Category: Legal and Research

New York Tax Law Update

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The following article was submitted by Guest Author, Kathryn Rookes, as a follow up to her previously submitted article, New York State Tax Law, which was posted on this site on July 23, 2009.

Kathryn is an experienced franchise attorney and a member of FSB Legal, a virtual law firm. She is one of the very few franchise attorneys in the United States with experience in a government regulatory practice (Maryland Division of Securities), private practice, and as in-house counsel. With this diversity of experience, Kathryn understands the issues that franchisors face on a daily basis.

New York Tax Law Update
as submitted by Kathryn Rookes, Attorney, FSB Legal

The IFA has received a response from the New York State Department of Taxation and Finance to its July 20 letter.

Reporting Deadlines: The Department is creating an automatic 90-day extension process for the initial as well as all future reporting deadlines. Prior to the initial deadline (set by the Legislature for September 20) the Department will post on its website instructions to request an automatic 90-day extension to December 20, 2009. All future annual deadlines, which were to be due March 20, will be given similar treatment, meaning that if a franchisor requests the extension all annual reports will be due June 20. Permanently moving these deadlines, rather than creating an extension process, would have required an act of the New York State Legislature.

Forms: In the coming days, the Department will post on its website the standardized form franchisors must use to report the required information.

Supplier Sales: The Department has dropped the requirement that franchisors report to the state sales made by “designated” or approved suppliers to New York franchisees. However, sales of supplies from a franchisor or its affiliates directly to a New York franchisee must still be reported.

Franchisee Gross Sales: If the franchisee currently reports gross sales to the franchisor, this information must be supplied to the state in the required reports. If a different performance measure is used (such as room-nights in lodging or cents-per-gallon of product in food service) that calculation must be explained and, where possible, the quantitative data for the relevant reporting period supplied to the state.

Franchisee Identifying Information: The requirement that franchisors report to the state the name, address and New York certificate of authority or federal tax identification number of the franchise remains in effect.

New York State Passes Tax Law For Franchisors

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The following article was submitted by Guest Author, Kathryn Rookes. Kathryn is an experienced franchise attorney and a member of FSB Legal, a virtual law firm. She is one of the very few franchise attorneys in the United States with experience in a government regulatory practice (Maryland Division of Securities), private practice, and as in-house counsel. With this diversity of experience, Kathryn understands the issues that franchisors face on a daily basis.

New York State Tax Law
as submitted by Kathryn Rookes, Attorney, FSB Legal

NY TaxNew York state has become the first state to pass a law that requires franchisors to provide detailed information on their franchisees and their franchisees’ operations to the state, so that the state can compare the submitted information to the tax returns that the franchisees file with the state. Complying with this new law can be quite burdensome and many franchisors do not even collect some of the information that must be submitted to the state of New York.

Who Must File?

The New York law applies to every franchisor that has at least one franchise in New York state that is required to be registered as a sales tax vendor. The law does not require that the franchisor itself be physically present in New York and applies even if the franchisor does not conduct any business in New York, other than having New York franchises.

The actual franchisees have no reporting responsibility under this new law, however, each reporting franchisor should let its franchisees know that it will be providing information on its New York franchises in its annual report.

What Must Be Reported?

The information that franchisors must report on their New York franchises includes:

· Each franchisee’s legal name
· Each franchisee’s phone number
· Each franchisee’s d/b/a name, if different from its legal name
· The owners’ names of each franchisee (e.g., principal shareholder, LLC member)
· Each franchisee’s Federal Employer Identification number (for an individual franchisee, this will be each franchisee’s social security number)
· Each franchisee’s New York Sales Tax Certificate of Authority number
· The beginning date of each franchisee’s unit
· Each franchise unit’s physical address
· Each franchise unit’s mailing address, if different
· Each franchisee’s gross sales, as reported under each franchise agreement
· Any discrepancies between each franchisee’s reported gross sales and gross sales of any audit that the franchisor conducted
· If known, the amount of New York state and local sales tax that each franchisee collected at each franchised unit
· The amount of royalty payments each franchisee paid to its franchisor
· The percentage of royalty that each franchisee pays to its franchisor
· The amount of sales the franchisor or its affiliates made to each franchisee
· The amount of sales each of the franchisor’s designated suppliers made to each franchisee

As you can see, the information required is quite extensive. Many franchisors will have to amend the manner in which they capture data on each New York franchise, as they may not currently be gathering all of the required information.

When Are Reports Due?

The first report under this new law is due September 20, 2009 and must contain information from March 1, 2009 to August 31, 2009. After that, franchisors must file by March 20 of each year, and each report must contain information from the end of the previous report to February 28 of that year.

