Franchise business is booming! According to the International Franchise Association, a new franchise will be opened every 8 minutes in 2015.\u00a0 But did you know that franchisers face additional sales tax challenges as they expand \u2014 both at home and abroad?<\/p>\n
For many franchise businesses, one of the biggest challenges is exemption certificate management.\u00a0 Often, individual franchises receive shipments of branded products from the franchisor intended for resale to customers.\u00a0 Sales tax only applies to the final end user in a transaction, so franchisees are considered re sellers and do not pay sales tax when they buy these products.<\/p>\n
But selling for resale creates documentation requirements. In order to ensure that the state is being paid its fair share of sales taxes, businesses (like franchisors) that sell products for resale must obtain an exemption certificate from every reseller they do business with.\u00a0 For most franchisors, this means current exemption certificates must be on file for every<\/em> franchisee.<\/p>\n If a franchisor doesn\u2019t have these exemption certificates at sales tax audit time \u2014 or if some of the certificates have expired \u2014 they could be on the hook for penalties and back taxes.<\/p>\n The situation gets even more complex when a franchise expands overseas.\u00a0 According to the International Franchise Association, overseas franchise growth is even hotter than growth in the U.S., leading many companies to consider expansion.\u00a0 However, businesses used to sales tax in the United States may find themselves stymied by the complexities of Value-Added Tax, or VAT.<\/p>\n Instead of applying only to the end user, VAT is charged at every stage of a transaction. Those same branded products that require a reseller exemption certificate in the U.S. will require VAT calculation when they are sold in other countries \u2014 or even, starting next year, in Puerto Rico (the only U.S. jurisdiction to enact a VAT law).<\/p>\n How tough is VAT to understand?\u00a0 So tough that many small businesses say they can\u2019t do business in the EU without special VAT exemptions.\u00a0 But that doesn\u2019t mean franchisors should be afraid of expansion: by using Avalara products to automate VAT determination and rates, even businesses without VAT experience can make sure they\u2019re complying with international tax rules.<\/p>\n