August 22, 2018- A & W Restaurants, Inc. v. Taxation and Revenue Department of the State of New Mexico, No. A-1-CA-35999

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Filed

Court of Appeals of New Mexico
8/22/2018 9:08 AM

IN THE COURT OF APPEALS OF THE STATE OF NEW MEXIC

Opinion Number:

Filing Date: August 22, 2018

No. A-1-CA-35999
A&W RESTAURANTS, INC.,
Petitioner-Appellant,

Vv.

TAXATION AND REVENUE
DEPARTMENT OF THE STATE OF
NEW MEXICO,

Respondent-Appellee.

APPEAL FROM THE ADMINISTRATIVE HEARINGS OFFICE
Brian VanDenzen, Chief Hearing Officer

Sutin, Thayer & Browne, P.C.
Stevan Douglas Looney
Justin R. Sawyer

Andrew J. Baranowski
Albuquerque, NM

for Appellant

Hector H. Balderas, Attorney General

Peter Breen, Special Assistant Attorney General
Taxation and Revenue Department

Santa Fe, NM

for Appellee

O re

Ma

of the Clerk

[>

—_—

rk Reynolds

OPINION
1 GALLEGOS, Judge.
2 	{t} 	A 2013 audit by the New Mexico Taxation and Revenue Department (the
· 3 Department) resulted in the assessment of unpaid gross receipts tax against A&W
· 4 Restaurants, 	Inc. 	(A&W), 	in the 	amount 	of $29,349.33. 	A&W protested the
5 Department's imposition of gross receipts tax on certain trademark-related royalty
6 fees contained within its franchise agreements with New Mexico businesses. The
7 hearing officer granted summary judgment in favor of the Department, and A& W
8 appeals. For the reasons that follow, we affirm.
9 BACKGROUND
10 	{2} 	A&W, 	an 	out-of-state 	corporation, 	entered 	into 	a number 	of franchise
11 	agreements with New Mexico businesses. Each of the franchise agreements, among
12 other terms, contained a provision by which A& W granted to franchisees a limited
13 	license to use specific trademarks. The authority to utilize the trademarks was
14 limited to use in connection with the operation of an A& W restaurant franchise. In
15 	consideration for the grant of the limited trademark license, the franchisees agreed
· 16 to pay A& W a monthly royalty fee equal to 5 percent of gross sales.
17 	{3} 	Following an audit in 2013, the Department determined that the royalty fees
18 	for the limited trademark license were subject to gross receipts tax as money received
19 "from granting a right to use a franchise employed in New Mexico[.]" NMSA 1978~

1 Section 7-9-3.5(A)(l) (2007). Consequently, the Department assessed gross receipts
2 tax on the royalty fees in the amount of $29,349.33. 1 In response, A& W filed a tax
3 protest with the Department, seeking an abatement of the gross receipts tax.
4 	{4} 	Pursuant to the Administrative Hearings Office Act, NMSA 1978, §§ 7-lB-l
5 to -9 (2015), A&W's tax protest went before a hearing officer. During the course of
6 proceedings, A& W and the Department filed cross motions for summary judgment.
7 A& W argued that the royalty fees it received as consideration from the limited
8 trademark licensing provisions are exempt from gross receipts tax as a matter of law
9 because trademarks are not considered "property" under the Gross Receipts and
10 Compensating Tax Act (the Act), NMSA 1978, §§ 7-9-1 to -116 (1966, as amended
11 	through2018). See§ 7-9-3(J) (defining "property");§ 7-9-3.5(A)(l) (defining "gross
12 receipts"). The Department, in contrast, argued that such royalty fees were taxable
13 	as receipts "from granting the right to use a franchise[.]" Section 7-9-3.5(A)(l).
14 After hearing argument from both sides, the hearing officer disagreed with A& W's
15 	legal position and awarded summary judgment to the Department. A& W appeals to
16 this Court pursuant to NMSA 1978, Section 7-l-25(A) (2015).
1The Department assessed gross receipts tax beginning on June 15, 2007, the
date the 2007 amendment to Section 7-9-3.5(A)(l) became effective. The audit
period at issue in this case went through December 31, 2011.
2

