 1       IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

 2 Opinion Number: ________________

 3 Filing Date: August 22, 2018

 4 No. A-1-CA-35999

 5 A&W RESTAURANTS, INC.,

 6                Petitioner-Appellant,

 7 v.

 8 TAXATION AND REVENUE
 9 DEPARTMENT OF THE STATE OF
10 NEW MEXICO,

11                Respondent-Appellee.

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

14   Sutin, Thayer & Browne, P.C.
15   Stevan Douglas Looney
16   Justin R. Sawyer
17   Andrew J. Baranowski
18   Albuquerque, NM

19 for Appellant

20   Hector H. Balderas, Attorney General
21   Peter Breen, Special Assistant Attorney General
22   Taxation and Revenue Department
23   Santa Fe, NM

24 for Appellee
                                         OPINION

 1 GALLEGOS, Judge.

 2   {1}    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,

12 among other terms, contained a provision by which A&W granted to franchisees a

13 limited license to use specific trademarks. The authority to utilize the trademarks

14 was limited to use in connection with the operation of an A&W restaurant

15 franchise. In consideration for the grant of the limited trademark license, the

16 franchisees agreed to pay A&W a monthly royalty fee equal to 5 percent of gross

17 sales.

18   {3}    Following an audit in 2013, the Department determined that the royalty fees

19 for the limited trademark license were subject to gross receipts tax as money
 1 received “from granting a right to use a franchise employed in New Mexico[.]”

 2 NMSA 1978, Section 7-9-3.5(A)(1) (2007). Consequently, the Department

 3 assessed gross receipts tax on the royalty fees in the amount of $29,349.33. 1 In

 4 response, A&W filed a tax protest with the Department, seeking an abatement of

 5 the gross receipts tax.

 6   {4}   Pursuant to the Administrative Hearings Office Act, NMSA 1978, §§ 7-1B-1

 7 to -9 (2015), A&W’s tax protest went before a hearing officer. During the course

 8 of proceedings, A&W and the Department filed cross motions for summary

 9 judgment. A&W argued that the royalty fees it received as consideration from the

10 limited trademark licensing provisions are exempt from gross receipts tax as a

11 matter of law because trademarks are not considered “property” under the Gross

12 Receipts and Compensating Tax Act (the Act), NMSA 1978, §§ 7-9-1 to -116

13 (1966, as amended through 2018). See § 7-9-3(J) (defining “property”); § 7-9-

14 3.5(A)(1) (defining “gross receipts”). The Department, in contrast, argued that

15 such royalty fees were taxable as receipts “from granting the right to use a

16 franchise[.]” Section 7-9-3.5(A)(1). After hearing argument from both sides, the

17 hearing officer disagreed with A&W’s legal position and awarded summary



           1
            The Department assessed gross receipts tax beginning on June 15, 2007, the
     date the 2007 amendment to Section 7-9-3.5(A)(1) became effective. The audit
     period at issue in this case went through December 31, 2011.

                                            2
 1 judgment to the Department. A&W appeals to this Court pursuant to NMSA 1978,

 2 Section 7-1-25(A) (2015).

 3 DISCUSSION

 4   {5}   This appeal requires us to consider the impact of two 2007 amendments to

 5 the Act on the taxability of trademark licensing royalty fees that make up part of a

 6 franchise agreement.

 7 I.      Standard of Review and Presumption and Burden Applicable to Tax
 8         Cases

 9   {6}   “Because the facts are not in dispute and the issue presented on appeal is

10 purely legal, our review is de novo.” Fed. Express Corp. v. Abeyta, 2004-NMCA-

11 011, ¶ 2, 135 N.M. 37, 84 P.3d 85. Likewise, because we must engage in statutory

12 construction, our review of the hearing officer’s decision is also de novo. See

13 Cooper v. Chevron U.S.A., Inc., 2002-NMSC-020, ¶ 16, 132 N.M. 382, 49 P.3d 61

14 (“The meaning of language used in a statute is a question of law that we review de

15 novo.”). “In interpreting statutes, we seek to give effect to the Legislature’s intent,

16 and in determining intent we look to the language used and consider the statute’s

17 history and background.” Valenzuela v. Snyder, 2014-NMCA-061, ¶ 16, 326 P.3d

18 1120 (internal quotation marks and citation omitted). “Tax statutes, like any other

19 statutes, are to be interpreted in accordance with the legislative intent and in a

20 manner that will not render the statutes’ application absurd, unreasonable, or


                                              3
 1 unjust.” City of Eunice v. N.M. Taxation & Revenue Dep’t, 2014-NMCA-085, ¶ 8,

 2 331 P.3d 986 (internal quotation marks and citation omitted).

