New York Tax Law - New Information

The New York State Department of Taxation and Finance has made some changes to its new reporting requirements for franchisors.

First, the NYSDTF has implemented an extension procedure for franchisors that are unable to meet the deadline. The extension must be filed before the due date (first due date is September 20, 2009) and once filed, is automatic. The extension is for 90 days.

Next, the NYSDTF has waived some of the information that it previously required, including audited gross sales of a franchise if the franchisor has audited and found gross sales to be different from what the franchisee reported and the amount of sales that a designated supplier has made to a franchisee.

The NYSDTF also has made changes to reporting requirements if the royalties are not paid as a percentage of gross sales.

Finally, the NYSDTF will waive penalties in some situations, when the information filed is incorrect because the franchisee supplied incorrect information to the franchisor without the franchisor's knowledge.

New York Tax Law Update!

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 Tax Law

New 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: http://www.nystax.gov/sbc/thirdpty.htm. Information on how to file will be available at this link 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.

Illinois Franchise Reform Bill Passes General Assembly

TO: Legislative Action Group
Legal Legislative Committee
Corporate Counsel Committee

FR: Troy Flanagan
Director, Government Relations

DT: June 2, 2009

RE: Illinois Franchise Reform Bill Passes General Assembly

Following efforts by the Illinois State Bar Association, the Illinois Retail Merchants Association and the IFA, legislation making needed changes to state franchise regulation was passed by the Illinois General Assembly on May 29. S.B. 1285, by Sen. Linda Holmes and Rep. Michael Zalewski, must be presented to Gov. Pat Quinn within 30 days, and he then has 60 days to take action.

S.B. 1285 accomplishes the following: conforms the renewal period to be 120-days after the franchisor's fiscal year-end; conforms the material change amendment time period to the FTC requirements of quarterly and within 30-days after the close of the quarter; requires disclosure documents to be prepared in accordance with the amended FTC Franchise Rule and the North American Securities Administrators Association Guidelines instead of the Uniform Franchise Offering Circular Guidelines; reduces the complications for large franchisors who have done business with Illinois (experienced franchisors); and gives the Illinois Attorney General a new remedy entitled "Assurance of Voluntary Compliance" for violations of the Illinois Franchise Disclosure Act.

IFA will continue to work with in-state allies to advocate approval of this measure by Gov. Quinn. Please contact me if you have any questions.

M. Troy Flanagan
Director, Government Relations
International Franchise Association
1501 K Street, NW, Suite 350
Washington, DC 20005
Direct 202.662.0792
Fax 202.628.0812
Cell 202.285.4371
tflanagan@franchise.org
www.franchise.org

Forms Available

I have several forms that I am willing to share with clients and future clients :-) Send me an email to get any of the following (I can't figure out how to post an attachment to my blog :-))

United States map showing registration states
Franchise registration renewal due dates
Franchise registration renewal effective dates
Franchise registration expiration dates
Filing Fees - Initial Filings
Filing Fees - Renewals
Filing Fees - Amendments

Also, if there are any client education materials that you would like to see, please let me know.

Thanks,

Item 20

Item 20 always is the most challenging item to update. No matter how careful you are, the numbers never reconcile the first time you review them. Here is a list of the reconciliations that I perform to make sure that everything matches.

Table 1 – Double-check the math to make sure everything adds up correctly. This really should be left to the end, because the numbers may change based on what the other tables reveal.

Table 2 – Make sure the numbers in the table match the list of franchisees that have transferred. When you pull the transfer list, make sure that you include the state in which the store was located, not just the state where the former franchisee now lives. Otherwise, the state numbers will be off. For the list of former franchisees, I break the list into 3 categories: transferred stores, terminated stores that were open, and terminated franchise agreements for stores that never opened. By breaking these lists out, it is much easier to reconcile the numbers in the tables.

Table 3 – I start by double-checking the math, to make sure everything adds up correctly. I then compare the ending state totals to the list of current franchisees, to make sure that the numbers match the list. On the first time through, the numbers generally will not match and you will need to go back to reconcile the discrepancies and find the mistakes. For the list of current franchisees, I break this list into 2 categories: currently open stores and franchise agreements signed but store not yet open. This makes it easier to identify where the discrepancies in the table come from.

Table 4 – I also start here by double-checking the math, to make sure everything adds up correctly. I then compare the ending state totals to the list of company owned stores, to make sure that the numbers match the list. Note that this list is pulled only for reconciliation purposes, it does not go in the FDD.

Table 5 – For the franchise agreement signed but store not yet open, I reconcile the numbers against the list that will be included with the current franchisee list. For the other 2 columns, I obtain the information needed from the business people in charge of these areas. These 2 columns are projections of what is expected this fiscal year, so estimates are needed rather than absolute precision.

Your Item 20 will generally take more time to complete than most other areas of the FDD, so once everything matches, the hardest part is done! Good luck reconciling!

