States are trending toward a broad view of nexus for franchisors. This means a restaurant company without physical presence in a state may still be subject to state tax liability if its franchisees conduct business there. As a franchisor, you must be aware of the tax laws of each state you – and your franchisees – do business in.

A recent example of this is KFC Corp. vs. Iowa. The Iowa Supreme Court upheld the Iowa Department of Revenue’s assessment of nearly $250,000 in corporate income tax on KFC, which didn’t have a restaurant or an employee in the state. All KFC restaurants in Iowa are independent franchises, but the court ruled a physical presence within the state was not required because KFC’s trademarks were an integral part of its business there, and the income derived from the use of this property was taxable under Iowa law. This decision is expected to intensify states’ aggressiveness toward asserting nexus.

It’s more important than ever to partner with an experienced tax adviser to avoid state tax surprises. The complexity in state tax laws creates many areas of uncertainty, but SS&G’s state and local tax team can help identify state tax exposure and make recommendations to mitigate or mediate liabilities. We regularly consult with clients on state tax exposure, which may involve:

• nexus studies
• tax exposure projections
• voluntary disclosure agreements

For reporting purposes complying with generally accepted accounting principles, our state tax professionals assist with identifying, quantifying, and preparing financial state disclosures for uncertain tax positions related to state income tax non-filing issues and other uncertain state tax positions, as required by ASC 740 (formerly known as FIN 48).