With state budgets struggling, a focus of collecting all possible taxes amplifies.  One such case originated in Iowa.  Kentucky Fried Chicken (KFC) is a Kentucky Corporation.  KFC’s only connection to Iowa is its independently owned and operated franchise locations.  That was enough for the Iowa Supreme Court to find KFC liable for $284,658.08 in unpaid corporate income taxes, penalties and interest.  The court, in the case of KFC Corp. vs. Iowa Department of Revenue, determined that KFC’s grant of a license to an Iowa franchisee was sufficient ‘physical presence’ within the state of Iowa to warrant the levying of taxes against the KFC. 

The recent court decision in Iowa cannot wholly be attributed to recent budget woes.  Over the years, the reaches of state taxes have   been slowly extending.  This, however, was the first time that a court found the licensing of a franchisee was sufficient grounds for finding tax liability.  The Iowa court rendered their decision in December of 2010.   This case was appealed to the Supreme Court of the United States.  The Supreme Court in October of this year declined to hear the case.  Thereby the Iowa court decision stands.  KFC is liable for the payment of Iowa’s  state taxes due to the franchisee’s use of the trademark in their state. 

Iowa is not the only state that is looking to collect taxes from franchisors.  Currently the states of Florida, Hawaii, Iowa, Louisiana, Massachusetts, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina and Wisconsin all take the position that franchisors must pay income tax on franchise-fee revenues received from franchisees in their state irrespective of the franchisor’s  physical or other business presence to the state.

Tax Judgment against Franchisor Stands

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