Sonic Industries, Inc. v. State

• Decision Date: 03 July 2000
• Docket Number: No. 20,676.,20,676.
• Citation: 11 P.3d 1219,129 N.M. 657
• Parties: SONIC INDUSTRIES, INC., Plaintiff-Appellant/Cross-Appellee, v. STATE of New Mexico and John Chavez, Secretary of the New Mexico Taxation and Revenue Department, Defendants-Appellees/Cross-Appellants.
• Court: Court of Appeals of New Mexico

11 P.3d 1219

129 N.M. 657

SONIC INDUSTRIES, INC., Plaintiff-Appellant/Cross-Appellee, v. STATE of New Mexico and John Chavez, Secretary of the New Mexico Taxation and Revenue Department, Defendants-Appellees/Cross-Appellants.

No. 20,676.

Court of Appeals of New Mexico.

July 3, 2000.

Certiorari Granted October 6, 2000.

Daniel H. Friedman, Simons, Cuddy & Friedman, LLP, Santa Fe, NM for Appellant.

Patricia A. Madrid, Attorney General, Bridget A. Jacober, Special Assistant Attorney General, Santa Fe, NM, for Appellees.

Curtis W. Schwartz, Timothy C. Holm, Modrall, Sperling, Roehl, Harris & Sisk, P.A., Santa Fe, NM, for Amicus Curiae-Long John Silver's, Inc.

Certiorari Granted, No. 26,447, October 6, 2000.

OPINION

ALARID, Judge.

{1} This interlocutory appeal requires us to determine the effect of a 1991 amendment to Subsection 7-9-3(J) of the Gross Receipts and Compensating Tax Act, NMSA 1978, §§ 7-9-1 through 7-9-89 (1966, as amended through 2000) (the Act) on the New Mexico Taxation and Revenue Department's (the Department) authority to assess gross receipts tax on royalty fees paid by New Mexico franchisees to Sonic Industries, Inc., (Sonic) an out-of-state franchiser of a fast-food restaurant system. We also address the issues of whether Sonic's franchising activities are a separate taxable activity from the selling of food by franchisees; whether the Department's notice of assessment was timely; and whether Sonic is subject to a penalty for negligent failure to report and pay gross receipts taxes on royalty payments made by New Mexico franchisees.

BACKGROUND

{2} Sonic is an Oklahoma corporation with its principal place of business in Oklahoma City, Oklahoma. Sonic has developed a format for operating fast-food restaurants known as the "Sonic System." Sonic itself does not own or operate restaurants in New Mexico and has no office, warehouse, or resident salesperson in New Mexico. Sonic enters into standardized "License Agreements" with the owners of the restaurants, who agree to operate Sonic restaurants at specified locations in New Mexico according to the Sonic System. The License Agreement describes the Sonic System as "the distinctive and proprietary drive-in, food service system... under which food is sold to the public from drive-in restaurants operated under the trade name and federally registered trademark and service mark `Sonic.'" Each owner pays Sonic a percentage of the restaurant's monthly gross sales as a royalty.

{3} The Department assessed Sonic $144,152.05 for gross receipts taxes for the period December 1988 through December 1994. The Department also assessed $88,789.62 in interest and penalty. Sonic paid the assessment and filed a claim for refund with the Department. The Department denied the claim. Sonic then filed a Complaint for Refund of Taxes Paid in the district court.

{4} In the district court, Sonic moved for partial summary judgment arguing that its franchising activities constitute non-taxable out-of-state sales of licenses and associated services. Since the Department did not dispute the factual basis of Sonic's motion, the motion raised a pure question of law. The Department filed a cross-motion for full summary judgment. In its response, Sonic argued that genuine issues of material fact precluded summary judgment in the Department's favor. The district court denied both motions for summary judgment, but certified both rulings for interlocutory appeal pursuant to NMSA 1978, § 39-3-4(A) (1999).

DISCUSSION

I. Sonic's Motion for Partial Summary Judgment

{5} Summary judgment is appropriate where, as here, the material facts are undisputed and the only matter to be resolved is the legal effect of those facts. See Johnson v. Yates Petroleum Corp., 1999-NMCA-066, ¶ 3, 127 N.M. 355, 981 P.2d 288. In reviewing the grant or denial of a motion for summary judgment, we apply a de novo standard of review. See id.

{6} Under the Act, "gross receipts" include: "the total amount of money or the value of other consideration received from selling property in New Mexico [or] from leasing property employed in New Mexico." NMSA 1978, § 7-9-3(F) (1978, as amended 1989). In 1979, this Court applied a substantially-similar prior version of this statute in three cases upholding the assessment of gross receipts tax on franchise fees paid to out-of-state franchisers. See AAMCO Transmissions, Inc. v. Taxation & Revenue Dep't, 93 N.M. 389, 600 P.2d 841 (Ct.App. 1979); Baskin-Robbins Ice Cream Co. v. Revenue Div., 93 N.M. 301, 599 P.2d 1098 (Ct.App.1979); American Dairy Queen Corp. v. Taxation & Revenue Dep't, 93 N.M. 743, 605 P.2d 251 (Ct.App.1979). In each case, we relied on the statutory definition of gross receipts as the total money or other consideration received by the taxpayer "from leasing property employed in New Mexico." Section 7-9-3(F) (emphasis added). We reasoned that the franchisers had property employed in New Mexico in the form of trademarks and other intangible rights licensed to and used by the in-state franchisees.

