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Washington: Franchisor Owes B&O Tax on Franchisee Income and Doesn’t Qualify for Realty Rental Exemption
Determination No. 18-0105, Wash. Dept. of Rev. (5/7/24). A ruling issued by the Administrative Review and Hearings Division of the Washington Department of Revenue (Division) concluded that a retail store franchisor was not exempt from Washington business and occupation (B&O) tax on a portion of charges that it had designated to its franchisees as “rental charges” when its franchisees were only granted the authority to do the particular act of operating a store subject to the franchisor’s extensive and detailed restrictions, and they did not have an exclusive right of continuous real property possession against the franchisor. Under the facts, the franchisor enjoyed “practically unfettered access” to the franchisee’s stores pursuant to their franchise agreements. The Division explained that the B&O tax “Rule 118” exemption for the lease of real estate did not apply to the facts at hand, because the franchisor was not truly leasing the store property to its franchisees in these transactions. Please contact us with any questions.
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