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14 Franchise L.J. 1 (1994-1995)

handle is hein.journals/fchlj14 and id is 1 raw text is: FRNUCHISE LAW JouRNAIzL AMERICAN BAR ASSOCIATION QUARTERLY JOURNAL OF THE FORUM ON FRANCHISING Who's Next for Nexus? State Income Taxation of Franchisors By NEAL D. BORDEN* ranchising has grown enor- mously in the last two decades. That growth has attracted a great deal of attention from the public, the press, the business community-and from government agencies and regula- tors. In that last category are the taxing authorities of many states, especially those currently suffer- ing revenue declines and deterio- rating tax bases. The pressures on NEAL D. BORDEN the states to expand their revenue sources are intense. Multistate franchisors are prime targets for aggressive tax collectors. Unfortunately, many franchisors first learn about state tax obligations as a result of the increasingly sophisticated audit procedures now being implemented by many state tax agen- cies. These procedures include the infamous nexus ques- tionnaires, far-flung audit offices, computer-linked tax and business registration record systems, and cooperative tax compacts among the states.1 The particular nature of fran- chising can produce difficult questions of liability for collec- tion or payment of taxes, and the consideration of these questions will now be even more problematic because of a recent South Carolina decision, Geoffrey, Inc. v. South Car- olina Tax Commission,2 which has received much attention in both state tax and franchise circles. To determine whether a franchisor is subject to a state tax, one must first determine whether the franchisor has been actively engaged in its business within the taxing state to an extent sufficient to give the taxing state jurisdiction over the franchisor. This means an analysis of the nexus, or connect- ing points, between the taxing state and the franchisor. The Supreme Court cases that have reviewed these issues provide the critical background for this analysis. *Mr. Borden is a partner in the Baltimore and Washington offices of Venable, Baetjer and Howard. Nexus for State Taxes-The Supreme Court Decisions The numerous Supreme Court and other judicial decisions bearing on the states' ability to tax interstate businesses are premised on the application of the Interstate Commerce and Due Process Clauses of the Constitution and the distinctions between them which were, until recently, often blurred.3 The explosive growth of interstate business after World War II virtually guaranteed a flood of state income tax litiga- tion, which crested with the Supreme Court's opinion in Northwestern States Portland Cement Co. v. Minnesota.4 The taxpayer in Northwestern States was an Iowa corporation with its home office and plant in Iowa, from which it filled orders regularly solicited from Minnesota customers. It leased an office in Minnesota and had four to six employees there. Almost one-half of its income was derived from Min- nesota sources, and Minnesota imposed its tax on that income in accordance with an apportionment formula. The Supreme Court upheld the tax, declaring that a state has (continued on page 14) VOLUME 14, NUMBER I • SUMMER 1994 1A Ik

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