Overreaching State Taxes Pose Threat to Franchise Model

As states scramble to increase revenue in the economic downturn, many are turning towards ambiguous bits of tax code to increase their coffers.  Of particular concern to the franchise industry are recent attempts to assess corporate income tax on businesses that operate in a state but don’t have a physical presence or employ anyone there.  Amongst the frustrated business owners affected by these predatory tax policies is IFA Board member Catherine Monson, CEO of Fastsigns International, who was recently profiled in a  Fiscal Times piece on state taxation policies.   Even though franchisors do not directly employ their franchisees, many states have attempted to tax franchisors for the business activity of their franchisees.  What is most shocking is that Monson was sent tax bills from seven states that don’t have a Fastsigns franchisee, and was forced to pay income tax where she has no physical presence or employees.  While this has become a common problem for franchisors, franchisees are being thrown into the state business tax frenzy when state departments of revenue send tax bills for business done across state lines, such as purchasing inventory or supplies.  Some businesses have even been taxed in states simply for driving through them. Despite such obviously abusive practices, response from the Federal government, which is mandated to regulate commerce between the states, has been marginal.  Last summer, the House Judiciary Committee passed The Business Activity Tax Simplification Act, or BATSA, which aims to limit the ability of states to tax businesses without a meaningful presence in their state.  Unfortunately, the bill has stalled in the House and has never been brought to a full vote despite bipartisan support.  At a moment when we are facing unprecedented economic, political, and regulatory uncertainty, it is increasingly important that Congress passes legislation like BATSA to promote tax certainty, growth and job creation.  To tell your legislators about the tax policies that impact your business, attend the 2012 IFA Public Affairs Conference, September 10-11 in Washington DC.  Click here to register and for more information.