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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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