Rust Tractor Co. v. Bureau of Revenue, 471

• Decision Date: 11 September 1970
• Docket Number: No. 471,471
• Citation: 475 P.2d 779,1970 NMCA 107,82 N.M. 82
• Parties: RUST TRACTOR CO., a Delaware corporation, and Rust Tractor of New Mexico, Inc., a New Mexico corporation, Appellants, v. BUREAU OF REVENUE, State of New Mexico, and Franklin Jones, Commissioner of Revenue, Appellees.
• Court: Court of Appeals of New Mexico

Page 779

475 P.2d 779

82 N.M. 82

RUST TRACTOR CO., a Delaware corporation, and Rust Tractor of New Mexico, Inc., a New Mexico corporation, Appellants, v. BUREAU OF REVENUE, State of New Mexico, and Franklin Jones Commissioner of Revenue, Appellees.

No. 471.

Court of Appeals of New Mexico.

Sept. 11, 1970.

Certiorari Denied Oct. 15, 1970.

Robert C. Poole, Poole, Tinnin & Danfelser, Albuquerque, for appellants.

James A. Maloney, Atty. Gen., Santa Fe, Richard J. Smith, Asst. Atty. Gen, John C. Cook, Sp. Asst. Atty. Gen., for appellees.

OPINION

SPIESS, Chief Judge.

Appeal is taken from a decision and order of the Commissioner of Revenue pursuant to § 72--13--39, N.M.S.A.1953 (Repl.Vol. 10, Supp.1969).

The appeal presents these questions: First, did the Commissioner properly impose a deficiency assessment at a 3% rate upon Taxpayer's receipts from transactions evidenced by written contracts denominated 'lease agreement' involving non-registered vehicles as against a contention that the transactions were installment sales agreements and the receipts taxable as to the particular equipment at 1 1/2% rate (at which rate tax had been paid)? We hold against the Commissioner on this question.

Second, did the Commissioner properly impose a compensating (use) tax upon Taxpayer's equipment which was rented or leased under agreements conceded to be leases as against contentions (a) that Taxpayer having paid gross receipts tax upon rentals received, the imposition of compensating tax resulted in double taxation upon an identical transaction, and (b) that the imposition of the compensating tax under the circumstances is violative of Section 1 of Article VIII of the New Mexico Constitution? We affirm the Commissioner on this question.

The assessments which were imposed covered the period January 1, 1964 to September 30, 1967.

All facts before the Commissioner and relating to both questions were stipulated. Accordingly, if but one inference can reasonably be drawn from the stipulated facts a question of law is presented and a finding of the Commissioner to the contrary is not binding on the reviewing court. If, however, more than one inference can reasonably be drawn then the finding of the Commissioner is conclusive. Northwest Bancorporation v. Board of Governors, Etc., 303 F.2d 832 (8th Cir. 1962); Pabst v. Wisconsin Department of Taxation, 19 Wis.2d 313, 120 N.W.2d 77 (1963); 4 Davis, Administrative Law Treatise § 29.05 (1958).

The questions presented will be disposed of in the order stated. The appeal is prosecuted by Rust Tractor Company, a Delaware corporation, and Rust Tractor of New Mexico, Inc., a New Mexico corporation, which is a wholly owned subsidiary of Rust Tractor Company. The questions affect both corporations alike and for the purpose of this opinion they are treated as a single taxpayer and referred to as 'Rust.' Rust is an authorized dealer for Caterpillar Company equipment and engaged solely in the sale, leasing and rental of heavy earth-moving and construction equipment and the supply of parts and service in connection with the maintenance and repair of such equipment.

It appears to be conceded, and we think properly so, that the facts stipulated by the parties present the issues involved here as questions of law, hence reviewable by this court.

The following are the stipulated facts material to a consideration of the first question. Rust entered into a number of transactions with customers involving heavy equipment. These transactions are referred to in the stipulation as 'lease purchase' or 'paid out lease' transactions. A copy of the form of agreement so employed is attached to and made a part of the stipulation. By oral or letter agreement made simultaneously with the execution of the form, it was agreed that upon compliance with the terms of the lease form the customer would automatically, and without additional consideration, become the owner of the equipment described and referred to in the form agreement.

