who didn't make earnings claims. But when the biggest and most visible franchise systems do not make earnings claims, and prospective buyers are presented with this voluminous disclosure document, that the federal government says "To protect you ----we..........." the marks don't catch on because they are buying in good faith that the franchisor is selling something that is valuable and they they can't buy the valuable franchise unless they sign the standard boilerplate franchise agreement that is most often offered as non-bargainable.
Item 20 is just an artifice to permit the franchisor to sell the franchise without making ANY "actionable" representations whatsoever as to the performance of the units in the system within the FDD or the franchise agreement. Buyers who do their due diligence on Item 20 with the provided references don't realize that this is the only information that they are relying on to purchase the franchise, and that any damages they may suffer because of misrepresentations made by franchisee references, past and present, are proximate to the representations of the references and NOT to any representations made by the franchisor.
Why is franchising treated uniquely under the Uniform Commercial Code? Why isn't the franchisor, the seller who will profit from the sale, responsible for disclosure of material risk information to the buyer of the franchise?
Carol Cross Eblen - You would be wrong since the UCC does not expressly or implicitly give any special treatment to franchisors in the sale of franchises.
You go on and on about disclosure of material risks and it is obvious that you don't know you are talking about. Why don't you prattle about franchisors not disclosing all the "unknowns"? They should be able to provide a speculative list for a prospective franchisee?
Ty
franchising differently and deems that unit financial performance statistics are not MATERIAL and do not have to be disclosed by the seller. Have you read the American Business Law Journal Article, 01 Jan 03, entitled "Franchising Fraud: The Continuing Need for Reform" that covers the Inducement problem and the flaw in the FTC Rule ----that was also pointed out by Robert Purvin of the AAFD and Susan Kezios of the AFA, and many other attorneys in public comments to the FTC?
Obviously, because franchisors are protected from fraud claims under cover of government regulation, they commit intentional torts and fraud feeling that they have immunity and impunity under the law!
Franchising fraud: the continuing need for reform
The more things change; the more they stay the same.
I have read the ABA article, Purvin and Kezios. The only one remotely comparable to your views is Susan Kezios and I don't mean to insult Susan.
If you were interested in advocacy you would focus on violations of the existing fraud and franchise laws, but you aren't in my opinion interested in true franchisee advocacy and are just a shrill contemptuous fraud.
Ty
saved by the government are ridiculous. Regulation of franchising won't eliminate fraud anymore than regulation of securities eliminated securities fraud, or the prohibition of murder eliminated murder. Geez! Get it through your heads. What is needed to prevent fraud in franchise investment is already here.
Anyone thinking of investing in a franchise can invest in expert pre investment due diligence assistance and reduce critical fraud risks enormously. But if you elect not to buy what you need, you get what you paid for. It's just like anything else in the world. There is no free lunch. The government aint your daddy. You don't know how to vet small business investment opportunities. Best evidence = all the folks who did it on their own and got fleeced.
You don't have to pay any attention to this, of course, You can just keep on whining about how the government let bad things happen to you and it isn't your fault. If anyone buys a frnachise today and doesn't get expert pre investment due diligence help and then gets fleeced - It is their fault. Buying a franchise blind is like crossing a busy street with your eyes closed. Odds are you're gonna end up seriously busted up. DUH!
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
I guess I misunderstood Richard Solomon's excellent tutorial available on Franchise Remedies where he describes how franchisors lie, cheat, and steal under Cover of the FDD and the Franchise Agreement.
Of course, all of those who profit from ineffective regulation and moral hazard want to protect the ineffective regulation.
absence of regulation. It is the enormous surplus of ignorant investors/stingy investors/stupid investors who won't do what is necessary to protect themselves. Sheep attract wolves - not something I just made up.
Since the fleeced rarely have money for representation after they have been cleaned out, the only way for me to make money is to help keep people from being fleeced in the first place.
So I confess to making money off the rotten situation in franchising. Anyone who resents what I do is perfectly free not to hire me and to make their investment decisions any way they like. You can't fix me. You can only screw yourself. Now aint that a damn shame!
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
and in his honor I will have the creme brulee fro dessert tonght.
treat have a Sacher Torte and some really good champagne.
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
Sacher Torte it is!
Ty
I still like burnt custard.
But he is rapidly developing a very jaded palate from eating Grandpa Seamus' cooking. He just adores Boef Rhonesque, made with pancetta instead of bacon; cipolini instead of pearl onions and Clos d'Oratoire instead of some nondescript pinot noir. His mom carries around some inexpensive jewelry in his diaper bag for when he tries to pick up some cute three year old.
