Strebeck Properties, Inc. v. New Mexico Bureau of Revenue
| Decision Date | 20 March 1979 |
| Docket Number | No. 3611,3611 |
| Parties | STREBECK PROPERTIES, INC., Appellant, v. NEW MEXICO BUREAU OF REVENUE, Appellee. |
| Court | Court of Appeals of New Mexico |
Appellant (Strebeck) conducts a 24-hour coin-operated laundry business in Clovis. The washers and dryers were purchased in another state and installed by Strebeck at its Clovis location. The business is operated as many laundromats are: the premises are not usually attended by any Strebeck employees; customers bring clothes to be washed and dried, select a machine or machines to be used, deposit the necessary coins required to make the machine(s) operate, and remove the clothes when the washing or drying operation is complete. No personal services are performed for customers by Strebeck. Strebeck pays the New Mexico Gross Receipts Tax on the proceeds received from the machines.
Upon these facts, not disputed on appeal or in the record, and after an audit for the period of April, 1974 through June 30, 1977, the New Mexico Bureau of Revenue (Bureau), assessed a compensating tax under § 72-16A-7, N.M.S.A. (1953) (now § 7-9-7, N.M.S.A. (1978)). Strebeck filed a protest arguing that since its equipment was leased, it was entitled to the deduction provided in § 72-16A-15.1, N.M.S.A. (1953) (now § 7-9-78, N.M.S.A.1978)). The protest was denied by the Bureau's Hearing Examiner and Strebeck timely appealed.
The Decision and Order of the Bureau included the following paragraphs:
4. As stated by taxpayer, the issue in the case is the application of § 72-16A-15.1, N.M.S.A. (1953) (now § 7-9-78, N.M.S.A.1978), which provides:
The value of tangible personal property, other than furniture or appliances furnished as part of a leased or rented dwelling house or apartment by the landlord or lessor, and other than mobile homes as defined in § 64-1-8, N.M.S.A.1953, may be deducted in computing the compensating tax due if the person using the tangible personal property:
A. is engaged in a business which derives a substantial portion of its receipts from leasing or selling tangible personal property of the type leased; and
B. does not use the tangible personal property in any manner other than holding it for lease or sale, or leasing or selling it either by itself or in combination with other tangible personal property in the ordinary course of business.
5. The taxpayer contends it "leases" its coin-operated machines to its customers and relies on the definition of leasing as defined in § 72-16A-3(J) ().
6. At the hearing, it was contended that the taxpayer makes no "use" of the imported machines; the only "use" of the machines is by customers of the taxpayer. Under the definition of "use" in § 72-16A-3(L), it is concluded that this taxpayer used the machines.
7. Is this taxpayer entitled to the deduction authorized in § 72-16A-15.1, which provides for a deduction from compensating tax, if the taxpayer is engaged in leasing the imported property to its customers? "Leasing" is defined in § 72-16A-3(J):
"Leasing" means any arrangement whereby, for a consideration, property is employed for or by any person other than the owner of the property;
A Bureau Regulation (G.R. Regulation 3(J):1) points out in the following example, that a license to use is not a lease:
Example 1: W Company leases ten coin-operated washing machines to the Parkdale Apartments. W claims that since Parkdale's tenants will in turn lease the machines for their own use, the receipts it receives from the transaction may be deducted under § 72-16A-14.5, p. 85, which allows a deduction for property leased for subsequent leasing. W may not deduct these receipts because Parkland's tenants are not leasing the washing machines. See G.R. Regulation 14.5:2, p. 85.
The parties agree that the sole issue to be resolved on appeal is whether Strebeck leased the use of its machines to its customers, qualifying it for the statutory deduction. The Bureau maintains that the laundromat operation constituted a license to the users, and imposition of the tax was correct.
The Bureau recognized that Strebeck claimed its deduction under § 72-16A-15.1 (see quoted Paragraph 4 above). It applied a Bureau regulation (see quoted Paragraph 7 above), which refers to the "leasing" definition of § 72-16A-3(J) (now § 7-9-3(J), N.M.S.A. (1978)), and cited the example thereunder illustrating a claimed deduction under § 72-16A-14.5, N.M.S.A. (1953) (now § 7-9-50, N.M.S.A. (1978)), which provides a deduction from Gross receipts tax for receipts on tangible property Leased for subsequent leasing. Neither the tax referred to in that section, nor the manner of acquisition of the tangible property, nor the illustration relied on by the Bureau has any application to the facts of this case.