With the exception of the oral or letter agreement the terms of the transactions were governed by the terms of the form agreement. Except in the event of customer's default in the performance of the obligations under the lease, Rust had no right to retake, control or use the equipment in any way at the end of the term. The customer could not terminate the lease except by making all payments provided for in the lease. The total amount of payments provided for in the lease was determined by Rust's customary retail price for the equipment plus an additional charge computed on the basis of a percentage of the retail price per year over the term of the lease. The additional charge was computed in the same manner as that used by Rust in computing interest in connection with installment sales under sales and security agreement forms.

The equipment, the subject of the lease form, was not carried as an asset on Rust's books while subject to the lease. The investment tax credit was made available only to the customer and the equipment was not depreciated by Rust on their books at any time. Rust booked all the transactions initially as sales taking into income the excess of the total lease payments over the cost of the equipment and treated them as sales for all accounting and bookkeeping purposes. The total amount of payments to be made under the lease form was treated as receivables on Rust's books and the additional charge was treated as unearned income with amounts transferred to income as payments were received.

Rust treated their interest under the lease form agreements as evidencing a sale with the reservation of a security interest, within the contemplation of the Uniform Commercial Code. The parties have stipulated that the vehicles forming the subject matter of the form agreements are not such as require registration under the Motor Vehicle Code. Rust did make returns and paid gross receipt taxes at the rate specified for transactions covering vehicles not registered under the Motor Vehicle Code in accordance with § 72--16--4.5, N.M.S.A.1953 (Repl.Vol. 10, Supp.1963), and § 72--16A--14(N), N.M.S.A.1953 (Repl.Vol. 10, Supp.1967). The Bureau, as has been stated, imposed a 3% rate and a 1% rate as to the municipal tax.

The parties are in substantial agreement that if the receipts are from the sale of the vehicles as distinguished from rentals under a pure lease that the deduction provided by § 72--16--4.5, supra, and § 72--16A--14(N), supra, are applicable and the deficiency assessment should be abated. Otherwise the amount of the deficiency assessment is owing.

As we have stated, the terms of the lease agreement are not in dispute. The issue between parties is as to its legal effect, which, in our view, is to be determined under the framework of the Uniform Commercial Code. Section 50A--9--102, N.M.S.A.1953 (Uniform Commercial Code--Secured Transactions) applies '* * * to any transaction (regardless of its form) which is intended to create a security interest in personal property * * *.' This Article (Article 9, Secured Transactions) '* * * applies to security interests created by contract including * * * lease or consignment intended as security.'

Section 50A--1--201(37) of the Uniform Commercial Code defines the term security interest and provides:

"Security interest' means an interest in personal property or fixtures which secures payment or performance of an obligation. * * * Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration * * * does make the lease one intended for security.'

The terms of the agreement are clear and unambiguous, consequently the intent of the parties must be ascertained from the language used. Brown v. American Bank of Commerce, 79 N.M. 222, 441 P.2d 751 (1968). The agreement provides that upon full payment of the rentals the lessee will become the owner of the property with no other or further consideration. This provision introduces an element under which an equity interest in the property is being created in the lessee through the payment of rentals. In accordance with the undisputed facts and the language of the agreements the parties are deemed as a matter of law to have intended the lease as one creating a security interest within the meaning of the Uniform Commercial Code. See Transamerica Leasing Corporation v. Bureau of Revenue, 80 N.M. 48, 450 P.2d 934 (Ct.App.1969).

It is our opinion that the so-called 'lease purchase' or 'paid out lease transaction' created a security interest in the equipment. Receipts by Rust were from the sale of the equipment rendering § 72--16--4.5, supra, and § 72--16A--14(N), supra, applicable with the result that the deficiency assessment made by the Commissioner should be cancelled and abated.

The second question, to which we have referred is presented by Rust through two points to which specific reference will hereinafter be made. The Commissioner imposed assessments in various amounts and for stated periods as compensating or use tax. The equipment covered by the assessments was equipment which had been out on lease or rental at some time during the assessment period and which remained unsold in Rust's inventory at the end of such period. This equipment was held for sale in Rust's inventory in the ordinary course of its business at all times when it was not out on lease or rental.

It was Rust's general practice to apply all rentals toward the purchase price where the customer wished to purchase equipment which had been rented to him without regard to whether the customer had an option to purchase the equipment. The equipment covered by the compensating tax assessments was never...