 3   {7}   There exists a statutory presumption that all receipts from engaging in

 4 business in New Mexico are taxable. Section 7-9-5(A). “The taxpayer claiming

 5 that receipts are not taxable bears the burden of proving the assertion.” MPC Ltd. v.

 6 N.M. Taxation & Revenue Dep’t, 2003-NMCA-021, ¶ 12, 133 N.M. 217, 62 P.3d

 7 308.

 8 II.     The Relevant Provisions of the Act

 9   {8}   The purpose of gross receipts tax is to provide revenue for public purposes

10 by taxing certain business activities within New Mexico. Section 7-9-2. Prior to

11 2007, the Legislature categorized these activities in the following ways: “selling

12 property located in New Mexico, . . . leasing or licensing property employed in

13 New      Mexico, . . . selling   services       performed   outside   New      Mexico,

14 [and] . . . performing services in New Mexico.” Section 7-9-3.5(A)(1) (2006).

15 “[G]ross receipts” were defined as “the total amount of money or the value of

16 consideration received” from engaging in these business activities. Id.

17         In 2007, the Legislature amended the definition of gross receipts to

18         the total amount of money or the value of other consideration received
19         from selling property in New Mexico, from leasing or licensing
20         property employed in New Mexico, from granting a right to use a
21         franchise employed in New Mexico, from selling services performed


                                               4
 1          outside New Mexico, the product of which is initially used in New
 2          Mexico, or from performing services in New Mexico.

 3 Section 7-9-3.5(A)(1) (emphasis added).

 4   {9}    Also in 2007, the Legislature amended the definition of “property” from

 5 “real property, tangible personal property, licenses, and franchises[,]” Section 7-9-

 6 3(J) (2006), to

 7          real property, tangible personal property, licenses other than the
 8          licenses of copyrights, trademarks or patents and franchises.

 9 Section 7-9-3(J).

10 III.     Gross Receipts Tax Applies to the Trademark Licensing Royalty Fees
11          That Are Part of A&W’s Franchise Agreements

12   {10}   After 1991, both franchise agreements and licensing agreements were

13 considered to be, and analyzed as, the sale of property. See Sonic Indus., Inc. v.

14 State (Sonic I), 2000-NMCA-087, ¶ 12, 129 N.M. 657, 11 P.3d 1219, rev’d on

15 other grounds by Sonic Indus., Inc. v. State (Sonic II), 2006-NMSC-038, ¶ 1, 140

16 N.M. 212, 141 P.3d 1266. However, by amending the definition of gross receipts

17 to include the new business activity categories of licensing property employed in

18 New Mexico and granting a franchise employed in New Mexico, Section 7-9-

19 3.5(A)(1), the Legislature has effectively taken licensing agreements and franchise

20 agreements out of the sale of property category. Given this development, and in

21 light of these new categories of gross receipts, the question before us is how to

                                             5
 1 properly analyze the taxability of a limited trademark license provision contained

 2 within a franchise agreement.

 3   {11}   Unsurprisingly, A&W and the Department have differing views on the

 4 analysis to be employed, as well as on the effect that the amendments have on the

 5 taxability of the limited trademark license royalties at issue in this case. A&W

 6 asserts that gross receipts tax applies to receipts from the licensing of property and

 7 that under the new 2007 Section 7-9-3(J) definition, trademark licenses are no

 8 longer considered to be property. Based on this definitional exclusion, A&W

 9 contends that the royalty fees received as consideration from the trademark

10 licensing provisions are exempt from gross receipts tax. Conversely, the

11 Department maintains that the royalty fees for the limited trademark license are

12 subject to gross receipts tax as money received from granting a right to use a

13 franchise, pursuant to Section 7-9-3.5(A)(1).

14   {12}   In resolving these arguments, the crucial question to be answered is whether

15 the royalty fees flowing from this particular trademark licensing provision should

16 be treated as being received from the grant of a franchise or from the licensing of a

17 trademark. If we were to limit ourselves to A&W’s view—that the limited

18 trademark licensing provision is a separately-itemized standalone agreement,

19 although contained within the franchise agreement—it would appear that the

20 answer is clear that the royalties received from the trademark license are excluded

                                              6
 1 from gross receipts under Sections 7-9-3.5(A)(1) and 7-9-3(J). Yet, it is not so

 2 simple. We must also, as the Department contends, consider the meaning of the

 3 word “franchise.” See Valenzuela, 2014-NMCA-061, ¶ 16, 326 P.3d 1120 (“[W]e

 4 should read the entire statute as a whole so that each provision may be considered

 5 in relation to every other part.” (internal quotation marks and citation omitted)).