Example 1 shown in Paragraph 7 of the Bureau's decision does not reach the "license-lease" distinction claimed by the Bureau. It does refer to G.R. Regulation 14.5:2 which, again, is a regulation applicable to a Gross receipts tax deduction under § 72-16A-14.5 for receipts from leasing property that is to be subsequently leased by the first lessee. That regulation is entitled "Lease vs. License to Use," and the examples cited thereunder, even though concerned with gross receipts tax, may be instructive on the question of license or lease:
G.R. REGULATION 14.5:2 LEASE vs. LICENSE TO USE
Receipts of a person who is a Lessor of tangible personal property From leasing tangible personal property To a lessee who grants a license to use the leased items of tangible personal property To a third party may not be deducted from gross receipts pursuant to this section. However, the deduction will be allowed if the lessor has accepted a non-taxable transaction certificate From the buyer in good faith that the property would be used in a non-taxable manner. (Emphasis supplied.)
If the lessee delivering the nontaxable transaction certificate does not use the property in a nontaxable manner, the Compensating Tax is due.
Example 1: Television Leasing, Inc., leases television sets to X Motel to place in the rooms of their guests. X Motel delivers a nontaxable transaction certificate to Television Leasing, Inc., pursuant to this section. X Motel may not properly deliver a nontaxable transaction certificate pursuant to this section because it is not subsequently leasing the television sets to its guest in the ordinary course of business; rather, it is granting its guests a license to use the television sets.
Example 2: X Bowling Equipment Company leases bowling equipment to a local bowling alley which in turn grants its customers a license to use that equipment. The local bowling alley may not deliver nontaxable transaction certificate to X Bowling Equipment Company pursuant to this section because the lease of the equipment is not for subsequent lease. See G.R. REGULATION 3(J): 1, p. 22.
Example 3: X is in the business of selling and leasing golf carts. Y, a country club, leases a golf cart from X and permits golfers to use it for a consideration. X's receipts from leasing the golf cart may not be deducted from gross receipts pursuant to Section 72-16A-14.5, because Y is not subsequently leasing the golf cart to golfers, but is merely granting a license to use the golf cart.
G.R. Regulation 14.5:1 was not referred to by the Bureau in its decision but it, too, may shed some light on the Bureau's interpretations of such a transaction as it considers a lease. It reads:
G.R. REGULATION 14.5:1 GENERAL EXAMPLES
The following examples (sic) illustrate the application of Section 72-16A-14.5 in various situations:
Example 1: The H Tool Company manufactures fishing tools for use in the oil field. H leases these tools to J Rental Company which in turn rents the tools to the P Drilling Company. If the J Rental Company delivers a nontaxable transaction certificate to H, H may deduct the amount of its rental from its gross receipts. Unlike the country club in Example 3 of G.R. Regulation 14.5:2 (dealing with gross receipts tax deductions), Strebeck customers do not conduct a larger business to which laundromat equipment is merely incidental; nor are they like the motel owners who lease television sets simply to provide an additional service to customers for the benefit of the principal business of renting rooms; nor do they fall into the same category as bowling alley operators who occasionally rent shoes and bowling balls and other bowling incidentals for the convenience of some of the customers of the alleys. All of those illustrations are concerned with operators of larger businesses providing services to their customers which are incidental to the principal businesses conducted. For purposes of being excused from payment of gross receipts tax, the supplier of such equipment to the business owner or operator is not considered to be leasing for re-lease.
The greater problem, however, is that (although Regulation 14.5:2 refers indiscriminately to "lessee" and "buyer") all of the illustrations are concerned with a lessor's liability for Gross receipts tax on the lease price received from one who, in turn uses the merchandise in a leasing business and delivers to the first lessor a nontaxable transaction certificate. Those illustrations are not concerned with a Purchaser-lessor's obligations to pay a Compensating tax if the seller-supplier is an out-of-state merchant, and the purchaser uses the merchandise in a New Mexico leasing business. We do not find the Bureau's regulations helpful because they are directed toward a dissimilar section of the Act. Our inquiry is whether Strebeck is entitled to the deduction from compensating tax liability for the "value of tangible personal property . . . (used by a person...
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