What constitutes 'good faith' when contesting tax liability for a Red Wagon Club franchise?

According to the 2024 Red Wagon Club Franchise Disclosure Document, a franchisee will be in default of their agreement if they fail to pay when due any federal or state income, service, sales, or other taxes due on Franchisee's RWC Business' operation, unless the franchisee is in good faith contesting its liability for these taxes.

The FDD does not define what constitutes 'good faith' when contesting tax liability. This means that the determination of whether a franchisee is genuinely and reasonably disputing their tax obligations is subject to interpretation and could be based on various factors. These factors may include whether the franchisee has sought professional tax advice, the legal basis for the dispute, and whether the franchisee is actively pursuing a resolution through appropriate channels.

For a prospective Red Wagon Club franchisee, it is important to understand the implications of this clause. While it allows for the possibility of disputing tax liabilities without immediately being in default, the franchisee bears the risk of proving that their contest is made in good faith. Failure to demonstrate good faith could result in the franchisor declaring a default and potentially terminating the franchise agreement. Therefore, it is advisable to consult with a legal professional to understand what actions and documentation would support a claim of good faith in the event of a tax dispute.