This summary was computer-generated without any editorial revision. It is not official, has not been checked for accuracy, and is NOT citable.
Facts
The case concerns Sonic Industries, Inc., an Oklahoma-based franchiser of fast-food restaurants, which licenses its proprietary "Sonic System" to franchisees in New Mexico. Franchisees pay Sonic a percentage of their monthly gross sales as royalties. Sonic does not own or operate restaurants in New Mexico, nor does it have a physical presence there. The New Mexico Taxation and Revenue Department assessed gross receipts tax on these royalty payments, which Sonic contested, arguing that its activities constituted non-taxable out-of-state sales of licenses and services (paras 2-3).
Procedural History
- District Court, Santa Fe County: Sonic filed a complaint seeking a refund of taxes paid after the Department denied its claim. The court denied both Sonic's motion for partial summary judgment and the Department's motion for full summary judgment but certified the rulings for interlocutory appeal (paras 3-4).
Parties' Submissions
- Plaintiff-Appellant (Sonic Industries, Inc.): Argued that its franchising activities were non-taxable out-of-state sales of licenses and services. It claimed that the 1991 amendment to the Gross Receipts and Compensating Tax Act reclassified licensing as selling, not leasing, and that its franchise agreements were executed in Oklahoma, not New Mexico. Sonic also contended that the Department's assessment was untimely and that it should not be penalized for failing to report and pay the taxes (paras 4, 8-9, 18-21).
- Defendants-Appellees (State of New Mexico and Taxation and Revenue Department): Asserted that Sonic's franchise fees were taxable gross receipts from selling property in New Mexico. They argued that the 1991 amendment did not alter the taxability of franchise fees and that Sonic's activities had a sufficient nexus with New Mexico to justify taxation. The Department also sought penalties for Sonic's failure to pay taxes (paras 6-7, 10-11, 17).
Legal Issues
- Whether the 1991 amendment to the Gross Receipts and Compensating Tax Act reclassified Sonic's franchise fees as non-taxable out-of-state sales.
- Whether Sonic's franchise fees constitute gross receipts from selling property in New Mexico.
- Whether the Department's notice of assessment was timely.
- Whether Sonic was subject to penalties for failing to report and pay gross receipts taxes (paras 1, 8-9, 17).
Disposition
- The district court's denial of Sonic's motion for partial summary judgment was affirmed.
- The district court's denial of the Department's motion for summary judgment on the taxability of franchise fees and the imposition of penalties was reversed.
- The district court's denial of the Department's motion for summary judgment on the issue of abatement of taxes for the period December 1988 to December 1989 was affirmed.
- The case was remanded for further proceedings (paras 42-44).
Reasons
Per Alarid J. (Bosson and Kennedy JJ. concurring):
Taxability of Franchise Fees: The court held that the 1991 amendment reclassified licensing as selling but did not alter the taxability of franchise fees. Sonic's franchise fees were deemed gross receipts from selling property in New Mexico because the franchise system had a sufficient nexus with the state. The court rejected Sonic's argument that the place of contracting (Oklahoma) determined the taxability of the fees, emphasizing that the economic activity occurred in New Mexico (paras 9-15).
Bundled Nature of Franchises: The court found that a franchise is a bundled form of property, including both intellectual property rights and associated services. Services provided by Sonic to maintain or enhance the franchise system, regardless of where they were performed, were part of the taxable franchise (paras 23-28).
Double Taxation Argument: Sonic's claim that its franchise fees were already taxed as part of its franchisees' gross receipts was rejected. The court held that Sonic and its franchisees were separate taxpayers, and their transactions were distinct for tax purposes (paras 30-33).
Timeliness of Assessment: The court found that the Department failed to establish the effective date of the notice of assessment, creating a genuine issue of material fact regarding the timeliness of the assessment for the period December 1988 to December 1989. Summary judgment on this issue was properly denied (paras 34-35).
Penalty for Non-Payment: The court upheld the imposition of penalties, finding that Sonic failed to demonstrate that it had acted reasonably or consulted tax professionals before failing to pay taxes. The affidavits submitted by Sonic were deemed insufficient to establish a genuine issue of material fact regarding its entitlement to penalty abatement (paras 36-41).