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Disclosing Franchisee Revenue in New York

New York State’s 2009-2010 budget contains a new law which is intended to make it less difficult for the State’s Department of Taxation and Finance to determine if franchisees of franchised chains are cheating on their taxes. This law, which received scant attention upon its creation, has recently attracted the attention of a number of franchisor trade groups as well as publications advocating franchisee and franchisor interests.

The Albany Business Review reports that the International Franchise Association (IFA) has written to the State Department of Taxation and Finance asking it to delay the enforcement of the new law. The law requires franchisors to report to the State what has been reported to them in terms of annual transactional information, including gross revenues on sales of goods and services and sales to franchisees by suppliers recommended by the franchisor.

The franchisee website BlueMauMau reports that the law’s intent is to give New York the right to demand from the franchisor the gross revenue figures gathered about a franchisee. BlueMauMau quotes the IFA’s letter as stating that this requirement is the first of its kind in the nation. The IFA is requesting that enforcement be stayed from the official effective date of September 20 to December 31, 2009.

Increased concern about the requirements of the law has caused it to appear in discussions on other franchise websites, such as QSR WEB, which voices the concerns of the quick service restaurant industry.

The official reason for the requested delay is that franchisors will not have time to collect the submitted information and submit it to the State in the 20 days outlined in the law. However, the real underlying concern about the law is that there are many reasons, some legitimate and some not, why the gross sales figures presented on tax returns might differ from the figures provided to the franchisor. But there will invariably be differences and the concern is that any discrepancy will become an automatic red flag for an audit, as well as giving rise to possible franchisor claims of underreporting.

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