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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