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Two Papa Johnís New York Franchise Owners Charged with Tax Fraud

by Ed Teixeira

Franchisors and franchisees should take heed from recent events in New York and be prepared for future audits.

Recent events in New York involving two franchisees, should serve as a warning to franchise owners. Some states are increasing audits of businesses in order to crack down on the underreporting and payment of sales taxes. Two Papa John franchisees that collectively operated 13 locations in the New York Metro area were charged with tax fraud. The two owners were charged in the past four months. One of the franchisees is charged with collecting approximately $671,576 in sales tax but reported $60,630 of it to the State.

The other Franchisee reportedly withheld approximately $217,000 in sales tax collections from customers but not remit payments to New York State. Audits conducted by the State uncovered the fraud. After adding interest, fines and penalties both franchisees face huge monetary penalties and prison time if convicted.

Having prior personal experience with the home healthcare industry and government audits used to uncover Medicare and Medicaid fraud I can foresee some similarities pertaining to these sales tax audits.

First of all, a number of the state authorities share information regarding these kinds of activities. Rest assured that other state agencies may be eyeing Papa John franchisees or other food franchisees as the target for audits.

Second, technology has made it easier to identify potential franchise operations that could be audited by identifying deviations in revenues, purchases and other factors from the group.

Third, states continue to be under financial pressure and as such continue to seek additional sources of funds. Franchisees should remain in compliance with their responsibilities pertaining to fiscal obligations. For their part franchisors need to be diligent and utilize their rights under the terms of the franchise agreements to confirm that their franchises are in compliance.

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