Alpha Corporation is a fast food franchisor. It developed from one very successful restaurant and is now a regional chain in the United States with 100 restaurants, 10 each in the states of A, B, C, D, E ,F G, H, I, and J. The owner and sole shareholder of Alpha no longer operates the first restaurant. He simply oversees the operations of the company as a whole. The Alpha headquarters is located in State Z. There are no franchisees located in State Z. It has no physical presence in any other state. It has 100 franchise arrangements with 100 unrelated individuals who operate the Alpha restaurants in the states noted above. The franchisees pay Alpha 3% of their gross receipts in order to use the Alpha name, the special menu, and restaurant theme. They also are entitled to attend training sessions at the headquarters given twice per year. The headquarters operation includes administrative support, training facilities, franchisee support, and research and development. State Z where Alpha is located has a very favorable state tax arrangement for business and only imposes a net worth tax. The owner of Alpha used to be a tax person. He has hired you as an accounting and reporting manager to assist him in the tax reporting for his company. His comment to you on your first day was: I am going to need you to spend only about 10% of your time on tax. We only pay State Z tax. I set it up that way used to be in the tax state tax business pretty slick arrangement, dont you think! We just dont have physical presence anywhere else. The time you will spend on tax will be mostly for federal. Really, I need your help mostly in keeping track of the money from the 100 independent franchisees.

You have just completed half of the state tax class at American University and wonder if the tax picture is as rosy as the owner thinks. Can this company really only owe a nominal capital based tax in Z and nothing in the ten other states? Is the company taxable outside of the state of Z? On what basis? What additional facts, if any, do you need to find out from the owner about the business to complete your review? Is there anything that can be done from a tax planning perspective to strengthen the existing favorable state tax position of Alpha or is it too good to be true? Do you have concerns about exposure to additional taxes? Why? Does it matter if some of the states outside of Z where there are unrelated franchisees have adopted the original or 2015 version of UDITPA?