Could three New Mexico RV-storage facilities deduct receipts from assigned open-air and overhead-covered parking spaces as leases of real property?

View original ruling (PDF)

Plain-English summary

Three related RV-storage facilities could not deduct receipts from assigned open-air and overhead-covered spaces as leases of real property. The Administrative Hearings Office treated the arrangements as taxable licenses to use space. It upheld the underlying gross receipts tax and mandatory interest but abated every civil penalty because the facilities had relied on advice from a CPA.

The facilities had substantial facts pointing toward leases. Each was surrounded by a perimeter fence and locked gate. Customers with individualized codes had access 24 hours a day, every day of the year. Month-to-month contracts identified particular spaces, and signs and ground-level survey whiskers marked the boundaries. Contracts gave customers the right to exclude other vehicles from their assigned spaces and were not revocable at will.

But the disputed spaces were open-air or only covered overhead, not individually enclosed. New Mexico's regulations treated monthly assigned parking spaces and open hangar or tie-down spaces as taxable services or licenses. Revenue Ruling 440-01-1 similarly distinguished an enclosed boat-storage garage from an open fenced yard and an unwalled covered slip.

The AHO found that the lack of physical partitions made the customers' practical ability to exclude others "elusory." Without an enclosure, the spaces did not provide the exclusive possession, use, access, dominion, and control needed for a real-property lease. The Department therefore properly allowed the deduction for fully enclosed units while denying it for the open and partially covered spaces.

Tax and interest remained, but penalties did not

The three facilities remained liable as follows:

• A Class RV Storage (Second Street): $19,486.39 tax and $2,332.52 stated interest, plus additional accrued interest; the $3,897.29 penalty was abated.
• A Class RV Storage at Journal Center (Paseo): $23,408.10 tax and $3,748.71 stated interest, plus additional accrued interest; the $4,657.56 penalty was abated.
• A Class RV Storage at Osuna: $58,917.06 tax and $5,383.74 stated interest, plus additional accrued interest; the $11,758.14 penalty was abated.

Interest could not be waived because Section 7-1-67 made it mandatory from the original due date until the tax principal was paid.

The penalties were different. The owner had disclosed the business model and proposed deductions to a CPA and relied on the CPA's advice. The AHO found a good-faith mistake of law on reasonable grounds rather than negligence, supporting abatement under Section 7-1-69(B) and Regulation 3.1.11.11.

Result: protests DENIED IN PART and GRANTED IN PART. The lease deduction failed for the disputed spaces; tax and interest remained; all three civil penalties were abated.

What this means for you

RV, boat, aircraft, and vehicle-storage operators

An assigned number, a long rental term, gated access, and a contractual right to exclude other vehicles may not be enough for New Mexico's real-property lease deduction. Physical enclosure or partitioning was decisive in this decision.

Self-storage businesses with different unit types

The Department allowed deductions for fully enclosed units at these same facilities. Operators should separately classify enclosed units and open or partially covered parking spaces rather than assuming one tax treatment covers the entire property.

Businesses relying on professional tax advice

Informed CPA advice can matter for civil penalty relief when the business fully discloses its model and proposed reporting position. It does not eliminate the underlying tax or mandatory interest.

Accountants and tax professionals

The AHO acknowledged that the contracts looked and acted like leases in several respects. The deduction still failed because Regulations 3.2.211.16 and 3.2.211.17, related rulings, and the cited cases tied a lease to exclusive practical control of physically partitioned space.

Common questions

Q: Were all receipts of these RV-storage facilities taxable?
A: No. The Department allowed the lease deduction for fully enclosed rented spaces. The dispute concerned open-air and overhead-covered spaces.

Q: Why didn't a fence and locked perimeter gate create exclusive possession?
A: Those measures controlled access to the facilities as a whole. The individual spaces themselves were marked only by signs and survey whiskers and were not physically enclosed.

Q: Did the contracts intend to create leases?
A: Yes. The AHO found that the parties intended leases and that the agreements lacked an at-will revocation right. The physical characteristics of the spaces nevertheless prevented the exclusive dominion and control required for leases.

Q: Were month-to-month terms long enough?
A: Duration was not the deciding defect. The decision held that even assigned open-air or covered spaces rented for qualifying periods remained licenses because they lacked physical partitioning and practical exclusivity.

Q: Why was interest not abated along with the penalties?
A: Section 7-1-67 made interest mandatory regardless of the reason for nonpayment.

Q: Why did CPA reliance eliminate the penalties?
A: The facilities showed that their owner disclosed the business model and proposed deductions to a trained tax professional and relied on that advice. The AHO treated the reporting error as a good-faith mistake of law on reasonable grounds, not negligence.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-53 — deduction for receipts from leasing real property
• NMSA 1978, § 7-9-3(E) — definition of leasing
• NMSA 1978, § 7-9-5 — presumption that business receipts are taxable
• NMSA 1978, § 7-1-17(C) — presumption that assessments are correct
• NMSA 1978, § 7-1-67 — mandatory interest
• NMSA 1978, § 7-1-69(B) — good-faith mistake-of-law exception to civil negligence penalty
• Regulations 3.2.211.16 and 3.2.211.17 NMAC — storage and parking lease-versus-license examples
• Regulation 3.1.11.11 NMAC — penalty-abatement grounds

Principal authorities discussed:

• Grogan v. New Mexico Taxation and Revenue Department, 2003-NMCA-033 — lease requires definite control and dominion
• Tarin's Inc. v. Tinley, 2000-NMCA-048 — lease-versus-license and revocability principles
• Quantum Corp. v. State Taxation and Revenue Department, 1998-NMCA-050 — exclusive secure areas supported lease treatment
• Revenue Ruling 440-01-1 — enclosed boat storage distinguished from open-yard and unwalled covered storage