Sending BLBQs, SDFs, and the FDD

I have spent the last few weeks studying for the Georgia one day attorneys exam, and therefore have neglected my blog. Yup, after 18 years of admission in Maryland, Georgia still wants me to take an exam. Now that the bar exam is over, and hopefully won’t have to be repeated :-), I can return to my regularly scheduled programming.

I will pick up where I left off, but a little behind schedule on the FDD updating process. Once each year, I circulate the Background/Litigation/Bankruptcy Questionnaire (“BLBQ”) to each person listed in Item 2, to make sure that no information has changed. I have each person review their questionnaire and sign and date if all information remains true. For any new person in Item 2, the BLBQ should have been sent out as soon as they were hired, so even they should have one to review.

I maintain my BLBQ form as a pdf form, so that I can email the blank form to each new hire that will be listed in Item 2. The new hire can then either type his or her responses in the form, before printing and then giving it back to me, or he or she can print the form and handwrite the requested information. When I receive a BLBQ from a new Item 2 person, I type the responses into the form and save it for use next year. In this manner, the Item 2 person does not have to provide the same information over and over again in later years. I simply email that person’s form to them already completed, so only changed information need be provided. The business people appreciate this time saving measure.

I also use the same process for the Seller Disclosure Form. In addition to circulating the Seller Disclosure Forms, I request that each salesperson also review and sign off on any form of policy that the company applies to the salespeople, such as an earnings claim policy or policy restricting investments in franchisees. This reinforces the company’s commitment to these policies.

Finally, I also circulate the disclosure portion of the FDD to each Item 2 person, requesting that each person review the FDD to determine if any information has changed. I generally allow 2 to 3 weeks to get comments back to me.

Next week, I’ll tackle the challenges of Item 20!

Make Your Mechanical Changes to Your FDD

While you are waiting for your business people to gather the information that you have requested, you can move forward with making some of the changes to your FDD. The first items I change are the effective date throughout the FDD, the footer (which I use to designate the brand, date and version of the FDD and whether it is the paper or electronic version) and the state effective dates, which I delete alltogether. For the information that I am waiting on from the business people, I add an @ symbol in the body of the FDD where the information goes. In this manner, I know that my FDD is not completely updated until a computer search of the document reveals no @ symbols. This makes it almost impossible to miss an item that requires updating.


Next I review the Item 2 bios to remove all items that are more than 5 years old, review Item 3 for closed litigation that is more than 10 years old and also review Item 4 for any bankruptcies that are no longer disclosable. In Item 21, I udpate the description of the financial statements and delete any unaudited financial statements that were previously included.


Finally, I delete all the exhibits that I know will be replaced and mark the location with the @ symbol, such as the list of current and list of former franchisees and the audited financial statements.


Next week, we will comple our due diligence and follow-up on requested information that has not yet been received. This is when the real tooth pulling begins!

Time to Request Information From the Business People

At year end, you should have pulled together the reports that you will need for your system statistics, so this week it’s time to alert the relevant business people about all of the additional information that will need to be updated in the FDD. I find it helpful to cut and paste the relevant portion of the FDD into the email in which I request the information. This helps the business people understand the context for the information. When I request this information, I focus on the following areas:

Item 1 – update on system statistics for affiliated franchise programs
Item 2 – update on comings and goings in the managerial ranks
Item 3 – update on pending litigation, particularly challenging to obtain from predecessors
Item 4 – update on pending bankruptcies
Item 5 - range of initial franchise fee during last year
Item 7 – update on initial investment costs
Item 8 – update on revenues from restricted purchases – this is difficult to obtain while the accounting group is trying to close out their year and work with the auditors (they experience work compression must like we do)
Item 11 – update on the outline for the training program
Item 11 – update on the use of the advertising funds (again challenging while the accounting group is trying to close out their year)
Item 11 – revised Table of Contents for the Operations Manual
Item 19 – updated financial performance representation information
Item 20 – updates for all 5 tables and a list of current and list of former franchisees

I follow-up on these requests on a weekly basis, to make sure that my requests remain high on the priority list.

Next week we will move on to making changes in the actual document. As always, if you would like an Excel spreadsheet that identifies each action item, send me an email request.

Time to Establish Your FDD Update Plan

Now that the holidays are behind us for another year, it’s time to hit the ground running for updating your FDD, if you have a December 31 fiscal year end. This is the time to establish your plan and timeline for updating the FDD, leaving plenty of time to prepare your state filings. I generally plan each step in the process, but the general categories to consider include circulating the FDD for comment, sending the Background/Litigation/Bankruptcy Questionnaires to the Item 2 people, sending the Salesperson Disclosure Form to your franchise salespeople, requesting specific information for the FDD (such as revenues from restricted purchases, financial performance representation data, Item 20 charts and lists, etc.), incorporating all comments and circulating a redlined FDD for final comments, incorporating new audited financial statements and obtaining the auditor’s consent, and creating the final clean and redline of the FDD for filing with the states. In the coming weeks, I will identify the more specific action items that must be addressed. If you would like an Excel spreadsheet that identifies each action item, send me an email request. Until next week, happy updating!