1 DISCUSSION
2 	{5} 	This appeal requires us to consider the impact of two 2007 amendments to the
3 Act on the taxability of trademark licensing royalty fees that make up part of a
4 franchise agreement.
5 I. 	Standard. of Review and Presumption and Burden Applicable to Tax
6 	Cases
7 	{6} 	"Because the facts are not in dispute and the issue presented on appeal is
8 purely legal, our review is de novo." Fed. Express Corp. v. Abeyta, 2004-NMCA-
9 011, 12, 135 N.M. 37, 84 P.3d 85. Likewise, because we must engage in statutory
10 construction, our review of the hearing officer's decision is also de novo. See Cooper
11 	v. Chevron US.A., Inc., 2002-NMSC-020, 116, 132 N.M. 382, 49 P.3d 61 ("The
12 meaning oflanguage used in a statute is a question oflaw that we review de novo.").
13 	"In interpreting statutes, we seek to give effect to the Legislature's intent, and in
14 	determining intent we look to the language used and consider the statute's history
15 	and background." Valenzuela v. Snyder, 2014-NMCA-061, 116, 326 P.3d 1120
16 (internal quotation marks and citation omitted). "Tax statutes, like any other statutes,
17 are to be interpreted in accordance with the legislative intent and in a manner that
18 will not render the statutes' application absurd, unreasonable, or unjust." City of
19 Eunice v. N.M 	Taxation & Revenue Dep't, 2014-NMCA-085, 18,331 P.3d 986
20 (internal quotation marks and citation omitted).
3

1 {7} 	There exists a 	statutory presumption that all receipts 	from 	engagmg m
2 business in New Mexico are taxable. Section 7-9-S(A). "The taxpayer claiming that
3 receipts are not taxable bears the burden of proving the assertion." MPC Ltd. v. N.M
4 	Taxation & Revenue Dep't, 2003-NMCA-021, ,r 12, 133 N.M. 217, 62 P.3d 308.
5 II. 	The Relevant Provisions of the Act
6 {8} 	The purpose of gross receipts tax is to provide revenue for public purposes by
7 taxing certain business activities within New Mexico. Section 7-9-2. Prior to 2007,
8 the Legislature categorized these activities in the following ways: "selling property
9 located 	in 	New 	Mexico, ... leasing 	or 	licensing 	property 	employed 	in 	New
10 Mexico, ... selling services performed outside New Mexico, [and] ... performing
11 	services in New Mexico." Section 7-9-3.S(A)(l) (2006). "[G]ross receipts" were
12 defined as "the total amount of money or the value of consideration received" from
13 	engaging in these business activities. Id.
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In 2007, the Legislature amended the definition of gross receipts to
the total amount of money or the value of other consideration received
from 	selling property 	in New 	Mexico, 	from 	leasing 	or 	licensing
property employed in New Mexico, from granting a right to use a
franchise employed in New Mexico, from selling services performed
outside New Mexico, the product of which is initially used in New
Mexico, or from performing services in New Mexico.
21 	Section 7-9-3.S(A)(l) (emphasis added).
4

1 {9} 	Also in 2007, the Legislature amended the definition of "property" from "real
2 property, tangible personal property, licenses, and franchises[,]" Section 7-9-3(J)
3 (2006), to
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real 	property, 	tangible personal property, 	licenses 	other 	than 	the
licenses of copyrights, trademarks or patents and franchises.
6 Section 7-9-3(J).
7 III.
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9 	{10}
Gross Receipts Tax Applies to the Trademark Licensing Royalty Fees
That Are Part of A&W's Franchise Agreements
After 	1991, 	both 	franchise 	agreements 	and 	licensing 	agreements 	were
10 considered to be, and analyzed as, the sale of property. See Sonic Indus., Inc. v. State
11 	(Sonic I), 2000-NMCA-087, ,r 12, 129 N.M. 657, 11 P.3d 1219, rev 'd on other
12 grounds by Sonic Indus., Inc. v. State (Sonic JI), 2006-NMSC-038, ,r 1, 140 N.M.
13 	212, 	141 	P.3d 1266. However, by amending the definition of gross receipts to
14 	include the new business activity categories of licensing property employed in New
15 	Mexico and· granting a franchise employed in New Mexico, Section 7-9-3.5(A)(l),
16 the Legislature has effectively taken licensing agreements and franchise agreements
17 out of the sale of property category. Given this development, and in light of these
18 	new categories of gross receipts, the question before us is how to properly analyze
19 the taxability of a limited trademark license provision contained within a franchise
20 agreement.
5

