As many government agencies attempt to collect more tax revenue some have decided to tax royalty payments of franchisors who have franchise outlets within their jurisdictions. Even though the payments owed to the franchisor are paid to a corporate entity outside the jurisdiction of that government agency, the government agencies nevertheless have recited to exercise their perceived rights to tax royalties. This is somewhat a new thing in franchising and some international franchisors had to deal with it.

Now this problem is happening more and more within the United States. It is for this reason that we attempted to shift our liabilities back onto the franchisee for these taxable payments, because it is almost impossible to keep up with all the BS laws that government agencies come up with in their haste to tax American businesses to death. It is like a story out of Ayn Rand. Below is a copy of the clause that I added to our franchising agreements to address this issue;

2.8 Tax Payments

If any amount payable by Franchisee to Franchisor hereunder is subject to withholding or other taxes that Franchisee is required to deduct from such payments, Franchisee shall withhold such amount, remit the withholding to the appropriate tax authority, and promptly deliver to Franchisor receipts of applicable governmental authorities for all such taxes withheld or paid. Franchisee shall be responsible for and shall indemnify and hold Franchisor harmless against any penalties, interest and expenses incurred by or assessed against Franchisor as a result of Franchisee's failure to withhold such taxes or to timely remit them to the appropriate

taxing authority. Franchisee agrees to fully and promptly cooperate with Franchisor to provide such information and records Franchisor requests in connection with any application by Franchisor to any taxing authority with respect to Franchisee.

If Franchisor is required to refund to Franchisee any amounts paid hereunder, Franchisor shall not be required to refund such amounts which were so withheld by Franchisee until Franchisor receives a refund of such amounts from the applicable government and/or agency thereof or Franchisor utilizes a foreign tax credit directly attributable to such amounts on its United States Federal income tax return which is accepted in full by the United States Treasury or with respect to the period within with such credit may be reduced or disallowed has expired.

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Quite frankly I am not even certain if this clause would hold up the court of law. So if you run a franchising company you'll need to ask a certified and experienced franchise attorney who also specializes in tax law. I hope you will consider this in 2006.

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