 6   {13}   Although we have no statutory definition of franchise in New Mexico, this

 7 Court observed in Sonic I that “[b]y 1969, when the Legislature extended the Act’s

 8 definition of property to ‘licenses, franchises, patents, trademarks and

 9 copyrights,’ the use of the term franchise to describe a prepackaged system for

10 doing business appears to have been well established.” 2000-NMCA-087, ¶ 24.

11 This Court also set forth the following definition of a franchise:

12          In its simplest terms a franchise is a license from the owner of a
13          trademark or trade name permitting another to sell a product or
14          service under that name or mark. More broadly stated, the franchise
15          has evolved into an elaborate agreement under which the franchisee
16          undertakes to conduct a business or sell a product or service in
17          accordance with methods and procedures prescribed by the franchiser
18          and the franchiser undertakes to assist the franchisee through
19          advertising, promotion and other advisory services.

20 Id. ¶ 23 (internal quotation marks and citation omitted).

21   {14}   We further observed in Sonic I that the Department had adopted a regulation

22 defining the word “franchise”:



                                              7
 1          A franchise is an agreement in which the franchisee agrees to
 2          undertake certain business activities or to sell a particular type of
 3          product or service in accordance with methods and procedures
 4          prescribed by the franchiser, and the franchiser agrees to assist the
 5          franchisee through advertising, promotion and other advisory services.
 6          The franchise usually conveys to the franchisee a license to use the
 7          franchiser’s trademark or trade name in the operation of the
 8          franchisee’s business.

 9 Id. ¶ 25 (emphasis omitted); see Black’s Law Dictionary 569 (9th ed. 2010)

10 (defining “franchise” as “[t]o grant (to another) the sole right of engaging in a

11 certain business or in a business using a particular trademark in a certain area”).

12 We further held “that for purposes of the Act, a franchise is to be treated as a

13 compound or ‘bundled’ form of property, which typically includes a license to use

14 the franchiser’s trademark and a commitment by the franchiser to perform various

15 services to assist the franchisee in the operation of the franchised business.” Sonic

16 I, 2000-NMCA-087, ¶ 28.

17   {15}   We can presume that the Legislature was aware of these longstanding and

18 undisturbed definitions of franchise in 2007 when it amended the definition of

19 gross receipts to include “the total amount of money or the value of other

20 consideration received . . . from granting a right to use a franchise employed in

21 New Mexico[.]” Section 7-9-3.5(A)(1); see Sonic I, 2000-NMCA-087, ¶ 25 (“[W]e

22 may infer from the Legislature’s inaction in response to this longstanding



                                              8
 1 administrative construction of the term franchise that this definition is consistent

 2 with the Legislature’s intent.”).

 3   {16}   Furthermore, we observe that the 2007 gross receipts amendment followed

 4 our Supreme Court’s 2006 decision in Sonic II. See 2006-NMSC-038, ¶ 9. The

 5 Supreme Court analyzed Sonic’s franchising activities under the then-current

 6 definition of gross receipts, which only included the money or value received from

 7 the sale or lease of property. Id. The Supreme Court first determined, in agreement

 8 with this Court’s opinion in Sonic I, that Sonic’s franchising activities constituted

 9 the sale of property. Id. ¶ 13. The Supreme Court went on to hold that when a

10 franchise agreement is executed outside of New Mexico, it is considered to be an

11 out-of-state sale, and thus not considered to fall within the definition of gross

12 receipts. Id. ¶ 14. Therefore, the practical effect of Sonic II was to render franchise

13 agreements with out-of-state franchisers, such as the agreement in the present case,

14 non-taxable.

15   {17}   Less than a year after the Sonic II decision, the Legislature added a new

16 category of business activity resulting in taxable gross receipts: granting a right to

17 use a franchise employed in New Mexico. See § 7-9-3.5(A)(1). By this change, the

18 Legislature effectively overruled Sonic II and restored the taxability of franchise

19 agreements, even those entered into out-of-state, so long as they are employed in

20 New Mexico. Nothing in the statute as amended indicates to us that the Legislature

                                              9
 1 intended to change the definition of a franchise as adopted by the Department or as

 2 laid out by this Court in Sonic I, or to use the word franchise in a manner

 3 unmoored from these longstanding definitions.

