Baskin-Robbins Ice Cream Co. v. Revenue Division, Dept. of Taxation and Revenue

• Court: Court of Appeals of New Mexico
• Writing for the Court: SUTIN; HENDLEY; HERNANDEZ
• Citation: Baskin-Robbins Ice Cream Co. v. Revenue Division, Dept. of Taxation and Revenue, 599 P.2d 1098, 93 N.M. 301, 1979 NMCA 98 (N.M. App. 1979)
• Decision Date: 09 August 1979
• Docket Number: No. 3683,BASKIN-ROBBINS,3683
• Parties: ICE CREAM COMPANY, Plaintiff-Appellant, v. REVENUE DIVISION, DEPARTMENT OF TAXATION AND REVENUE of the State of New Mexico, Defendant-Appellee.

Page 1098

599 P.2d 1098

93 N.M. 301

BASKIN-ROBBINS ICE CREAM COMPANY, Plaintiff-Appellant, v. REVENUE DIVISION, DEPARTMENT OF TAXATION AND REVENUE of the State of New Mexico, Defendant-Appellee.

No. 3683.

Court of Appeals of New Mexico.

Aug. 9, 1979.

Sandra Jo Craig, Schlenker, Craig & Lebeck, Albuquerque, for plaintiff-appellant.

Jeff Bingaman, Atty. Gen., Sarah Bennett, Sp. Asst. Atty. Gen., Santa Fe, for defendant-appellee.

OPINION

SUTIN, Judge.

Taxpayer appeals a Decision and Order of the Director, Revenue Division, which imposed payment of gross receipts taxes based upon income derived from an Area Franchise Agreement entered into with Creamland Dairies, Inc., a New Mexico based corporation engaged in the manufacture and processing of dairy products in New Mexico. We affirm.

In his Decision and Order, the Director states that the issue is whether Taxpayer is subject to the New Mexico gross receipts tax on royalties received by Taxpayer based on Creamland's sales of Taxpayer's brand of ice cream products in New Mexico.

The Decision and Order is lengthy and detailed and is supported by judicial authority. It relates to two subjects: (1) that Taxpayer is engaged in business in New Mexico by leasing its property in New Mexico, and (2) that Taxpayer is not engaged in interstate commerce.

In arriving at its Decision, the Director found that Taxpayer is a Delaware Corporation with headquarters in California. It owns distinctive trademarks, trade names, emblems, merchandizing designs and services, recipes and formulas. It has no employees nor any offices located in New Mexico. It does not own or lease any real property nor does it manufacture or sell any products in New Mexico.

Under the 1966 franchise agreement executed in California, taxpayer furnished its assorted items to Creamland to use in the manufacture and sale of ice cream products to "Baskin-Robbins 31 Ice Cream" retail stores in New Mexico, stores that are established by Creamland through a "B-R Retailers Franchise Agreement." This Agreement continued to the time of trial.

Taxpayer's trademarks are "31" and "Baskin-Robbins 31 Ice Cream." (The parties agreed that the secret recipe book and the trademarks were the basis of the agreement; that these were properties used by Creamland to manufacture Baskin-Robbins Ice Cream according to the recipes). Taxpayer's most valuable assets are its trade name, trademark and related intangibles. These properties are used in New Mexico. The secret formulas and techniques are utilized in New Mexico. Taxpayer's method of business exploits the New Mexico market for Taxpayer's benefit.

Creamland pays Taxpayer a royalty in California based upon the ice cream products sold by Creamland to its New Mexico retail stores. The remainder of the "findings" will be discussed under the two subjects mentioned above.

A. Taxpayer is engaged in business by leasing its property to Creamland in New Mexico.

The Director further found that Taxpayer had "property located in New Mexico; the formula or recipe book and more importantly, A bundle of intangible rights being employed in New Mexico"; that the grant of rights to Creamland of some part of Taxpayer's property rights in its trademarks and secret formula " is the Leasing of property which is employed in New Mexico regularly and systematically for business purposes"; that the legislature intended to impose a tax on receipts from Leasing such property employed in New Mexico because of the definition of "property" in § 7-9-3(I), N.M.S.A. 1978, and Taxpayer is "engaging in business" in New Mexico.

The Director held that Creamland was engaged in business because its gross receipts were derived from leasing property in New Mexico.

To determine the validity of the Director's ruling we must seek the answer in the definitional aspects of the Gross Receipts Tax Act.

