Some businesses, including franchisors, may be engaged in more than one classification of business activities. In such instances, West Virginia municipal business and occupation tax law generally requires the business to separately report income derived from separate classifications. For franchisors, relevant business classifications include (1) service business and other callings, (2) sales (at retail or wholesale), and (3) rental activities. Depending upon the particular circumstances, a franchisor must report its gross receipts from local sources in one or more of these classifications. The rates of tax applied to gross receipts from these business activities vary.
Following is a general explanation of the tax classifications referenced above:
Service Business and Other Calling
Gross revenues from service activities or other callings not otherwise classified from West Virginia sources are generally taxable under the catchall “service” classification of the West Virginia municipal business and occupation tax. Generally, a franchisor’s receipt of royalty payments for the use of trademarks and provision of support services to a franchise location within a municipality would be gross receipts taxable in this “service” classification.
Wholesale Sales
Persons engaged in selling any tangible personal property to another entity inside a taxing jurisdiction for the purpose of resale (other than to tax exempt purchasers) are considered to be selling at wholesale. Gross receipts from such sales must be reported on the appropriate City’s tax return and the required amount of tax remitted. Sales to a franchisee for resale or to be used in the franchisee’s business operation would generally fit within this classification.
Rentals
Another important classification in the franchising context is “rentals”. Each person engaged in furnishing any real or personal property which has tax situs in a taxing jurisdiction is required to report the gross income derived therefrom under the rental and royalty classification on the municipal business and occupation tax form. This applies to everything from leases of land, buildings and fixtures to equipment rentals and the like.
Example
A franchisor receives monies from a franchisee located in a municipality that imposes the municipal Business and Occupation Tax. The franchisor, through the use of representatives, provides ongoing support to the franchisee for the purpose of training, purchasing, marketing, equipment, advertising, etc. The franchisor receives $50,000 from royalties, $100,000 from sales of tangible personal property and $12,000 from the rental of realty or tangible personal property. The franchisor must report the $50,000 under the “service” classification, the $100,000 under the “wholesale” classification and the $12,000 under the “rental” classification on the appropriate municipal Business and Occupation Tax form.