The IRS Office of Chief Counsel has informally ruled (General Legal Advice Memorandum 2014-004; the “GLAM”)[1] that payments made by manufacturers to their franchisees under “facility image upgrade programs” are immediately includible in the taxable income of the franchisees.  The franchisees then may obtain an offsetting deduction only through depreciation of the property upgrades, typically over a 15-year period for retailers.[2]

In a recent blog post,[3] we discussed the IRS’s views of the tax treatment of the manufacturer in connection with these types of payments.  The IRS held that the manufacturer could deduct the payments immediately.  As we observed in the prior post, “Unspoken is the possibility that the IRS would require the construction support payment to be treated as income to the retailer when received.  See, e.g., John B. White, Inc. v. Commissioner, 55 T.C. 729 (1971), aff’d per curiam, 458 F.2d 989 (3d Cir. 1972) (incentive payment by car manufacturer to dealer to move to a better neighborhood must be included in dealer’s income).”  With its new guidance discussed in this post, the IRS has dropped the other shoe and held that the retailer must include the amount in income immediately.[4]

The GLAM involved various types of payments made by automobile manufacturers to their dealers.  The reasoning is not specific to the automotive industry, however, and could apply to any type of manufacturer/franchisee relationship.  Indeed, the IRS might apply the Chief Counsel’s views to other franchise relationships as well, e.g., in the hospitality industry, where the franchisor seeks to financially support specific features of its franchisees.


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The IRS recently held that a manufacturer did not have to capitalize, but instead could deduct, construction support payments that it made to its dedicated retailers. From a retailer’s point of view, this means that payments of this type cost the manufacturer less after tax and, as a result, should encourage such payments to be made.

In Chief Counsel Advice 201405014 (Sept. 12, 2013, released Jan. 31, 2014), a manufacturer provided construction support payments to its dedicated retailers to enable them to “incorporate seven critical image elements” into their stores. The retailers had to continue to sell the manufacturer’s products and maintain the store design for at least 15 years; otherwise, the construction support payments had to be returned to the manufacturer.


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U.S. Senate Finance Committee Chairman Max Baucus recently released “discussion drafts” of several tax reform proposals. In the current political climate, tax reform may be a long way off, and a discussion draft is a long way from a formal proposal. However, it is never too early to pay attention to ideas that have actually been put on the table.

The basic concept of business tax reform is to lower the corporate tax rate (currently 35%) to somewhere below 30%. To do this in a revenue-neutral fashion so as not to increase the deficit would require numerous specific tax benefits to be cut back. Overall, these benefits tend to be utilized more by manufacturers than retailers. As a result, retailers currently have among the highest effective tax rates. However, a few such benefits affected by the Baucus proposals are particularly important to retailers. Each retailer will need to determine for itself how it is affected by tax reform, something that cannot be known until the reduced tax benefits and the amount of rate reduction are determined.

While some of Senator Baucus’s proposals for reductions in benefits may be extremely important to certain retailers (e.g., the international proposals that would affect large multinational retailers), the focus here is on a few proposals likely to be of interest to many retailers.


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Companies incorporated in Delaware have until June 30 to enter into Delaware’s recent Voluntary Disclosure Agreement (VDA) program and become compliant with their unclaimed property reporting obligations. Under Delaware law, holders of unclaimed property are subject to audit for all open periods: over 30 years! However, holders that enroll in the Secretary of State’s VDA program by June 30 will be subject to a “limited” lookback period that goes back to 1996 and will be relieved of interest and penalties. By contrast, companies that are audited by the Department of Finance are subject to liability, including interest and penalties, for years dating back as far as 1981. Companies incorporated in Delaware ought to consider the VDA program regardless of where they do business. Moreover, Delaware escheat law is so broad that it potentially covers companies that are incorporated anywhere in the U.S. if the owners of the unclaimed property have certain connections with Delaware.
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Legislation passed by the U.S. Senate on May 6, 2013 would impose sales tax collection obligations on retailers with no physical presence in a state but would not provide a needed income tax safe harbor. 

In what may prove to be one of its most bi-partisan moments in recent years, the U.S. Senate passed S. 743 (The Marketplace Fairness Act of 2013) by a large margin: 69 – 27. The Bill would require remote sellers with more than $1 million in total sales to collect sales taxes in states that adopt sales tax simplification measures. These simplification measures require one-stop tax compliance, one-stop auditing, standardization of what is subject to tax, and 90-day notice of rate changes. 

Logic tells us that virtually every state will adopt these sales tax simplification measures, at least for remote sellers. This is a development that over time may lead to sales tax simplification for all sellers.    
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Many businesses became subject to new payment card reporting requirements (Form 1099-K) in early 2012 for payments made in 2011. Starting on January 1, 2013, those businesses will become subject to new backup withholding requirements and potential penalties for incorrect filing of Forms 1099-K.

The purpose of the new rules was to improve tax compliance among merchants that accept payment through payment cards (such as credit cards) and third party settlement organizations (such as PayPal or Google Wallet). These rules impact both the merchants that receive the Forms 1099-K as well as the payors (including merchant banks and settlement organizations) that have to issue the Forms 1099-K.


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The Obama Administration has released its Framework for Business Tax Reform, a broad-brush look at where it would want to take business taxes. The Framework would eliminate a number of targeted tax benefits and would tighten the rules relating to taxation of foreign operations, with the goal of using the revenue produced to reduce the overall corporate tax rate. The proposal would not be a tax cut but would raise revenue. However, there would be winners and losers. On balance, the proposal could be favorable to many retailers.
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Bipartisan legislation has been introduced that would regulate state taxation of digital goods and services that are delivered electronically (i.e., not through tangible storage media). Digital goods would include, for example, downloads of software, music, and e-books. The professed goal is to prevent multiple taxation of these products and services as well as to prevent taxation that is discriminatory when compared to the sale of goods and services that are not delivered electronically.
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Numerous localities (most recently Montgomery County, Maryland) have adopted taxes on checkout bags at retail establishments. Statewide taxes have not yet been adopted but are under consideration, and even Federal legislation has been introduced that would impose such a tax. The purpose of the taxes is not so much to raise revenue as to discourage