The Iowa Supreme Court ruled that KFC owed $284,000 in back taxes for the period from 1997-1999 even though Kentucky Fried Chicken corporation had no corporate presence in Iowa. The KFC locations in Iowa are all independent franchisee locations. KFC, franchisor, is a Delaware corporation with its corporate headquarters in Kentucky. The Iowa Department of Revenue argued that the location of the brand in Iowa, creating customers and royalties from Iowa, gave Iowa the right to tax KFC corporate. The lower Iowa court found that because the KFC brand and trademarks were an integral part of the businesses in Iowa, the income derived from the use of the brand and marks was taxable. The Iowa Supreme Court upheld the lower court’s ruling stating that the U. S. Supreme Court would likely find that the fees were taxable under federal law.
Clearly this poses serious questions and implications for franchisors. If states tax the revenues earned by independent franchisees around the country, the franchisor’s financial burdens will drastically increase.
I will certainly provide future posts on this topic as more states rule on this issue. In the meantime, I welcome your comments and feedback.