In a recent opinion, the Texas State Office of Administrative Hearings (SOAH) disagreed with a Texas franchisor that claimed rent and other fees received from its franchisees were mandated by fiduciary duty to flow through to other entities and therefore not taxable revenue.

The Franchise Agreement and the Franchise Disclosure Document of the franchisor, an automotive maintenance and repair business with more than 150 franchises located nationwide, detail specific costs the franchisee is required to pay the franchisor, including the fees for rent, training, marketing, IT support, and software. The franchisor subleases the locations to, and collects rent from, the franchisees. There was no evidence establishing the amount the franchisor pays to third parties for services, such as software. Furthermore, the Franchise Agreement contained an Independent Contractor clause, indicating, in part, the terms of the agreement should not be construed to create an agency relationship. 

Nonetheless, the franchisor claimed that it had a fiduciary duty to distribute rent payments and other fees to the third parties. Therefore, those collected fees constitute flow-through funds and were not taxable revenue under Texas Tax Code §171.1011(f). Fiduciary duties arise either as a matter of law, such as in a trustee relationship, or informally, such as in a moral or personal relationship of trust and confidence. However, ordinary contractual duties do not rise to the level of a fiduciary relationship. The SOAH found the franchisor’s duties to pay rent and other fees to third parties were ordinary contractual duties and did not rise to the level to those of a fiduciary.

The franchisor also claimed that the payment of rent and other fees on behalf of the franchisee was mandated by law. Similarly, the SOAH found that the payments were governed by ordinary contractual duties and were not mandated by law.

Because the payment of rent and fees on behalf of the franchisees did not amount to a fiduciary duty and was not mandated by law, the franchisor was not entitled to exclude the collected fees from revenue and was required to pay taxes on the collected fees.