1 {11} 	Unsurprisingly, A&W and the Department have differing views on the
2 analysis to be employed, as well as on the effect that the amendments have on the
3 taxability of the limited trademark license royalties at issue in this case. A& W asserts
4 that gross receipts tax applies to receipts from the licensing of property and that
5 under the new 2007 Section 7-9-3(J) definition, trademark licenses are no longer
6 considered to be property. Based on this definitional exclusion, A&W contends that
7 the royalty fees received as consideration from the trademark licensing provisions
8 are exempt from gross receipts tax. Conversely, the Department maintains that the
9 royalty fees for the limited trademark license are subject to gross receipts tax as
10 money received from granting a right to use a franchise, pursuant to Section 7-9-
11 	J.5(A){l ).
12 	{12} 	In resolving these arguments, the crucial question to be answered is whether
13 	the royalty fees flowing from this particular trademark licensing provision should be
14 treated as being received from the grant of a franchise or from the licensing of a
15 	trademark. If we were to limit ourselves to A& W's view-that the limited trademark
16 	licensing 	provi$ion 	is 	a 	separately-itemized 	standalone 	agreement, · although
17 contained witp.in the franchise agreement-it would appear that the answer is clear
18 that the royalties received from the trademark license are excluded from gross
_19 receipts under Sections 7-9-3.S(A)(l) and 7-9-3(J). Yet, it is not so simple. We must
20 also, as the Department contends, consider the meaning of the word "franchise." See
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1 Valenzuela, 2014-NMCA-061, ,-r 16, 326 P.3d 1120 ("[W]e should read the entire
2 statute as a whole so that each provision may be considered in relation to every other
3 part." (internal quotation marks and citation omitted)).
4 	{13} 	Although we have no statutory definition of franchise in New Mexico, this
5 Court observed in Sonic I that "[b ]y 1969, when the Legislature extended the Act's
6 definition 	of 	property 	to 	'licenses, 	franchises, 	patents, 	trademarks 	and
7 copyrights,' the use of the term franchise to describe a prepackaged system for doing
8 business appears to have been well established." 2000-NMCA-087, ,-r 24. This Court
9 also set forth the following definition of a franchise:
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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 franchiser
and 	the 	franchiser 	undertakes 	to 	assist 	the 	franchisee 	through
advertising, promotion and other advisory services.
18 Id. ,-r 23 (internal quotation marks and citation omitted).
19 	{14} 	We further observed in Sonic I that the Department had adopted a regulation
20 defining the word "franchise":
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A franchise is an agreement in which the franchisee agrees to undertake
certain business activities or to sell a particular type of product· or
service in accordance with methods and procedures prescribed by the
franchiser, and the franchiser agrees to assist the franchisee through
advertising, 	promotion and other advisory services. 	The 	franchise
7

1
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usually conveys to the franchisee a license to use the franchiser's
trademark or trade name in the operation of the franchisee's business.
3 Id.~ 25 (emphasis omitted); see Black's Law Dictionary 569 (9th ed. 2010) (defining
4 "franchise" as "[t]o grant (to another) the sole right of engaging in a certain business
5 or in a business using a particular trademark in a certain area"). We further held "that
6 for purposes of the Act, a franchise is to be treated as a compound or 'bundled' form
7 of property, which typically includes a license to use the franchiser's trademark and
8 a commitment by the franchiser to perform various services to assist the franchisee
9 in the operation of the franchised business." Sonic I, 2000-NMCA-087, ~ 28.
10 	{15} 	We can presume that the Legislature was aware of these longstanding and
11 	undisturbed definitions of franchise in 2007 when it amended the definition of gross
12 receipts to include "the total amount of money or the value of other consideration
13 	received ... from granting a right to use a franchise employed in New Mexico[.]"
14 	Section 7-9-3.5(A)(l); see Sonic I, 2000-NMCA-087, ~ 25 ("[W]e may infer from
15 the 	Legislature's 	inaction 	in . response 	to 	this 	longstanding 	administrative
16 construction 	of the 	term 	franchise 	that this 	definition 	is 	consistent with 	the
17 Legislature's intent.").
18 	{16} 	Furthermore, we observe that the 2007 gross receipts amendment followed
19 our Supreme Court's 2006 decision in Sonic II. See 2006-NMSC-038, ~ 9. The
20 Supreme 	Court analyzed 	Sonic's 	franchising 	activities under the 	then-current
21 	definition of gross receipts, which only included the money or value received from
8

I 	the sale or lease of property. Id. The Supreme Court first determined, in agreement
2 with this Court's opinion in Sonic I, that Sonic's franchising activities constituted
3 the sale of property. Id. ,r 13. The Supreme Court went on to hold that when a
4 	franchise agreement is executed outside of New Mexico, it is considered to be an
5 out-of-state sale, and thus not considered to fall within the definition of gross
6 receipts. Id. ,r 14. Therefore, the practical effect of Sonic II was to render franchise
7 agreements with out-of-state franchisers, such as the agreement in the present case,
8 non-taxable.
9 	{17} 	Less than a year after the Sonic II decision, the Legislature added a new
10 category of business activity resulting in taxable gross receipts: granting a right to
11 	use a franchise employed in New Mexico. See§ 7-9-3.S(A)(l). By this change, the
12 Legislature effectively overruled Sonic II and restored the taxability of franchise
13 	agreements, even those entered into out-of-state, so long as they are employed in
14 New Mexico. Nothing in the statute as amended indicates to us that the Legislature
15 	intended to change the definition of a franchise as adopted by the Department or as
16 laid out by this Court in Sonic I, or to use the word franchise in a manner unmoored
17 from these longstanding definitions.
18 	{18} 	We are therefore not convinced that the trademark licensing provision in this
19 case should be treated as a standalone agreement-separate and apart from the
20 	franchise-simply because it is a separate line item in the franchise agreement, as
9

