Take Action Now To Avoid Unexpected State Tax Liabilities

Traditionally, nexus for state income tax liability has required some type of physical presence or continuous contacts by the franchisor/distributor with a particular state. With the advent of taxing authorities asserting that all that is needed is "economic nexus," franchisors are now increasingly exposed to income tax liability based upon royalty revenue they receive regardless of its bricks and mortar in the state.¹ Furthermore, budget deficits in many states cause many states to become increasingly aggressive in the assessment and collection of taxes from nonresident franchisors. After all, it is more politically expedient to raise revenue from nonresident businesses than to impose new taxes on resident businesses. Considering this, franchisors should assume that they owe taxes not only in their home state but also in any state where they have franchisees, regardless of whether they have a physical presence in the state. Only through a proactive approach can