 4   {18}   We are therefore not convinced that the trademark licensing provision in this

 5 case should be treated as a standalone agreement—separate and apart from the

 6 franchise—simply because it is a separate line item in the franchise agreement, as

 7 A&W urges. To the contrary, it is especially clear here in the context of a fast-food

 8 franchise that the trademark license is the heart of the franchise agreement.

 9 Consider the value of an A&W franchise in which the franchisee is not granted a

10 license to use A&W’s logos, colors, or menu items. Is such an agreement even a

11 franchise? It certainly would bear little resemblance to a traditional franchise as

12 commonly defined and understood. And in fact, A&W itself agreed during oral

13 argument before this Court that a franchise of this sort would be “not entirely

14 complete” without the trademark. In this light, we conclude that the trademark

15 licensing provision at issue in this case is central to the overall franchise and

16 should be treated as part of the franchise for purposes of gross receipts, regardless

17 of whether it was separately stated and itemized in the franchise agreement.

18   {19}   This is consistent with the Legislature’s intent, made manifest through the

19 2007 amendment to the definition of gross receipts, to subject franchise

20 agreements like the one in Sonic II to gross receipts tax. This is also consistent

                                              10
 1 with the 2006 legislative amendment that added the licensing category to the

 2 definition of gross receipts. Section 7-9-3.5(A)(1) (2006). Presumably, the addition

 3 of this new category will subject certain types of licensing agreements to gross

 4 receipts tax. We acknowledge, though, as A&W has forcefully argued, trademark

 5 licenses are not considered to be property under the 2007 definition, and are

 6 therefore not taxable. This does not mean, however, that the trademark license

 7 provision at issue in this case is untaxable. The provision here is notably different

 8 from a traditional trademark license, which exists apart from a franchise

 9 agreement. See Irene Calboli, The Sunset of “Quality Control” in Modern

10 Trademark Licensing, 57 Am. U.L. Rev. 341, 348-51 (2007) (explaining that

11 trademark licenses generally take three forms: (1) production outsource

12 agreements, wherein a company that normally produces a product outsources

13 production of that product, under the trademark, to another company; (2) collateral

14 licensing agreements, wherein a company licenses the use of its trademark to

15 another company for use on products collateral to those traditionally produced by

16 the licensing company; and (3) trademark promotional licensing (also known as

17 trademark merchandising), wherein a company licenses its trademark for use on a

18 product wholly unrelated to products originally bearing the licensed mark).

19   {20}   We can see nothing absurd or unreasonable about subjecting trademark

20 licensing provisions contained within a franchise to gross receipts tax, while at the

                                            11
 1 same time exempting standalone trademark licensing agreements, like those

 2 described above, from gross receipts tax. See City of Eunice, 2014-NMCA-085, ¶

 3 8; cf. Michael J. Maloof & Co. v. Bureau of Revenue, 1969-NMSC-100, ¶ 7, 80

 4 N.M. 485, 458 P.2d 89 (“In the field of taxation, more than in other fields, the

 5 [L]egislature possesses the greatest freedom in classification[.]”). This is especially

 6 so where we have held that “a franchise is to be treated as a compound or

 7 ‘bundled’ form of property, which typically includes a license to use the

 8 franchiser’s trademark and a commitment by the franchiser to perform various

 9 services to assist the franchisee in the operation of the franchised business.” Sonic

10 I, 2000-NMCA-087, ¶ 28. Our conclusion—that the Legislature intended to subject

11 a franchise, including the bundled trademark license agreement, to gross receipts

12 tax, while at the same time intending not to tax standalone trademark licensing

13 agreements—harmonizes the various statutory provisions at issue here. See

14 Luboyeski v. Hill, 1994-NMSC-032, ¶ 10, 117 N.M. 380, 872 P.2d 353

15 (“Whenever possible, we must read different legislative actions as harmonious

16 instead of as contradicting one another.”).

17 CONCLUSION

18   {21}   We conclude that the Legislature’s 2007 amendment to the definition of

19 gross receipts to add money or the value of other consideration received from the

20 grant of a franchise employed in New Mexico evidenced its intent to subject

                                             12
 1 franchise agreements such as the one at issue in this case to gross receipts tax, and

 2 that the taxable gross receipts include the royalties received from a limited

 3 trademark license granted as part of the franchise.

 4   {22}   Therefore, we affirm.

 5   {23}   IT IS SO ORDERED



 6                                        _______________________________
 7                                        DANIEL J. GALLEGOS, Judge
 8 WE CONCUR:


 9 _______________________________
10 EMIL J. KIEHNE, Judge


11 _______________________________
12 JENNIFER L. ATTREP, Judge




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