What is excluded from the definition of Gross Sales for an Extreme Art Studio franchise?

According to the 2024 Extreme Art Studio Franchise Disclosure Document, Gross Sales does not include federal, state, or municipal sales, use, or service taxes collected from customers and paid to the appropriate taxing authority. Additionally, bona fide customer refunds and customer tips are also excluded from the definition of Gross Sales.

This definition of Gross Sales is important because Extreme Art Studio franchisees pay a monthly royalty fee based on a percentage of Gross Sales. Specifically, the royalty fee is the greater of 8% of Gross Sales or $500 per month. By excluding taxes, refunds, and tips from the calculation of Gross Sales, the royalty fee is based on the net revenue retained by the franchisee rather than the total amount of money collected from customers.

It is typical in the franchise industry to exclude sales taxes from the calculation of gross sales for the purpose of determining royalty fees. This ensures that franchisees are not paying royalties on money that they are simply collecting and remitting to government entities. Similarly, excluding customer refunds ensures that franchisees are not penalized for legitimate returns or service issues. Excluding customer tips is also a common practice, as these amounts are typically considered to be the property of the employees providing the service.