Franchisees Must Be Notified

By March 20 of each year, the franchisor must provide each New York franchisee with a statement that includes all of the information that the franchisor submitted as part of its report. The statement may be in summary form, as long as certain of the required information is included. Each franchisor should send this statement to its franchisees in such a manner as to be able to verify that each statement was sent in a proper and timely manner.

Where Do You File?

Franchisors must file their information return electronically with the New York State Department of Taxation and Finance. To file a return and for additional information go to the Tax Department’s Web site. Information on how to file will be available at this site after September 1, 2009.

What Happens If You Don’t File?

Violations of the law can result in a penalty of $500 for 10 or fewer failures and up to $50 for each additional failure. If a franchisor fails to timely file an information return under the new law, additional penalties of not less than $500 but up to $2000, will apply to each failure. The total penalties assessed for each reporting period may not exceed $10,000.

Controlling Brand & Trademark within Social Media: What to do if franchisees got there first

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trademark protectionI was recently asked to share my point of view on how a franchise brand can — or even should — wrest control of their brand on social media destinations when franchise holders have been early entrants.

Here are my initial thoughts:

As is typical in most franchise agreements, there’s most likely a clause regarding use of the brand name and trademark. It may need some interpretation to Web 2.0 usage, but there should be no problem applying the language in this regard. Also, online branding falls into marketing, and ultimately, advertising. I’m certain franchise agreements provide typical clauses that prohibit franchisees from utilizing non-authorized ads, etc.

All that being said, it’s always best to convince rather than demand. If the organization is large, it may be more effective to work through advertising cooperatives and franchisee advisory councils in pushing anything regarding social media. One strategy could see the franchisor contributing financially to a social media strategy. (Much cheaper than legal expense to enforce clauses in franchise agreement; not to mention “expense” of diminished morale) As incentive to initiate the same, franchisees would need to voluntarily relinquish their online identities so the parent company may establish one facebook page, one twitter id and one website.

I would recommend developing a template for franchisees to use that would piggyback off the national identity. For example, if corporate identity is Zippy Lube, the franchisee could use Zippy Lube NY or Zippy Lube NY 101 or Zippy Lube Jamaica NY and so on. Each franchisee could have their own web page linked to company website. It’s important to maintain uniformity and a sense of organization when attached to company brand or when linked together.

Please share your thoughts below. Thank you.

Changing Sign From Franchise to Independent and the “After-Effect”

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blank-sign“What is the effect on a business if you take down the brand name sign and put up an unknown brand?”, was a recent question for discussion in a couple of the LinkedIn franchise groups. The question turned into a good discussion as there were over fifteen responses but I was surprised there was minimal reference to legal obligations and potential ramifications under the franchise agreement. Below, please find a few of the comments submitted, including my own. As we have done in the past, the names of the responders will only be identified as their LinkedIn description and their names will not be included in this forum. Upon reading the comments please free to include your own at the end of this article.

Award Winning Franchise Sales Specialist and Business Consultant said: That is a very good question. This is purely antedotal experience but what I have noticed in two industries;

Hotels- Drop-off is immediate. However, only about 10% of the revenue typically comes from the sign itself. It is the lack of a global reservation system that has the greatest effect.

Real Estate Companies- Slower but I typically saw a decline of revenues of up to 50% over a much longer period. ie. 5-7 years. Was this because of the sign or lack of tools and systems that the brand provided.

As a zee and a zor I would never sell nor buy a brand merely on the benefits of the sign. It’s the tools, systems, and experience that the brand provides that is of most vaule to small business owners.

CEO/Founder & Managing Partner of a franchise consulting firm chimed in: The question is too broad to to have a strong singular answer.

A McDonald’s owner (just using an analogy for comparative purposes) with a six of seven figure marketing budget and with an organization that has a 55+ year history, deeply embedded in the American culture would be committing commerce suicide.

However, I have been a part of a franchise where a number of the franchisee’s left the system in a service business; having established their capability, customer service commitment and frankly a strong book of business. Still they lost sleep, hair and either gained or lost weight before having made the decision.

How much of who you are is about you, your service, your relationships, your ongoing knowledge and the trust you have developed compared to the value brought by the company branding?

Secondly, taking the sign down only one part of the thought process. You may or may not value the marketing or positioning that the franchise has established but are you gong to be able to replicate it? Are you also going to have the time and the competency to evaluate both the future of the service, its technology and it’s market while continuing as it’s operator? Do you have the professionalism, time and organization to replace the things that the franchise should be providing?

Things that make you go hmmm…or, if they don’t, they should.

