KFC Ordered to Pay Tax to Iowa

Kentucky Fried Chicken has since its founding by “Colonel” Harlan Sanders been a franchised operation. Sanders had set up 600 franchises by the time he sold his interest in 1964; today there are more than 37,000. KFC Corp. picks franchisees, advertises the brand, and guards the secret recipe of 11 herbs and spices; individual franchisees actually operate the stores.

Normally, corporate income tax is only owed by companies that have property or employees in a state. KFC’s franchisees do, and pay taxes, but KFC Corp. in distant Louisville (or rather Delaware, where royalty payments from franchisees are not taxed) do not. Nevertheless, they’ve been ordered to pay $250,000 in corporate income taxes on the profits they’ve earned:

[F]ranchise operators pay KFC for the use of its logo and systems, and adhere to the company’s menu, marketing and facility stipulations. This is enough presence to derive income and therefore owe income taxes, according to a unanimous ruling that was handed down by the Iowa Supreme Court Dec. 30.

According to Bloomberg, the Iowa Department of Revenue and Finance claimed KFC owed the money, including interest and penalties, for 1997, 1998 and 1999. KFC challenged the assessment because it didn’t own property in Iowa, but it was overturned in the state’s highest court last week.

I’ve heard it claimed that because this out-of-state company is benefitting from its franchisees’ market in Iowa, it should pay a share of its profits to the state to pay for essential services like roads and courts and such. I have three reactions:

  • Iowans are already benefitting from KFC Corp’s brand, in that the Colonel’s chicken dinner sales are voluntary transactions that make both parties better off.
  • Iowa government spending is mostly for education, health care, police, parks, etc.: things that overwhelmingly benefit Iowa residents and the KFC franchisees, not KFC Corp and its employees. Residents should be willing to pay for the services they use and want rather than sticking out-of-state corporations with the bill.
  • Should it really be the case that because someone in Iowa owes money to a Delaware company (which is essentially the relationship here), the Delaware company is subject to Iowa’s income tax? Does that system have a logical stopping point aside from every state’s corporate income tax being imposed on everyone?

More on the scope of state taxing authority here.


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