The state of New York has launched what may become an effort to tax franchisors with franchisees operating in the Empire State, no matter where the franchisors themselves operate.

The state’s opening gambit is a provision in its annual budget legislation requiring that out-of-state franchisors inform the New York Department of Taxation and Finance of the identities and addresses of franchisees located in New York, along with detailed data on:

  • Gross sales for each New York franchise location as reported to the franchisor, and as audited by the franchisor;
  • Gross New York sales taxes collected by each franchisee;
  • Royalties paid to franchisors by their New York franchisees, along with details as to how franchisors compute royalties;
  • Gross sales to New York franchisees by franchisors or their affiliates, or by any suppliers designated by franchisors.

Franchisors were required to submit information returns before Sept. 20 covering New York operations through Aug. 31, and they should obtain expert legal advice before complying.

For one thing, the state’s gambit probably isn’t innocent. New York says it just wants to know whether franchisees comply with tax laws. But the legislation raises complex issues under the Constitution’s commerce clause and the due-process clause of the 14th Amendment, and no one knows where the courts might take these issues.


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