Founder, Owner and President of a franchise consulting firm added: I think the best example I can provide has to do with a brand that has been with my family for 4 generations now, Dairy Queen. Most of us have seen the iconic mansard red roofs of Dairy Queen and the image box out front. Some have seen these businesses close down and become all kinds of businesses. In fact just within a few hours drive of my house these former DQ’s once serving those glorious soft serve treats are now Taco stands, Cuban sandwich shops, nail salons, and I even saw one that was a puppy store.

Not good for the brand indeed.

As a DQ franchisee, I can tell you that when this type of thing occurrs it definately DOES impact the neighboring franchisees who remain in the brand. Without question it forces consumer to question the concept. They question everything from the strength of the brand, the tastiness of the food (in this example), and even the cleanliness of the other stores.

In my opinion it is ESSENTIAL for brands to completely demark so that every traceable sign of the former brand is extinguished. Franchisors who get lazy about this hurt their concept.

Of course, I participated in the discussion and added my views accordingly: Let’s not forget the resale value as a franchised brand as opposed to selling the business as an independent and all that goes along with it including attracting more potential buyers, proven business sytem, training, support for the new franchisee, advertising commitments, etc.

All go a long way especially if having to carry some paper is the only way to make the deal happen. Which might very well be the case in today’s economic environment.

Certainly the seller would feel more comfortable financing part of the deal if the business was still a franchise as he knows there are systems to follow and reporting to home office that will somewhat keep the business in line. As an independent, there’s no telling what direction the new owner would take and for how long. What condition would the business then be in if the business needed to be repossessed and operated again by the previous seller?

…It’s just flat out suicide!

I also added the following statement: Personally, the chance of total failure would be far greater as an independent. If the decision is made to take down the franchise sign, then why not solicit franchisor’s assistance to sell the business and then use the proceeds to open as an indpendent. If necessary, negotiate with the franchisor to waive non-compete, etc.

Quite frankly, I believe no one would take this route because they probably feel it’s just easier to operate the current business as an independent because the business is already up and running. In the end, most decisions to de-identify is a matter of not wanting to pay royalties. So, I say, live up to the franchise agreement and if so desired, exit with dignity and your reputation in tact.

An interesting note: The large majority of responses were submitted by franchise consultants. Although most of the consultants were former franchise company executives or franchisees. Only a couple of responses, and brief ones at that, were from current franchise company executives. As stated above, it’s another one of those things that make you go hmmm…or, if they don’t, they should.

New Laws Threaten Multi-Unit Owner Growth and Expansion

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ifa2The following article was recently published in the International Franchise Association publication, Franchising World. The article addresses future franchise growth as potentially being affected by several bills expected to be considered by Congress. If the bills become law, the negative effects could be dramatic.

New Laws Threaten Multi-Unit Growth and Expansion
“Perfect storm” of organized-labor legislative proposals is aimed squarely at multi-unit owners.
By Matthew Shay
as published in Franchising World April 2009

Multi-unit franchise ownership continues to increase in popularity as a growth strategy for franchising. Data show that since 2004, multi-unit operators control almost half of franchised units and about 20 percent of franchisees are multi-unit operators. Industry-research firm FRANdata expects the growth to continue as more franchisors embrace multi-unit operators, and the established field of professionally-managed and sizable franchisee-owned companies gains popularity.

This growth, however, could be threatened by a “perfect storm” of three separate organized-labor-related bills expected to be considered by Congress. If enacted into law, these measures could derail the franchising industry’s ability to provide jobs and boost economic output to their local communities. The eye of this coming storm is aimed squarely at multi-unit restaurant owners.

The Employee Free Choice Act, known as “Card Check;” the Healthy Families Act; and the Re-Empowerment of Skilled and Professional Employees and Construction Tradesworkers Act, called “RESPECT” by its proponents, all sound harmless enough. However, despite the use of words like “choice,” “healthy” and “respect,” these bills, if passed, could result in the largest expansion of government interference into the free enterprise system since the New Deal.

Card Check would eliminate secret-ballot elections and require only signatures on cards to organize any segment of workers in a business, even in just one store. This means that you could walk into one of your stores on a Monday morning to find that a simple majority of your clerks had signed union cards over the weekend. Congratulations! You are now bound to a union such as the International Brotherhood of Teamsters and you only have a few weeks to negotiate a contract before a government bureaucrat imposes one.

The Healthy Families Act would require employers with as few as 15 employees to provide seven days of leave—with pay—annually to all full-time employees and a pro-rated amount of leave to part-time employees. Employees could take the leave in increments as small as six minutes with no notice and no documentation, and workers would be entitled to the leave almost immediately. Employees would be allowed to report to work an hour late in 56 different instances or be 15 minutes late for 224 days. In many cases, employees could do so without any notice, and the employer could not discipline the employee or require documentation. If this is enacted, you would either have to hire additional employees to be sure your shifts are always covered or not be able to service your customers’ needs adequately.

