Congress should pass Business Activity Tax Simplification Act
By Kenneth R. Switzer, vice president and chief financial officer, Marco’s Franchising, LLC
11/14/12 02:30 PM ET
I’m the chief financial officer of Marco’s Franchising, a company founded and headquartered in Ohio that franchises Marco’s Pizza stores across the country. We don’t own the 300-plus stores that operate under our name nor do we pay their employees. So why should we be asked to pay corporate income taxes – in Wisconsin?
That’s a question I’ve been mulling since early this year when Wisconsin told us that we owed it back taxes. Its reasoning was bizarre. Because a single employee of ours visited the single store we franchise – but don’t own – in the state for less than 24 hours, Wisconsin says we must pay corporate taxes there.
Unfortunately, this isn’t an isolated outrage for small businesses like mine. Franchisors are being hit with corporate tax assessments by multiple states. It’s the latest example of bureaucrats running amok – making a money grab in an already difficult economic climate.
My company’s saga started with a letter from Wisconsin’s Department of Revenue asking us for information on the lone Marco’s Pizza franchised location in Weston, Wisconsin. We dutifully complied. Next, a letter demanding that we follow Wisconsin’s corporate income tax laws, even though we have no property or employees there. They asked us to file Wisconsin tax returns for every year since the store opened (2007), and made it clear what would happen if we did not.
We needed to produce copies of pages from our corporate tax returns that detailed information about our entire business; not just the one store we franchise in Wisconsin. The ensuing hunt for documents and figuring out how to comply with Wisconsin laws ended up costing us over 40 man hours and thousands of dollars. Rather than racking up thousands more fighting the tax assessment we paid it. In the end, a great deal of effort and expense was expended – both by us and I presume the Wisconsin paper pushers – all for less than $1,000 in total taxes.
A few thousand dollars might not sound like a lot, but small businesses, especially those in the food industry, have to watch the bottom line very closely. Unexpected bills like this one add up. In fact, margins in food service are small as our costs have increased dramatically in the last few years; just like those at the grocery store and gas pump. So the thought of being nickel and dimed by states across the country is disturbing.
Wisconsin is not alone in its quest to fill its coffers with the earnings of out-of-state operations. Among the other states reaching outside their borders for revenue are Texas, Ohio, North Carolina, Arizona, South Carolina, Minnesota and Iowa. This phenomenon is a growing problem for the more than 825,000 franchise businesses that support nearly 18 million jobs across the U.S. In the last two years Marco’s created over 3,500 total jobs as a result of our growth. States such as Wisconsin should find way to recruit growing businesses, job creating business such as Marco’s Pizza rather than penalize
Fortunately, there’s a solution that can help protect businesses similar to Marco’s Pizza from becoming piggy banks for cash-hungry states. The Business Activity Tax Simplification Act (BATSA), now pending in Congress, would establish a single, uniform standard for all states and therefore prevent unexpected tax judgments or fishing expeditions against small businesses. The Supreme Court has spoken on this topic. Nearly twenty years ago, it ruled that a state can tax out of state companies only if they have a “substantial” connection with that state. BATSA would codify that assertion. The legislation has bipartisan support and the support of this small businessman.
It’s rare for me to look to the federal government for solutions to help grow our business. But in this case, I see no other options. We want the chance to expand and create jobs. Serving one federal and one state taxing authority is fair and, as a good corporate citizen, we happily do so. But having to worry about 49 other tax masters is not something we can or should have to do as Marco’s Pizza grows.
Switzer is vice president and chief financial officer of Marco’s Franchising, LLC.