1 A&W urges. To the contrary, it is especially clear here in the context of a fast-food
2 franchise that the trademark license is the heart of the franchise agreement. Consider
3 the value of an A& W franchise in which the franchisee is not granted a license to
4 use A& W's logos, colors, or menu items. Is such an agreement even a franchise? It
5 certainly would bear little resemblance to a traditional franchise as commonly
6 defined and understood. And in fact, A& W itself agreed during oral argument before
7 this Court that a franchise of this sort would be "not entirely complete" without the
8 trademark. In this light, we conclude that the trademark licensing provision at issue
9 in this case is central to the overall franchise and should be treated as part of the
10 franchise for purposes of gross receipts, regardless of whether it was separately
11 	stated and itemized in the franchise agreement.
12 	{19} 	This is consistent with the Legislature's intent, made manifest through the
13 	2007 amendment to the definition of gross receipts, to subject franchise agreements
14 like the one in Sonic II to gross receipts tax. This is also consistent with the 2006
15 	legislative amendment that added the licensing category to the definition of gross
16 receipts. 	Section 	7-9-3.S(A){l) 	(2006). 	Presumably, 	the 	addition 	of this 	new
17 category will subject certain types of licensing agreements to gross receipts tax. We
18 	acknowledge, though, as A& W has forcefully argued, trademark licenses are not
19 considered to be property under the 2007 definition, and are therefore not taxable.
20 This does not mean, however, that the trademark license provision at issue in this
10

1 case is untaxable. 	The 	prov1s1on 	here 	is notably 	different from 	a traditional
2 trademark license, which exists apart from a franchise agreement. See Irene Calboli,
3 	The Sunset of "Quality Control" in Modern Trademark Licensing, 57 Am. U.L. Rev ..
4 341, 348-51 (2007) (explaining that trademark licenses generally take three forms:
5 (1) production outsource agreements, wherein a company that normally produces a
6 product outsources production of that product, under the trademark, to another
7 company; (2) collateral licensing agreements, wherein a company licenses the use
8 of its trademark to 	another company for use 	on products collateral to those
9 traditionally produced by the licensing company; and (3) trademark promotional
. 10 	licensing (also known as trademark merchandising), wherein a company licenses its
11 	trademark for use on a product wholly unrelated to products originally bearing the
12 licensed mark).
13 	{20} 	We can see· nothing absurd or unreasonable about subjecting trademark
14 licensing provisions contained within a franchise to gross receipts tax, while at the
· 15 	same 	time 	exempting 	standalone 	trademark 	licensing 	agreements, 	like 	those
16 described above, from gross receipts tax. See City ofEunice, 2014-NMCA-085, ,r 8;
17 cf Michael J. Maloof & Co. v. Bureau of Revenue, 1969-NMSC-100, ,r 7, 80 N.M.
18 	485,458 P.2d 89 ("In the field of taxation, more than in other fields, the [L]egislature
19 possesses the greatest freedom in classification[.]"). This is especially so where we
20 have held that "a franchise is to be treated as a compound or 'bundled' form of
11

1 property, which typically includes a license to use the franchiser's trademark and a
2 commitment by the franchiser to perform various services to assist the franchisee in
3 the operation of the franchised business." Sonic I, 2000-NMCA-087, ,r 28. Our
4 conclusion-that the Legislature intended to subject a franchise, including the
5 bundled trademark license agreement, to gross receipts tax, while at the same time
6 intending not to tax standalone trademark licensing agreements-harmonizes the
7 various statutory provisions at issue here. See Luboyeski v. Hill, 1994-NMSC-032,
8 ,r 10, 117 N.M. 380, 872 P.2d 353 ("Whenever possible, we must read different
9 legislative actions as harmonious instead of as contradicting one another.").
10 CONCLUSION
11 	{21} 	We conclude that the Legislature's 2007 amendment to the definition of gross
12 receipts to add money or the value of other consideration received from the grant of
13 	a franchise employed in New Mexico evidenced its intent to subject franchise
14 agreements such as the one at issue in this case to gross receipts tax, and that the
15 	taxable gross receipts include the royalties received from a limited trademark license
16 	granted as part of the franchise.
17 	{22} 	Therefore, we affirm.
18 	{23} 	IT IS SO ORDERED
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1 |WE CONCUR:
AL Q. Vil
2 3 EMIL J. KICHNE, Judge
4 5 JENNIFER L. ATTREP, Judge
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