Franchise Lawyer Blog

We have previously written about state efforts to obtain franchisor financial information, specifically efforts by the New York State Department of Taxation and Finance to require annual information returns from franchisors. The purpose of this would be to determine if franchisees are not providing completely accurate information for the purpose of fixing sales taxes and state income taxes.

A recent piece in the Law Journal Newsletters Franchising Business & Law Alert, written by Dirk Giseburt, Rochelle Spandorf and Jaymee Castrillo, reports that the State of California has now initiated efforts through its California Franchise Tax Board (FTB) to require California franchisees to begin withholding 7% of all lease and royalty payments to out-of-state franchisors that exceed $1500 per calendar year. The stated goal is to require out-of-state franchisors to become qualified to do business in the State of California, which carries with it the obligation to file State income tax returns. Apparently, some organizations, such as the IFA, are questioning the FTB's authority to impose such a withholding requirement. The inquiry into applicability in a particular instance would focus on two theories, first, that royalties and the like represent California source income; and second that a franchisor has established a business situs in California when its intangible assets are used in a California business, in this case, the asset being the franchise license.

As in New York, these fledgling regulations are still being tested. Franchisors and franchisees are well advised to refer to their accountants and franchise counsel for an up to date assessment of current applications, so that they are continually making informed decisions as to whether or not to provide different types of reporting under consideration.

New York's Department of Taxation and Finance has extended the original September 21 compliance deadline and reportedly is changing the rule to make it less burdensome. The available 90 day extensions now extend until December 20, 2009.

As we have explored on this blog previously, there has been endless discussion during this economic downturn concerning the effect current economic conditions will have on the franchising model. That discussion continues unabated, as evidenced by the following entries found through the briefest of internet searches:

A franchise fix for the recession blues? - BNET

Franchise leader says industry can lift economy - Fox Business

Fewer small business jobs lost in October - CNNmoney.com

Lackluster economy creates prime tenant market. - Franchising World.

The Franchise Decision - WSJ.com

The accepted wisdom on franchise growth is that the most valuable resource, people, is in ample supply in the marketplace. The second most valuable resource, real estate, has become more affordable, opening the door to small business devolopment. The equation goes like this: recently downsized capable business person with entrepeneurial bent cannot find a job and so creates a new business by acquiring a franchise, with the help of affordable rents.
The clouds on the horizon for this sunny view arise when one considers an enormously stingy credit environment and sharply reduced consumer spending.
There is no question that franchising presents some business opportunities that would otherwise never materialize in this economic environment. And in the long run, franchsing as a model seems destined to occupy a larger and larger segment of the US economy. Buying into an established system and brand increases the odds of success exponentially in an economic environment that moves faster and faster. However, there is also no question that people are spending less money: on eating out, clothes, electronics, almost anything you can think of. Until consumer confidence returns in full, this softness in spending is going to slow nearly every segment of the economy, and franchised businesses will fare no different.