Section 7-9-3(E) reads:

"engaging in business" means carrying on or causing to be carried on any activity with the purpose of direct or indirect benefit;

"The definition of 'business' as stated in the statute does not say 'any Act engaged in for gain,' but rather 'any Activity.' Webster's New International Dictionary lists, as synonyms of Activity, the words Occupation and Business. Accordingly, no definitive distinction can be drawn between the definition of Business as used in the statute, and that of its common and accepted meaning." (Emphasis theirs.) Novak v. Redwing, 89 Ga.App. 755, 81 S.E.2d 222, 224 (1954). See, State v. Spink Hutterian Brethren, 77 S.D. 215, 90 N.W.2d 365, 379 (1958). ("The words 'occupation' and 'business' are synonyms of 'activity.' ")

We find that Taxpayer was "engaging in business" as defined by Section 7-9-3(E). It was doing what it was organized and authorized to do. Besser Company v. Bureau of Revenue, 74 N.M. 377, 394 P.2d 141 (1964).

The remaining issue is whether taxpayer was "leasing property employed in New Mexico" as stated in the definition of "gross receipts." Section 7-9-3(F).

Section 7-9-3(J) reads:

"leasing" means Any arrangement whereby, for a consideration, property is employed for or by any person other than the owner of the property. (Emphasis added.)

Section 7-9-3(I) reads:

"property" means . . . Licenses, franchises . . . Trademarks . . . . (Emphasis added.)

Taxpayer was "engaging in business" and owned "property" in New Mexico used by Creamland the franchise and trademarks. Is the Area Franchise Agreement "any arrangement" within the definition of "leasing"? The term "any arrangement" is broad and expansive.

H & R Block, Inc. v. Lovelace, 208 Kan. 538, 493 P.2d 205, 211-12 (1972) defines a franchise as follows:

. . . 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 franchisor and the franchisor undertakes to assist the franchisee through advertising, promotion and other advisory services. The franchise may encompass an exclusive right to sell the product in a specified territory (see 15 Business Organizations, Glickman, Franchising, § 2.01).

By translating the definition of "leasing" into the facts of this case, "leasing" means an Area Franchise Agreement (any arrangement) whereby for payment of royalties (a consideration) a franchise and trademark (property) are employed by Creamland (any person) other than Taxpayer (owner) of the franchise and trademarks (property).

When definitions of "engaging in business," "leasing" and "property" are applied to Taxpayer, Taxpayer cannot escape the fact that it is leasing property in New Mexico for which it receives royalties. The royalties are "gross receipts," the money received by Taxpayer from leasing property employed in New Mexico. Section 7-9-3(F).

In so construing the statute, we follow the rule announced by Justice Moise in Besser Company, supra, that a taxpayer "should be given a fair, unbiased and reasonable construction, without favor either to the taxpayer or the state, to the end that the legislative intent is effectuated and the public interests to be subserved thereby furthered." (74 N.M. at 381, 394 P.2d at 145.)

Taxpayer is "engaging in business" by "leasing" property employed in New Mexico. "For the privilege of engaging in business, an excise tax equal to four percent of gross receipts is imposed on any person engaging in business in New Mexico." Section 7-9-4(A).

Taxpayer is subject to the Gross Receipts Tax Act.

B. Taxpayer is not engaged in interstate commerce.

The Director determined that "The fact that the franchise and royalty payments were received in California or that the franchise was executed by the taxpayer in California does not per se, establish that the taxpayer's receipts were from interstate commerce"; that to the extent that the Taxpayer's property is used solely in New Mexico, the taxpayer's activity is localized in New Mexico; that this is not the classic case involving the transportation of property or service from one state to another; that if ever the Taxpayer's activities involved interstate commerce, that commerce ceased when Creamland started performance in New Mexico pursuant to the franchise agreement.

"It is Taxpayer's position that its activities (vis a vis the Agreement) are clearly interstate commerce. To the extent the activities which the Director relies on to support this Assessment are Intra state, they are activities of Creamland . . . Not those of Taxpayer. It is Taxpayer's activities which must be examined to sustain the Assessment of Gross Receipts Tax." (Emphasis added.) (Br. p. 16.) "Clearly," says Taxpayer, "the agreement and the Lanham Act requires services from Taxpayer, many of which are performed in California." We disagree.

What are Taxpayer's "activities" or "services" that place it in the stream of commerce? (1) New flavors are developed in California; (2) forms for leases and agreements supplied by Taxpayer are developed in California; (3) trademarks are the symbol of the good will of Taxpayer's business and its continued value depends upon the continuing use of the trademarks in its business with its continuing effort to regulate the use of the trademarks. When we bundle up these "activities" or "services," we find no relationship to the concept of interstate commerce. The only contact Taxpayer has with New Mexico is its...