What deductions are permitted when calculating Gross Sales for Azal Coffee royalty payments?
Azal_Coffee Franchise · 2024 FDDAnswer from 2024 FDD Document
"Gross Sales" means the entire amount of all of your revenues from the ownership and operation of the Franchise Business and any business at or about the Franchise Location including sales at or from the Franchise Location and outside sales and sales at events outside the Franchise Location as well as the proceeds of any business interruption insurance, whether the revenues are evidenced by cash, credit, checks, gift certificates, coupons and premiums (unless exempted by us), services, property or other means of exchange, excepting only the amount of any sales taxes
that are collected and paid to the taxing authority. You may deduct cash refunded and credit given to customers and receivables uncollectible from customers in computing Gross Sales if the cash, credit or receivables represent amounts previously included in Gross Sales for which you paid royalty fees. You may not deduct fees and other amounts taken by third-party delivery service providers. You are deemed to receive Gross Sales at the time the goods, products, merchandise, or services from which they derive are delivered or rendered or at the time the relevant sale takes place, whichever occurs first. Gross Sales consisting of property or services (for example, "bartering" or "trade outs") are valued at the prices applicable to the products or services exchanged for the Gross Sales at the time the Gross Sales are received.
Source: Item 22 — CONTRACTS (FDD page 51)
What This Means (2024 FDD)
According to Azal Coffee's 2024 Franchise Disclosure Document, Gross Sales are defined as the total revenue from the Franchise Business, including sales at the location, outside sales, and sales at events outside the location, as well as proceeds from business interruption insurance. This encompasses all revenues, whether received in cash, credit, checks, gift certificates, coupons, services, property, or other forms of exchange. The royalty fee is 5% of Gross Sales.
However, there are specific deductions allowed when calculating Gross Sales for royalty payments. Azal Coffee franchisees can deduct the amount of any sales taxes that are collected and paid to the taxing authority. Additionally, they may deduct cash refunded and credit given to customers, as well as receivables uncollectible from customers, provided these amounts were previously included in Gross Sales and royalty fees were paid on them.
Importantly, the FDD stipulates that fees and other amounts taken by third-party delivery service providers cannot be deducted from Gross Sales. This means that even though a portion of the revenue might be allocated to these services, the royalty fee calculation must still include these amounts. Gross Sales are deemed to occur when the goods, products, merchandise, or services are delivered or rendered, or when the relevant sale takes place, whichever happens first. For bartering or trade-outs, the value is determined by the prices applicable to the products or services exchanged at the time the Gross Sales are received.