Sonic Industries v. State of N.M.
Decision Date | 03 August 2006 |
Docket Number | No. 26,447.,26,447. |
Citation | 2006 NMSC 038,141 P.3d 1266 |
Parties | SONIC INDUSTRIES, Plaintiff-Petitioner, v. STATE of New Mexico and John Chavez, Secretary of the New Mexico Taxation and Revenue Department, Defendants-Respondents. |
Court | New Mexico Supreme Court |
Simons & Slattery, L.L.P., Daniel H. Friedman, Santa Fe, NM, for Petitioner.
Patricia A. Madrid, Attorney General, Jeffrey W. Loubet, Special Assistant Attorney General, Bruce J. Fort, Special Assistant Attorney General, Bridget A. Jacober, Special Assistant Attorney General, Santa Fe, NM, for Respondents.
Modrall, Sperling, Roehl, Harris & Sisk, P.A., Curtis W. Schwartz, Timothy R. Van Valen, Katharine Cook Fishaman, Santa Fe, NM, for Amicus Curiae, Holiday Hospitality Franchising Inc.
{1} This case requires us to determine whether franchise fees paid by New Mexico franchisees to an out-of-state corporation are subject to taxation under the Gross Receipts and Compensating Tax Act, NMSA 1978, §§ 7-9-1 through 7-9-100 ( ).1 Sonic Industries, Inc., an out-of-state corporation, appeals from an opinion of the Court of Appeals which held that the New Mexico Taxation and Revenue Department has the authority to assess gross receipts tax (GRT) on fees paid to Sonic by its New Mexico franchisees. See Sonic Indus., Inc. v. State, 2000-NMCA-087, 129 N.M. 657, 11 P.3d 1219. In its appeal to this Court, Sonic raises five issues: 1) whether 1991 amendments to the Gross Receipts and Compensating Tax Act eliminated the GRT and the compensating tax on out-of-state conveyances of intangibles, including franchises and trademarks, and their use in New Mexico; 2) whether the Court erred in ruling that Sonic's licensing of its trademarks and its out-of-state performance of services for New Mexico franchisees are "bundled" elements of a taxable New Mexico sale of a franchise; 3) whether the Court's grant of summary judgment in favor of the Department was precluded by material factual disputes; 4) whether Sonic's receipts from licensees are a pre-existing contractual split of a single revenue stream on which GRT has already been paid; and 5) whether the Court erred in granting summary judgment to the Department on the assessment of a penalty against Sonic. We reverse the Court of Appeals' determination that the 1991 amendments to the Gross Receipts and Compensating Tax Act did not affect the Department's ability to assess GRT on Sonic's franchising activities. We hold that Sonic's franchising activities constitute out-of-state sales that are not subject to GRT. Having determined that the franchising fees paid to Sonic are not taxable, we find it unnecessary to answer the other questions raised by Sonic regarding the bundling of franchise services with the out-of-state grant of a license to use franchises or trademarks in New Mexico and the assessment of a penalty against Sonic.
{2} Sonic is a corporation located in Oklahoma City, Oklahoma. Sonic maintains its corporate office in Oklahoma. Its franchising activities are managed from the Oklahoma corporate office and sales are solicited from this out-of-state location. Sonic has no office, warehouse, or resident salesperson in New Mexico, and thus no reporting location in New Mexico. Sonic enters License Agreements with franchisees who will operate restaurants in New Mexico and around the country. Even though the franchises exist in New Mexico, the franchisees travel to Oklahoma City to sign the agreements. The License Agreements between Sonic and its franchisees grant to franchisees the right to adopt and use the "Sonic System." The "Sonic System" includes the right to use federally registered trademarks, trade names, and service marks. Also specified in the License Agreements are Sonic's duties, which include providing plans for buildings, an operations manual, services such as marketing assistance and training, and a field evaluation program. Franchisees are also provided with financial resources and purchasing cooperatives. These services are in large part performed outside New Mexico. Under the Agreement, each franchisee pays an initial payment and a specified percentage of the revenues generated by the restaurant as a royalty to the Oklahoma corporation. These revenues are taxed by the Department as gross receipts and it is undisputed that the New Mexico franchisees have fully paid GRT on these revenues.
{3} In November 1995, the Department issued an assessment to Sonic for GRT, penalty, and interest for the period of December 1988 through December 1994. The Department alleged that Sonic owed $232,941.67 as a result of failing to pay GRT on franchise fees paid by New Mexico franchisees. Sonic paid the full amount assessed and filed a claim for refund which the Department denied. Sonic then filed a Complaint for Refund of Taxes Paid against the Department in district court.
