One of the pieces of legislation currently pending before Congress that has the potential to significantly affect franchisors is the Business Activity Tax Simplification Act, or BATSA.  BATSA would clarify federal tax law by resolving the question of economic "nexus" that is required for a state to succesfully impose an income tax on out-of-state companies.  

As reported in my January 6, 2011 blog post, a number of states have begun taxing out-of-state franchise companies on income that the franchisors earn from their in-state franchisees.  Under the reasoning of these states, intangible property that a franchisor owns within the state – which can be company’s goodwill and the right to license its trademarks to in-state franchisees – creates a sufficient connection to the state to justify taxation on revenue generated within the state. Last year's KFC Corp. v. Iowa Department of Revenue case is only the latest in a line of cases that appears to validate this practice.  The United States Supreme Court's refusal to hear the KFC case appears to provide even further validation to this practice.

According to an op-ed piece in Roll Call by Reps. Bob Goodlatte (R-Va) and Bobby Scott (D-Va.), BATSA would provide a federal preemption law to prevent state departments of revenue from taxing out of state franchisors without a physical “nexus” in that state.  As the Congressmen state in their op-ed:

The legislation would clarify that a state or locality can’t levy a direct tax on a business unless the business has employees, an office or property in a state for more than two weeks during the year. The standard, if enacted, would reduce litigation, improve certainty and create greater investment in new jobs.

BATSA would apply to business-activity taxes, including income taxes and franchise taxes, but would NOT apply to transaction taxes, such as sales taxes. The famous, years-long battle over when sellers should collect state sales taxes on purchases made online is a separate question not affected by BATSA in any way.

BATSA is a pleasant anomaly in Washington: a thoroughly bipartisan bill with nearly as many Democrats as Republicans onboard. BATSA has also overwhelmingly been approved twice by the House Judiciary Committee.

The International Franchise Association is a strong supporter of BATSA, as it would lessen the administrative and financial burden on franchisors, who today face the very real threat of having to file income tax returns in each and every one of the states in which a franchisee is located.