{7} As of 1979, when we decided AAMCO, Baskin-Robbins, and American Dairy Queen, the Act defined leasing as "any arrangement whereby, for a consideration, property is employed for or by any person other than the owner of the property." NMSA 1978, § 7-9-3(J) (1978). During the 1991 legislative session, the Fortieth Legislature amended Section 7-9-3(J) to read:

"leasing" means any arrangement whereby, for a consideration, property is employed for or by any person other than the owner of the property, except that the granting of a license to use property is the sale of a license and not a lease[.]

1991 N.M. Laws, ch. 203, § 1 (emphasis added).

{8} Sonic argues that we must revisit the issue decided by our earlier cases because the 1991 amendment to Subsection 7-3-9(J) has overturned AAMCO, Baskin-Robbins, and American Dairy Queen to the extent they relied on the premise that licensing fees paid to a franchiser constitute receipts from "leasing property employed in New Mexico." Sonic points out that under the amended version of Subsection 7-9-3(J), the granting of a license to use the Sonic System now constitutes selling, not leasing as in 1979 when we decided AAMCO, Baskin-Robbins, and American Dairy Queen. Second, Sonic argues that license fees paid by New Mexico franchisees do not satisfy the alternative definition of gross receipts as receipts from "selling property in New Mexico" because Sonic structured the franchise transactions so that the License Agreements became effective in Oklahoma, not New Mexico. According to Sonic, we should apply a place-of-contracting rule and hold that to the extent Sonic was engaged in selling licenses to use the Sonic System, it was engaged in selling in Oklahoma, not in New Mexico.

{9} We agree with Sonic's first point. A Sonic franchise, as defined in the standard License Agreement, consists of a bundle of intangible, intellectual property rights and associated services. Pursuant to its standard License Agreement, Sonic grants a New Mexico franchisee the "right, license and privilege" to "adopt and use"the Sonic System at a specified location in New Mexico. Sonic retains ultimate ownership of all intellectual property used by the franchisee pursuant to the License Agreement. In our view, when Sonic enters into a Sonic License Agreement, Sonic clearly is engaging in the "granting of a license to use [the Sonic System]," and thus, by operation of the 1991 amendment to Subsection 7-9-3(J), this activity constitutes "selling." To the extent our decisions in AAMCO, Baskin-Robbins, and American Dairy Queen proceeded from the assumption that the licensing of a franchiser's system constituted "leasing property in New Mexico," that former analysis is foreclosed by the 1991 amendment to Subsection 7-9-3(J). Accordingly, subsequent to the July 1, 1991, effective date of the amended version of Subsection 7-9-3(J), neither this Court nor the Department may rely upon the definition of gross receipts as receipts from "leasing property employed in New Mexico" to support the imposition of gross receipts tax on royalty fees paid to Sonic by New Mexico franchisees.

{10} We disagree, however, with Sonic's second point. As we explain below, the Legislature's reclassification of licensing as a subclass of selling does not affect the status of franchise fees paid as gross receipts.

{11} Our Legislature has taken the following approach: an exhaustive definition of gross receipts, which is then qualified by numerous exemptions and deductions. The Act imposes a tax on the privilege of "engaging in business in New Mexico." Section 7-9-4. As of 1979, when we decided AAMCO, Baskin-Robbins, and American Dairy Queen, the Act divided the universe of activities that constitute engaging in business in New Mexico into three categories: "selling property in New Mexico," "leasing property employed in New Mexico," and "performing services in New Mexico." 1969 N.M. Laws, ch. 144, § 1.

{12} In 1991, the Legislature chose to reclassify licensing as a form of selling. Sonic argues that this "seemingly small legislative amendment profoundly alters New Mexico's tax structure." The flaw in Sonic's argument is that it fails to acknowledge that for purposes of Subsection 7-9-3(F)'s definition of gross receipts, the 1991 amendment worked a zero-sum game: to the extent the reclassification of licensing results in fewer transactions that constitute "leasing," it results in correspondingly more transactions that constitute "selling." Thus, although the 1991 amendment requires us to alter our analysis of franchise fees under the Act, it does not change the result reached in the 1979 trilogy of franchise cases unless a Sonic franchise can be "in New Mexico" for purposes of the phrase "leasing property employed in New Mexico," but not be "in New Mexico" for purposes of the phrase "selling property in New Mexico."

{13} This brings us to Sonic's second point. Sonic...