“State Nexus Activity” by Frank C. Carnahan
The North Carolina House of Representatives proposed legislation mandating the franchisor reporting of specified information, including: an annual report due by May 1 with the name and address of a recipient of consideration paid by an insurer or of a franchisee, date of each transaction, and for insurers: the amount of consideration paid itemized by recipient, and the total consideration paid during the period covered by the report, and for franchisors the gross sales of each franchise located in this State, as reported by the franchisee to the franchisor; the total amount of sales by the franchisor to the franchisee, itemized by franchisee; and the income of each franchise located in this State, as reported by the franchisee to the franchisor.
Recently a franchisor with franchisees in Puerto Rico, but without affiliates or employees and not engaged in a trade or business in Puerto Rico, was found liable for the tax imposed pursuant to Article 1233-1(a) of the Puerto Rico Internal Revenue Code of 1994 (PR Code), taxing income actually or constructively received from sources within Puerto Rico. Income in the nature of franchise royalties was subject to the Puerto Rico tax at the established rate of 29%. If a franchisor does not enter into an agreement with Puerto Rico to be directly liable for the tax, franchisees are obligated under §§1147 and 1150 of the PR Code to withhold and pay over the 29% tax directly to the Puerto Rican authorities.
FIN 48 and Reporting For Uncertain Tax Positions
The IRS released the controversial Announcement 2010-9, I.R.B. 2010-7, 408, requiring business taxpayers to report their uncertain tax positions as described in FIN 48. IRS Commissioner Douglas H. Shulman gave the luncheon address on April 12 at the Tax Executives Institute’s 60th Annual Midyear meeting in Washington, D.C. and reiterated the importance of the Service’s proposed tax reporting for uncertain tax positions – such as alleging a franchisor is not liable for income taxes to a jurisdiction where they have only an “economic presence” but not a “physical presence”.