A&W Rests., Inc. v. Taxation & Revenue Dep't of N.M.

Decision Date22 August 2018
Docket NumberNo. A-1-CA-35999,A-1-CA-35999
Citation429 P.3d 976
Parties A&W RESTAURANTS, INC., Petitioner-Appellant, v. TAXATION AND REVENUE DEPARTMENT of the State of New Mexico, Respondent-Appellee.
CourtCourt of Appeals of New Mexico

Sutin, Thayer & Browne, P.C., Stevan Douglas Looney, Justin R. Sawyer, Andrew J. Baranowski, Albuquerque, NM, for Appellant.

Hector H. Balderas, Attorney General, Peter Breen, Special Assistant Attorney General, Taxation and Revenue Department, Santa Fe, NM, for Appellee.

GALLEGOS, Judge.

{1} A 2013 audit by the New Mexico Taxation and Revenue Department (the Department) resulted in the assessment of unpaid gross receipts tax against A&W Restaurants, Inc. (A&W), in the amount of $29,349.33. A&W protested the Department’s imposition of gross receipts tax on certain trademark-related royalty fees contained within its franchise agreements with New Mexico businesses. The hearing officer granted summary judgment in favor of the Department, and A&W appeals. For the reasons that follow, we affirm.

BACKGROUND

{2} A&W, an out-of-state corporation, entered into a number of franchise agreements with New Mexico businesses. Each of the franchise agreements, among other terms, contained a provision by which A&W granted to franchisees a limited license to use specific trademarks. The authority to utilize the trademarks was limited to use in connection with the operation of an A&W restaurant franchise. In consideration for the grant of the limited trademark license, the franchisees agreed to pay A&W a monthly royalty fee equal to 5 percent of gross sales.

{3} Following an audit in 2013, the Department determined that the royalty fees for the limited trademark license were subject to gross receipts tax as money received "from granting a right to use a franchise employed in New Mexico[.]" NMSA 1978, Section 7-9-3.5(A)(1) (2007). Consequently, the Department assessed gross receipts tax on the royalty fees in the amount of $29,349.33.1 In response, A&W filed a tax protest with the Department, seeking an abatement of the gross receipts tax.

{4} Pursuant to the Administrative Hearings Office Act, NMSA 1978, §§ 7-1B-1 to -9 (2015), A&W’s tax protest went before a hearing officer. During the course of proceedings, A&W and the Department filed cross motions for summary judgment. A&W argued that the royalty fees it received as consideration from the limited trademark licensing provisions are exempt from gross receipts tax as a matter of law because trademarks are not considered "property" under the Gross Receipts and Compensating Tax Act (the Act), NMSA 1978, §§ 7-9-1 to -116 (1966, as amended through 2018). See § 7-9-3(J) (defining "property"); § 7-9-3.5(A)(1) (defining "gross receipts"). The Department, in contrast, argued that such royalty fees were taxable as receipts "from granting the right to use a franchise[.]" Section 7-9-3.5(A)(1). After hearing argument from both sides, the hearing officer disagreed with A&W’s legal position and awarded summary judgment to the Department. A&W appeals to this Court pursuant to NMSA 1978, Section 7-1-25(A) (2015).

DISCUSSION

{5} This appeal requires us to consider the impact of two 2007 amendments to the Act on the taxability of trademark licensing royalty fees that make up part of a franchise agreement.

I. Standard of Review and Presumption and Burden Applicable to Tax Cases

{6} "Because the facts are not in dispute and the issue presented on appeal is purely legal, our review is de novo." Fed. Express Corp. v. Abeyta , 2004-NMCA-011, ¶ 2, 135 N.M. 37, 84 P.3d 85. Likewise, because we must engage in statutory construction, our review of the hearing officer’s decision is also de novo. See Cooper v. Chevron U.S.A., Inc. , 2002-NMSC-020, ¶ 16, 132 N.M. 382, 49 P.3d 61 ("The meaning of language used in a statute is a question of law that we review de novo."). "In interpreting statutes, we seek to give effect to the Legislature’s intent, and in determining intent we look to the language used and consider the statute’s history and background." Valenzuela v. Snyder , 2014-NMCA-061, ¶ 16, 326 P.3d 1120 (internal quotation marks and citation omitted). "Tax statutes, like any other statutes, are to be interpreted in accordance with the legislative intent and in a manner that will not render the statutes’ application absurd, unreasonable, or unjust." City of Eunice v. N.M. Taxation & Revenue Dep’t , 2014-NMCA-085, ¶ 8, 331 P.3d 986 (internal quotation marks and citation omitted).

