In recent years we have noticed more states
starting to impose a state income tax on franchisor royalties, even where the
franchisor has no physical presence in that state. In 2011, the Supreme Court
of Iowa, in KFC Corporation vs. Iowa
Department of Revenue, held that Iowa was allowed to assess an income tax
on the franchisor, on those royalties paid to the franchisor by KFC franchisees
in Iowa. This decision was made despite the fact that KFC Corporation had no
physical presence in the State of Iowa. The U.S. Supreme Court has declined to
review the ruling.
This ruling, along with other recent court
rulings in various states indicates that most states will likely begin, or
continue, to aggressively pursue the collection of income taxes off of royalty
income from franchisors, regardless of their physical presence in a state. Franchisors
need to prepare for the possibility of having to pay income tax in various
states. We suggest each franchisor with franchisees in multiple states begin
working with an accountant to analyze taxable income with respect to these
types of tax liabilities.