{4} In the district court, Sonic moved for partial summary judgment alleging that its franchising activities constituted non-taxable out-of-state sales of licenses and associated services. The Department filed a motion for full summary judgment challenging Sonic's legal conclusions. The court denied both parties' motions for summary judgment, but certified its denials for interlocutory appeal.
{5} The Court of Appeals upheld the Department's assessment of the GRT on the licensing fees paid to Sonic by its New Mexico franchisees. Interpreting the effect of the 1991 amendments to the Gross Receipts and Compensating Tax Act, the Court held that "fees paid to Sonic by New Mexico franchisees for the right to operate Sonic restaurants located in New Mexico constitute receipts from selling property in New Mexico" and are taxable gross receipts as defined by Section 7-9-3(F) ( ) of the Gross Receipts and Compensating Tax Act. Sonic, 2000-NMCA-087, ¶ 15, 129 N.M. 657, 11 P.3d 1219.2
{6} Sonic filed a petition for a writ of certiorari in this Court on August 25, 2000, which was granted on October 6, 2000. On June 7, 2002, this Court entered an order quashing the writ of certiorari. Sonic filed a motion for reconsideration or rehearing which was granted on September 3, 2002. On October 2, 2002, a stay in proceedings was ordered pending a ruling in Kmart Corp. v. Taxation & Revenue Dep't, 2006-NMSC-006, 139 N.M. 172, 131 P.3d 22, which also raised the issue of the Department's authority to impose GRT on the licensing of intangible property subsequent to the 1991 amendments. The Kmart Opinion was filed in 2005 after this Court lifted a stay in the proceedings that had been granted when Kmart filed for bankruptcy in 2002. Id. ¶ 8. Having decided the Department's taxation authority in Kmart, we now lift the stay ordered in this proceeding in order to determine the Department's authority to impose GRT on franchise fees paid by New Mexico franchisees to Sonic.
{7} Because the material facts in this case are undisputed, we review de novo the Court of Appeals' application of the law to the facts. TPL, Inc. v. Taxation & Revenue Dep't, 2003-NMSC-007, ¶ 10, 133 N.M. 447, 64 P.3d 474. The interpretation of phrases within a statute is a question of law that is reviewed de novo. Id.
{8} The main issues raised in this case are substantially similar to issues addressed by this Court in Kmart. In Kmart, we acknowledged that our opinion was necessarily a response to the Court of Appeals' decision in Sonic. Kmart, 2006-NMSC-006, ¶ 10, 139 N.M. 172, 131 P.3d 22. Although Kmart involved the assessment of GRT on trademark licensing royalties rather than the taxability of franchise fees, "we do not perceive any legally significant distinction between franchise fees and trademark licensing royalties" within the context of determining the applicability of GRT, id., and this Court's analysis in Kmart is therefore applicable to the facts of this case.
{9} As in Kmart, "[t]his case requires us to decide if the Legislature intended to apply the GRT to the receipts generated from the License Agreement" at issue. Id. The purpose of the GRT is to provide revenue by taxing certain activities within New Mexico. Section 7-9-2 (1966). These activities include "selling property in New Mexico," "leasing property employed in New Mexico," and "performing services in New Mexico." Section 7-9-3.5(A)(1) ( ). In 1991, the Legislature amended the definition of leasing within the Gross Receipts and Compensating Tax Act. "In the amended statute, leasing was defined as `an 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.'" Kmart, 2006-NMSC-006, ¶ 14, 139 N.M. 172, 131 P.3d 22 ( ). Prior to the 1991 amendments, license agreements were considered leases subject to GRT because the intangible subject matter of the license agreements was used or employed within New Mexico. Id. ¶¶ 13-14; Am. Dairy Queen Corp. v. Taxation & Revenue Dep't, 93 N.M. 743, 747, 605 P.2d 251, 255 (Ct.App.1979) (); Baskin-Robbins Ice Cream Co. v. Revenue Div., Dep't of Taxation & Revenue, 93 N.M. 301, 304, 599 P.2d 1098, 1101 (Ct.App.1979) (same); AAMCO Transmissions, Inc. v. Taxation & Revenue Dep't, 93 N.M. 389, 391-92, 600 P.2d 841, 843-44 (Ct.App.1979) (same). As in Kmart, the effect of this legislative change is at the heart of the issues identified in this case and will necessarily determine whether or not the fees paid by Sonic franchisees are subject to taxation.
{10} The Court of Appeals found that the 1991 amendments to Section 7-9-3(J) require that the granting of...
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