The Iowa Supreme Court has ruled a fast food company has to pay taxes to the state even though it has no corporate presence here. The Iowa Department of Revenue ruled in 2001 that the Kentucky Fried Chicken corporation owed just over 284-thousand dollars in corporate income taxes, penalties and interest for 1997 through 1999.
K-F-C’s corporation is located in Delaware with its primary place of business in Louisville, Kentucky. The company appealed saying all of the restaurants in Iowa are owned by independent franchisees, and without a physical presence in the state, under federal and state law the company does not owe any taxes on franchise royalties. The Department of Revenue said the royalties are taxable because the fees are derived from Iowa customers and are made possible by Iowa’s infrastructure and the legal protection of the Iowa marketplace.
The district court found that, because K-F-C’s marks and trademarks were “an integral part of business activity occurring regularly in Iowa,” the income derived from the use of that property was taxable under Iowa law. The Iowa Supreme Court agreed that the U.S. Supreme Court would likely find that the fees are taxable under federal law, and upheld the district court ruling.