1.8 LICENSE, DISTRIBUTORSHIP, AGENCY OR FRANCHISE ARRANGEMENT
1.8.1 License
A license is an agreement by the owner of a patent, trademark or trade name to allow another person to utilize such patent, trademark or trade name to sell or manufacture a product for a limited period of time. A foreign corporation that enters into a licensing agreement with a person in the United States generally will not be deemed to be doing business in the United States, but such foreign corporation may be subject to U.S. taxes on royalty payments made pursuant to the license agreement.
1.8.2 Distributorship
A distributorship is a license to sell products under a particular trademark or trade name. It may be exclusive within a specified territory. Generally, the relationship between the supplier and distributor is that of an independent contractor, and a foreign corporation will not be deemed to be doing business in Washington State merely because it sells its products here through an authorized distributor. A foreign corporation should be able to avoid state and federal taxes, license fees and reporting requirements if sales through the distributor are structured in the manner discussed in Section 1.2.4 above. However, if the U.S. distributor is a subsidiary or an affiliate of the foreign corporation, the parties must review the intercompany pricing issues discussed in [Section ___ Chapter __] of this Guide.
1.8.3 Agency
An agency is a contractual relationship pursuant to which an agent performs services on behalf of a principal and, in return, receives a fee or commission. It is important to distinguish between a general agent and an independent broker or commission agent. A general agent has authority to bind its principal by its actions that are within the scope of his authority, and a general agent normally is subject to extensive contractual control by its principal. An independent broker or commission agent, however, does not have the same authority to bind its principal and is not subject to the same degree of control by the principal.
As discussed above, a foreign corporation may effect sales in Washington State through an independent broker or commission agent without qualifying or registering to do business in this state and without subjecting the foreign corporation to license fees and state taxes. In addition, activation of an independent agent generally will not by itself cause the foreign corporation to be considered as engaged in a U.S. trade or business or to have a permanent establishment in the U.S. for purposes of federal income tax. A foreign corporation that does business in this state through a general agent, however, may not only be subject to license fees and taxes, but also will be subject to the jurisdiction of U.S. courts and will be generally liable for all acts of the agent within the scope of its authority. It is extremely important, therefore, to avoid establishing a general agency relationship when it is the intention of the foreign corporation merely to establish a sales agency or service representative arrangement with an independent commission agent. Such sales agency and service representative agreements should require the approval of the foreign corporation prior to acceptance of sales or service orders, and the foreign corporation should refrain from exercising too much control over the day-to-day operations of the agent so that the independent contractor relationship will not be jeopardized.
1.8.4 Franchise
A franchise may be defined as a license from the owner of a trademark or trade name to permit another to sell a product or service under that name or mark. It is generally understood that the franchisor has a duty to the public to oversee the quality of the product or service offered by the franchisee. The agreement between the franchisor and the franchisee therefore gives the franchisor control over such matters as the location and appearance of the place of business, the products used or sold, bookkeeping methods, advertising and sales methods, appearance and quality of personnel, hours of business, the territory served and prices charged. A franchise agreement often may include a license to use certain patents, formulas or other trade secrets in the conduct of the franchisee’s business. Because the franchisor and franchisee normally are treated as independent contractors, a foreign corporation should not be deemed to be doing business in Washington State by virtue of entering into a franchise agreement with a person located here. Nevertheless, a foreign corporation will generally be subject to U.S. taxes on the income received pursuant to that franchise agreement because this income will be derived from a U.S. source.
A license is an agreement by the owner of a patent, trademark or trade name to allow another person to utilize such patent, trademark or trade name to sell or manufacture a product for a limited period of time. A foreign corporation that enters into a licensing agreement with a person in the United States generally will not be deemed to be doing business in the United States, but such foreign corporation may be subject to U.S. taxes on royalty payments made pursuant to the license agreement.
1.8.2 Distributorship
A distributorship is a license to sell products under a particular trademark or trade name. It may be exclusive within a specified territory. Generally, the relationship between the supplier and distributor is that of an independent contractor, and a foreign corporation will not be deemed to be doing business in Washington State merely because it sells its products here through an authorized distributor. A foreign corporation should be able to avoid state and federal taxes, license fees and reporting requirements if sales through the distributor are structured in the manner discussed in Section 1.2.4 above. However, if the U.S. distributor is a subsidiary or an affiliate of the foreign corporation, the parties must review the intercompany pricing issues discussed in [Section ___ Chapter __] of this Guide.
1.8.3 Agency
An agency is a contractual relationship pursuant to which an agent performs services on behalf of a principal and, in return, receives a fee or commission. It is important to distinguish between a general agent and an independent broker or commission agent. A general agent has authority to bind its principal by its actions that are within the scope of his authority, and a general agent normally is subject to extensive contractual control by its principal. An independent broker or commission agent, however, does not have the same authority to bind its principal and is not subject to the same degree of control by the principal.
As discussed above, a foreign corporation may effect sales in Washington State through an independent broker or commission agent without qualifying or registering to do business in this state and without subjecting the foreign corporation to license fees and state taxes. In addition, activation of an independent agent generally will not by itself cause the foreign corporation to be considered as engaged in a U.S. trade or business or to have a permanent establishment in the U.S. for purposes of federal income tax. A foreign corporation that does business in this state through a general agent, however, may not only be subject to license fees and taxes, but also will be subject to the jurisdiction of U.S. courts and will be generally liable for all acts of the agent within the scope of its authority. It is extremely important, therefore, to avoid establishing a general agency relationship when it is the intention of the foreign corporation merely to establish a sales agency or service representative arrangement with an independent commission agent. Such sales agency and service representative agreements should require the approval of the foreign corporation prior to acceptance of sales or service orders, and the foreign corporation should refrain from exercising too much control over the day-to-day operations of the agent so that the independent contractor relationship will not be jeopardized.
1.8.4 Franchise
A franchise may be defined as a license from the owner of a trademark or trade name to permit another to sell a product or service under that name or mark. It is generally understood that the franchisor has a duty to the public to oversee the quality of the product or service offered by the franchisee. The agreement between the franchisor and the franchisee therefore gives the franchisor control over such matters as the location and appearance of the place of business, the products used or sold, bookkeeping methods, advertising and sales methods, appearance and quality of personnel, hours of business, the territory served and prices charged. A franchise agreement often may include a license to use certain patents, formulas or other trade secrets in the conduct of the franchisee’s business. Because the franchisor and franchisee normally are treated as independent contractors, a foreign corporation should not be deemed to be doing business in Washington State by virtue of entering into a franchise agreement with a person located here. Nevertheless, a foreign corporation will generally be subject to U.S. taxes on the income received pursuant to that franchise agreement because this income will be derived from a U.S. source.