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The Franchise Memorandum

New York Imposes New Tax Reporting Requirements on Franchisors
Posted in State Taxation

The recently enacted 2009-2010 New York State Education, Labor and Family Assistance Budget Bill (Budget Bill) amends the New York Tax Law to impose unprecedented new reporting requirements on franchisors. The relevant text can be found at in Subpart G, which starts on page 163. These requirements apply to any franchisor with at least one franchisee engaged in taxable sales in New York, although it is not clear how master franchise and area representative relationships will be treated. Under these requirements, a franchisor must file a return on behalf of each of its New York franchisees to report:

  • The gross sales of the franchisee in New York as reported by the franchisee to the franchisor
  • The total amount of sales by the franchisor to the franchisee
  • Any income reported to the franchisor by the franchisee
  • The name, address, and New York certificate of authority or federal tax identification number of each franchisee

The first set of returns from franchisors are due on or before September 20, 2009, and must cover the period from March through August 2009. The second set of returns from franchisors are due on or before March 20, 2010, and must cover the period from September 2009 through February 2010. Thereafter, all returns are due annually on or before March 20. While it is clear that franchisors must electronically file all returns with the New York State Department of Taxation and Finance, further instructions regarding these filings are expected to be released any day. In addition to the electronic filings, each franchisor is required to give the franchisee whose information is included in its returns a copy of the information in the returns pertaining to that franchisee.  

To help ensure compliance with the new reporting requirements, the Budget Bill adds specific penalties to the New York Tax Law. If a franchisor fails to include required information in its returns or fails to provide a franchisee with a copy of the information in its returns pertaining to that franchisee, the franchisor is subject to a penalty of $500 for ten or fewer failures and up to $50 for each additional failure. If a franchisor fails to file a return on time, the franchisor is subject to a penalty of $500 to $2,000. Total liability for the filing failures described above may not exceed $10,000 for any annual filing period. In addition, if the Commissioner imposes penalties and later determines that the failures that gave rise to those penalties were entirely due to reasonable cause and not due to willful neglect, the Commissioner must remit the penalties.

Although the new reporting requirements arguably apply to every franchisor that has at least one franchisee in the State of New York, the state appears to be targeting larger franchisors and sending them a form letter requesting a list of all of their New York based franchisees. We recommend that franchisors comply with these letters and provide the requested franchisee lists, which in most cases simply involves updating information already in the franchisors’ FDDs. The stated purpose of the request for franchisee lists is to assist New York in making all franchisees “aware of the law change, as well as give them the opportunity to apply for New York’s Voluntary Compliance Program.” This program provides franchisees with the opportunity to “review and correct any of their tax filings with New York without any penalty or threat of criminal prosecution.” Regardless of whether a franchisor receives a letter from New York, it is probably wise for the franchisor separately to alert its New York franchisees of the new reporting requirements and of the Voluntary Compliance Program, especially if the franchisor is concerned that there may be some discrepancies.

The provisions imposing the new reporting requirements on franchisors were added to the Budget Bill late in the legislative process and do not seem to have been openly debated among legislators. Clearly, these provisions are part of a larger scheme in New York to increase revenues in tough economic times by pushing the line of what may be taxed within the state. The International Franchise Association (IFA) opposes New York’s new reporting requirements “as an unconstitutional intrusion into interstate commerce and an aggressive redefining of ‘nexus.’” To counter the trend by New York and other states, the IFA and others in the franchise community are advocating for federal legislation specifically to address and make uniform the nexus required for state taxation. Currently, the IFA’s main focus is on the Business Activity Tax Simplification Act of 2009 (BATSA), which was introduced by U.S. Rep. Rick Boucher (D-VA) in February 2009, and would codify the “physical presence” standard. 

Please contact us if you have any questions or concerns relating to your compliance with New York’s new reporting requirements. 

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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