Franchise frenzy: U.S. and global tax implications
- Sales and Use Tax
- October 8, 2015 | Jeanette Sherman
Franchise business is booming! According to the International Franchise Association, a new franchise will be opened every 8 minutes in 2015. But did you know that franchisors face additional sales tax challenges as they expand — both at home and abroad?
For many franchise businesses, one of the biggest challenges is exemption certificate management. Often, individual franchises receive shipments of branded products from the franchisor intended for resale to customers. Sales tax only applies to the final end user in a transaction, so franchisees are considered resellers and do not pay sales tax when they buy these products.
But selling for resale creates documentation requirements. In order to ensure that the state is being paid its fair share of sales taxes, businesses (like franchisors) that sell products for resale must obtain an exemption certificate from every reseller they do business with. For most franchisors, this means current exemption certificates must be on file for every franchisee.
If a franchisor doesn’t have these exemption certificates at sales tax audit time — or if some of the certificates have expired — they could be on the hook for penalties and back taxes.
The situation gets even more complex when a franchise expands overseas. According to the International Franchise Association, overseas franchise growth is even hotter than growth in the U.S., leading many companies to consider expansion. However, businesses used to sales tax in the United States may find themselves stymied by the complexities of Value-Added Tax, or VAT.
Instead of applying only to the end user, VAT is charged at every stage of a transaction. Those same branded products that require a reseller exemption certificate in the U.S. will require VAT calculation when they are sold in other countries — or even, starting next year, in Puerto Rico (the only U.S. jurisdiction to enact a VAT law).
How tough is VAT to understand? So tough that many small businesses say they can’t do business in the EU without special VAT exemptions. But that doesn’t mean franchisors should be afraid of expansion: by using Avalara products to automate VAT determination and rates, even businesses without VAT experience can make sure they’re complying with international tax rules.
When you run into tax pain as a franchisor, Avalara is here to provide relief. Check out Solving 5 Sales Tax Challenges for Franchises and put your focus back on your business — not on your taxes.