{7} There exists a statutory presumption that all receipts from engaging in business in New Mexico are taxable. Section 7-9-5(A). "The taxpayer claiming that receipts are not taxable bears the burden of proving the assertion." MPC Ltd. v. N.M. Taxation & Revenue Dep’t , 2003-NMCA-021, ¶ 12, 133 N.M. 217, 62 P.3d 308.

II. The Relevant Provisions of the Act

{8} The purpose of gross receipts tax is to provide revenue for public purposes by taxing certain business activities within New Mexico. Section 7-9-2. Prior to 2007, the Legislature categorized these activities in the following ways: "selling property located in New Mexico, ... leasing or licensing property employed in New Mexico, ... selling services performed outside New Mexico, [and] ... performing services in New Mexico." Section 7-9-3.5(A)(1) (2006). "[G]ross receipts" were defined as "the total amount of money or the value of consideration received" from engaging in these business activities. Id .

In 2007, the Legislature amended the definition of gross receipts to
the total amount of money or the value of other consideration received from selling property in New Mexico, from leasing or licensing property employed in New Mexico, from granting a right to use a franchise employed in New Mexico, from selling services performed outside New Mexico, the product of which is initially used in New Mexico, or from performing services in New Mexico.

Section 7-9-3.5(A)(1) (emphasis added).

{9} Also in 2007, the Legislature amended the definition of "property" from "real property, tangible personal property, licenses, and franchises[,]" Section 7-9-3(J) (2006), to

real property, tangible personal property, licenses other than the licenses of copyrights, trademarks or patents and franchises.

Section 7-9-3(J).

III. Gross Receipts Tax Applies to the Trademark Licensing Royalty Fees That Are Part of A&W’s Franchise Agreements

{10} After 1991, both franchise agreements and licensing agreements were considered to be, and analyzed as, the sale of property. See Sonic Indus., Inc. v. State (Sonic I ), 2000-NMCA-087, ¶ 12, 129 N.M. 657, 11 P.3d 1219, rev’d on other grounds by Sonic Indus., Inc. v. State (Sonic II ), 2006-NMSC-038, ¶ 1, 140 N.M. 212, 141 P.3d 1266. However, by amending the definition of gross receipts to include the new business activity categories of licensing property employed in New Mexico and granting a franchise employed in New Mexico, Section 7-9-3.5(A)(1), the Legislature has effectively taken licensing agreements and franchise agreements out of the sale of property category. Given this development, and in light of these new categories of gross receipts, the question before us is how to properly analyze the taxability of a limited trademark license provision contained within a franchise agreement.

{11} Unsurprisingly, A&W and the Department have differing views on the analysis to be employed, as well as on the effect that the amendments have on the taxability of the limited trademark license royalties at issue in this case. A&W asserts that gross receipts tax applies to receipts from the licensing of property and that under the new 2007 Section 7-9-3(J) definition, trademark licenses are no longer considered to be property. Based on this definitional exclusion, A&W contends that the royalty fees received as consideration from the trademark licensing provisions are exempt from gross receipts tax. Conversely, the Department maintains that the royalty fees for the limited trademark license are subject to gross receipts tax as money received from granting a right to use a franchise, pursuant to Section 7-9-3.5(A)(1).

{12} In resolving these arguments, the crucial question to be answered is whether the royalty fees flowing from this particular trademark licensing provision should be treated as being received from the grant of a franchise or from the licensing of a trademark. If we were to limit ourselves to A&W’s view—that the limited trademark licensing provision is a separately-itemized standalone agreement, although contained within the franchise agreement—it would appear that the answer is clear that the royalties received from the trademark license are excluded from gross receipts under Sections 7-9-3.5(A)(1) and 7-9-3(J). Yet, it is not so simple. We must also, as the Department contends, consider the meaning of the word "franchise." See Valenzuela , 2014-NMCA-061, ¶ 16, 326 P.3d 1120 ("[W]e should read the entire statute as a whole so that each provision may be considered in relation to every other part." (internal quotation marks and citation omitted) ).

{13} Although we have no statutory definition of franchise in New Mexico, this Court observed in Sonic I that "[b]y 1969, when the Legislature extended the Act’s definition of property to ‘licenses, franchises, patents, trademarks and copyrights,’ the use of the term franchise to describe a prepackaged system for doing business appears to have been well established." 2000-NMCA-087, ¶ 24, 129 N.M. 657, 11 P.3d 1219. This Court also set forth the following definition of a franchise:

In its simplest terms a franchise is a license from the owner of a trademark or trade name permitting another to sell a product or service under that name or mark. More broadly stated, the franchise has evolved into an elaborate agreement under which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by the
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