A & W Restaurants, Inc.

16-49

On September 27, 2013, the Department assessed the Taxpayer for gross receipts tax and interest for the periods from June 30, 2007 to December 31, 2011.  The Taxpayer filed a protest of the assessment on December 23, 2013.  The Taxpayer entered into franchise agreements with New Mexico businesses.  Section 1 of this agreement, entitled “Grant of License” grants a franchisee a limited license to use specific trademarks identified in the appendix to the agreement.  The authority to use the trademarks is limited exclusively to use in connection with sales from a single restaurant established under the agreement.  The agreement also sets the amounts that a franchisee is to pay the Taxpayer.  Some of these are one-time fees, while others are paid on a monthly basis and are calculated based on the prior month’s gross sales.  The Department audited the Taxpayer for gross receipts tax for the periods from January 1, 2006 through December 31, 2011.  The Department concluded that the continuing royalty fee was subject to gross receipts tax because the payments by franchisees to the Taxpayer represented receipts from granting a right to use a franchise employed in New Mexico.  The Taxpayer argues that the continuing royalty fee is consideration for the Taxpayer’s granting of a limited license to utilize its trademarks, which it claims is then exempt from gross receipts tax under the definition of “property” as provided in Section 7-9-3(J) NMSA 1978, which excludes trademarks.  The Department asserts that the royalty fees paid are taxable as gross receipts because they are receipts from granting a right to use a franchise employed in New Mexico, which is subject to gross receipts tax under Section 7-9-3.5(A)(1) NMSA 1978.  While the Taxpayer held that the trademarks must be unbundled from the other receipts, the hearing officer found that, based on prior case law, a franchise is to be treated as a compound or bundled form of property, which includes a license to use trademarks.  The Taxpayer is obligated to pay gross receipts tax on the total receipts received from granting a right to use a franchise employed in New Mexico.  The Taxpayer’s protest was denied.