Does Ella Cafe have the discretion to collect taxes from the franchisee in the same manner as royalty fees?
Ella_Cafe Franchise · 2024 FDDAnswer from 2024 FDD Document
In addition to all other payments provided for in this Agreement, Franchisee must pay Franchisor and its Affiliates and all of Franchisee's third-party vendors, suppliers, and landlord promptly when due:
(i) All amounts advanced by Franchisor or which Franchisor has paid, or for which it has become obligated to pay on Franchisee's behalf for any reason whatsoever.
(ii) The amount of all sales taxes, use taxes, personal property taxes, and similar taxes, which are or may be imposed upon Franchisee and required to be collected or paid by Franchisee (a) because of Franchisee's Gross Sales, or (b) because of Initial Franchise Fees, Royalty Fees, or advertising fees (and Franchisee Advertising Co-op dues, if any) collected by Franchisor from Franchisee (but excluding ordinary income taxes).
Franchisor, in its discretion, may collect the taxes in the same manner as Royalty Fees are collected and promptly pay the tax collections to the appropriate governmental authority; provided, however, that unless Franchisor so elects, it will be Franchisee's responsibility to pay all sales, use, or other taxes now or hereinafter imposed by any governmental authorities on Initial Franchise Fees, Royalty Fees, and advertising fees.
Source: Item 22 — CONTRACTS (FDD page 50)
What This Means (2024 FDD)
According to Ella Cafe's 2024 Franchise Disclosure Document, Ella Cafe has the discretion to collect certain taxes from franchisees in the same manner as royalty fees. Specifically, Ella Cafe may collect sales taxes, use taxes, personal property taxes, and similar taxes that are imposed on the franchisee and required to be collected or paid (a) because of the franchisee's Gross Sales, or (b) because of Initial Franchise Fees, Royalty Fees, or advertising fees collected by Ella Cafe from the franchisee.
This means that Ella Cafe can choose to collect these taxes directly from the franchisee, similar to how it collects royalty fees, and then remit the taxes to the appropriate governmental authority. However, the FDD stipulates that unless Ella Cafe chooses to do so, it remains the franchisee's responsibility to pay all sales, use, or other taxes imposed by governmental authorities on Initial Franchise Fees, Royalty Fees, and advertising fees.
This provision offers Ella Cafe flexibility in managing tax collection and remittance. For the franchisee, it's important to understand whether Ella Cafe will elect to collect these taxes or if the responsibility falls on the franchisee. This will impact the franchisee's accounting and payment procedures. It is important to note that this excludes ordinary income taxes, which remain the franchisee's responsibility.