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
I’m not changing that diaper ... you reap what you deserve Richard
The more things change; the more they stay the same.
At least my take is; it isn’t that what you ask for is wrong. I think Les would agree; it ain’t going to happen. So the focus should be on educating people about the reality of risk before they sign and the dangers of mistakes if they find themselves in the middle of conflict. The vast, vast majority have no idea, but what is more dangerous than having no idea is that people believe that rules apply and protection must be somewhere. Or perhaps even worse .. effective regulation is on the way.
If we waste our time expecting the miracle of government intervention we waste people.
I met a lovely couple yesterday in the middle of very serious conflict. In short; they seemed to be relying on a detailed, substantiated, brilliant, formal complaint to the regulator that must find the franchisor guilty of numerous breaches of contract and law. Before they knew what hit them they would have been burnt and still waiting for the regulator.
I have never read Richard’s ‘Wait; The Cavalry Is On The Way’ tutorial although I will check Seamus’ recent efforts in case he has gone totally mad.
Carol, you have learnt so much and have so much to offer but personally, I think you are off course.
Here is the funny bit; those that persist in wanting you to go away because you persist in following your line when it ain’t gunna happen are persisting in following their line to get you to go away when it should be obvious by now that that ain’t gunna happen either.
The more things change; the more they stay the same.
The implication upon Zor's is clear - Tightening of controls from an outside big brother. Zee's are subject to Zor audits of financial records that must be kept up to date and available upon demand. So, what's the issue with a Zor being subject to the same standards? A dual record of numbers being maintained by an outsider. Zors may need to reconsider how they re-allocate Zee royalty revenue as reported by the Zee. I'm sure the NY policy makers are savvy enough to understand the Zee's P&L is a function of unit level economic versus a Zor's P&L being of function of system wide economics. The only number that should stay consistent between the 2 are Net Sales (Gross Sales less: State Sales & Use Taxes) which is generally the basis of calculating the royalty and ad fund fees paid to the Zor by the Zee. What's so complicated in reporting the same to a governing agency?
Another consideration is how the Zee and Zor measure valuation of the franchise agreement. Zee's amortize the their upfront franchise fees, and once in business, Zee's expense the royalties and ad fund contributions as business deductions. Zor's, of great brands, have begun applying a different accounting standard to value their Franchise Rights within the Franchise Agreement as a basis of Trademark valuation. Under FASB 141 & 142 trademark goodwill can be valued as an indefinite lived asset rationalized by a franchise's historic franchise renewal demand. In other words, the system has a strong history of "re franchising" individual franchised units. These valuations are driven by royalties paid by Zee's derived from the Zee's reported net sales to the Zor. A Zor looking for financing or has already received financing via Wall Street must exploit FASB 141 & 142 to record the most optimum valuation of the franchise agreement to collateralize the new money finance. Hence, higher the valuation, higher the financing proceeds. Good for Zor, bad for Zee. Zee never knows if its agreement will be renewed by the almighty Zor. Ironically, regardless of a franchise agreement having a defined life, the Zee never knows when its true time is up if the almighty Zor decides to Terminate on a non-curable default breach of contract basis.
An outside big brother auditing sales numbers reported between Zee and Zor can also extract a reasonable dollar contribution made by Zees into the franchise system Ad Fund. Anyone ever wonder what a Zor does with the Ad Fund (a/k/a the slush fund)? Where is it reported? How do we know if the Zor is ethical as a manager? Is there an opportunity for a Zor to enrich themselves through the Ad Fund? Does the Zor have a history of "netting" expenses between the Zor P&L and Ad Fund administration? Can this practice be considered a form of money laundering? Is the Ad Fund audited by the Zee's? Or, is the Ad Fund buried behind the veil of CORPORATE SECRECY?
I think the New York has had enough of Zor explanations and the world is starting to see the blood bath fields of fallen Zees. I asked New York to find the Ad Fund. Then you'll find the fraud...
IFA keeps driving that train high on cocaine. IFA you better watch your speed. Trouble ahead, trouble behind. You know that notion just crossed my mind....
Two things: First, if the franchisors get the extension, it is guaranteed there will be massive lobbying and payoffs to get this law reversed. Second, and you can answer this question better than I, Michael, how do you define a "national" franchise? Are there any potential loopholes in this wording? That specific phrase is used in the article, whether it is used in the law I don't know.
Well, I guess for those franchise systems in New York this is the beginning of the end for not providing earnings claims.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
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