The RESPECT Act would change the statutory definition of “supervisor,” effectively making your managers and staff, who you rely on to manage your daily operations, members of a union. Your managers or supervisors would become part of a bargaining unit potentially making staffing decisions based on union membership rather than merit, ability or your established staffing policies.

IFA certainly supports an employee’s right to unionize and to be treated fairly and equitably, but these laws would jeopardize the basic tenets of franchising—being able to establish uniform processes and operations throughout systems. And if you own multiple units, you could very easily be affected differently from unit-to-unit, wreaking havoc on your company.

The likelihood of these laws being passed is high. To defeat their passage or make them less onerous, the franchising industry—franchisors and franchisees together—must work harder than ever to ensure that lawmakers in Congress understand the severe consequences on small businesses.

We are actively developing educational programs and other member services to better meet the needs of multi-unit operator-members of IFA in all franchising sectors. And our new Franchise Congress will be designed to step up our grassroots efforts by providing the tools and information needed to get all members more engaged politically.

It is more important than ever to have single and multi-unit franchisees involved in IFA to help defeat laws that restrict the virtues of the franchise model. As the old adage says, “there is strength in numbers.” That’s the key to success for all in franchising.

Be Aware Of The Downside

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optimismThe following was my response to a recent post on Franchise Pick. The post was about franchisor, Curves International, and its actions when one of its franchisees fails and shuts down its location.

Joel Libava, The Franchise King, posted a question today on Twitter about whether or not a business plan is important when considering a franchise opportunity. My response was a firm yes, but the plan must include an exit strategy. That exit strategy must include a plan for predetermined events like retirement, as well as unforeseen events usually as a result of poor sales, employee theft, mismanagement, etc.

Unfortunately, it’s human nature only to look at the positives of a relationship, personal or business. How many couples avoid the issue of prenuptial agreements because they don’t want to start off on the wrong foot? Maybe they feel it will jinx their relationship or provide an out to the party not willing to work at the relationship? The same is certainly true in the franchise arena. However, in both cases, it is prudent to look at the potential downside and have all the issues outlined ahead of time. If nothing else, at least it keeps everyone focused on the potential consequences of failure. Something that may provide them even more incentive to succeed. I mean it is easier to fail, than it is to succeed!

In the case of franchisee failure, there’s no way it can possibly be a surprise to anyone. Trends become evident and it would take a tremendous amount of shear stupidity and ignorance for anyone to believe a franchise location closing is a surprise. I guess we could chalk it up to the “head in the sand” scenario?

My recommendation to franchisees and franchisors alike is to have a business plan in place at the beginning, complete with an exit strategy. Understand your mutual obligations upon termination. Communicate, communicate and communicate all the way from franchise disclosure to franchise closure. Notice the only thing missing is “dis.” To use the street slang of “dis”, make sure you don’t dis communications, don’t dis obligations, and don’t dis responsibility. For anyone that doesn’t know what dis means, it’s most easily defined as “ignoring and/or disrespecting.”

My advice to franchisees, don’t get all starry-eyed at your partner like you’re in love. Realize it’s a business relationship and make sure all parties to the agreement, including yourself, live up to their obligations. Further, when trouble is on the horizon, do not, I repeat, do not put your head in the sand. Keep in mind that when your head is in the sand, your most vulnerable ass-et, is exposed to the entire world to take advantage of.

To the Curves franchisor I say “Shame on you as you tarnish the good name of franchising and all the franchise bretheren because of your greed, unprofessionalism and lack of common, decent care for individuals. The very individuals that trusted you to take them to the altar.”

More Regulatory Structure for Franchising?

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enforcement2Real estate, insurance and financial services industries all fall into the category of highly regulated and policed industries.

Licensing, including testing, are required for all sales personnel. Continuing education is also mandatory. Each industry has some type of regulatory agency with enforcement powers whose primary focus is to maintain the integrity of the respective industry. Each industry maintains some type of bonding or minimal cash position requirements to ensure economic stability.

If franchising adopted a similar structure, or a portion thereof, what would be the pros and cons? What would the effects be over the next twenty years?

Recent discussions in various franchise groups eluded to the fact that there are too many franchisors within franchising today. There’s been talk of less than ethcial practices by various franchisors and very poor business practices by others. Would tighter controls and stricter requirements strengthen or actually weaken the franchise industry?

Mind you, before chastising me about all of the above, believing it is my intent to propose more regulation and the requirements that come along with regulation, please understand it is not my position that any of the above be entertained. Instead, I believe issues need to be discussed, problems need to be identified, and solutions need to be implemented to fortify ALL franchising sooner by the ENTIRE industry itself, rather than later when it’s out of our hands.