Source

• Listing: New Mexico Decisions & Orders
• Decision post: A Class RV Storage
• Decision PDF: D&O 19-26

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF Case No. 18.03-061A
5 A CLASS RV STORAGE
6 TO ASSESSMENT ISSUED UNDER
7 LETTER ID NO. L2055615280
8 &
9 A CLASS RV STORAGE AT JOURNAL CENTER Case No. 18.08-198A
10 TO ASSESSMENT ISSUED UNDER
11 LETTER ID NO. L0446191408
12 &
13 A CLASS RV STORAGE AT OSUNA Case No. 18.08-199A
14 TO ASSESSMENT ISSUED UNDER
15 LETTER ID NO. L2042133296

16 v. AHO D&O # 19-26

17 NEW MEXICO TAXATION AND REVENUE DEPARTMENT.

18 DECISION AND ORDER

19 On July 10, 2019, Hearing Officer Ignacio V. Gallegos, Esq., conducted an

20 administrative hearing on the merits in the matter of the tax protest of A Class RV Storage, A

21 Class RV Storage at Journal Center, and A Class RV Storage at Osuna (collectively

22 “Taxpayers”) pursuant to the Tax Administration Act and the Administrative Hearings Office

23 Act. At the hearing, Benjamin C. Roybal, Esq. (Betzer, Roybal & Eisenberg, P.C.) appeared

24 representing Taxpayers. Taxpayers’ witnesses David Murphy, managing member, and Mark

25 Styles, commercial real estate attorney, appeared and offered testimony. Staff Attorney Marek

26 Grabowski appeared, representing the opposing party in the protest, the Taxation and Revenue

27 Department (“Department”). Department protest auditor Nicholas Pacheco appeared as a witness

28 for the Department. Taxpayers’ exhibit books were admitted into the record without objection

29 from the Department and are more fully described in the Exhibit log.

In the Matter of the Protest of A Class RV Storage, page 1 of 42.
1 In quick summary, this protest involves Taxpayers’ consolidated cases, and the

2 Department’s assessments for unpaid gross receipts tax for tax periods from June 30, 2011 through

3 June 30, 2017 following audits. Taxpayers contended that their contracts to rent out RV storage

4 spaces were leases of real property and entitled to be deducted from gross receipts under NMSA

5 1978 Section 7-9-53 (1998). The Department argued that the space rentals were licenses to use the

6 space, and subject to the gross receipts tax. Ultimately, after making findings of fact and discussing

7 the issue in more detail throughout this decision, the hearing officer finds that the Department’s

8 position that revenue was earned from granting licenses to use the space was justified, and the

9 Taxpayers failed to overcome the presumption of correctness in the application of the regulations.

10 IT IS DECIDED AND ORDERED AS FOLLOWS:

11 FINDINGS OF FACT

12 1. Taxpayer A Class RV Storage (referred to by the parties and hereinafter as

13 “Second Street”) is a self-storage facility wholly owned and operated by D&H Murphy

14 Investments, LLC, a New Mexico Limited Liability Corporation. Mr. Murphy and his spouse

15 owned the LLC during the timeframes subject to audit. Mr. Murphy has been managing member

16 since 2009, when the facility opened. [Second Street Stipulation #1; Administrative File; Direct

17 Examination of David Murphy, CD1 28:30-30:00, CD1 1:10:00-1:11:00].

18 2. The Department conducted an audit of the Second Street Taxpayer’s business for

19 filing periods beginning January 1, 2011 and ending December 31, 2016. [Taxpayer’s Exhibit

20 Second Street #1.1 through 1.8; Direct Examination of David Murphy, CD1 1:22:05-1:23:00].

21 3. The Department’s Audit concluded that the Second Street Taxpayer was

22 improperly deducting recreational vehicle (RV) parking spaces as real property leases on their

23 Gross Receipts Tax reports for the applicable period, further concluding that the reported income

In the Matter of the Protest of A Class RV Storage, page 2 of 42.
1 was derived from a license to use the storage space rather than a lease of real property.

2 [Taxpayer’s Exhibit Second Street #1.1 through 1.8, Direct Examination of David Murphy, CD1

3 1:22:10-1:23:30].

4 4. The Department, in denying the Second Street Taxpayer’s deduction, relied

5 heavily on the fact that land partitions were not enclosures, not self-contained, and were situated

6 outside, concluding that “the customer does not have exclusive possession, use or access to the

7 property.” [Taxpayer’s Exhibit Second Street #1.1 through 1.8; Direct Examination of Nicholas

8 Pacheco, CD2 2:40:00-2:45:35].

9 5. Taxpayer A Class RV Storage at Journal Center (referred to by the parties and

10 hereinafter as “Paseo”) is a self-storage facility wholly owned and operated by A Class RV

11 Storage at Journal Center, LLC, a New Mexico Limited Liability Corporation, owned by David

12 Murphy, managing member, and another partner. The business operates a self-storage facility.

13 Mr. Murphy has been managing member since 2011, when the facility opened. [Paseo

14 Stipulation #1; Administrative File; Direct Examination of David Murphy, CD1 28:30-30:00,

15 CD1 53:30-54:00].

16 6. The Department conducted an audit of the Paseo Taxpayer’s business for filing

17 periods beginning January 1, 2011 and ending June 30, 2017 [Taxpayer’s Exhibit Paseo #1.1

18 through 1.8; Direct Examination of David Murphy, CD1 1:06:30-1:07:10].

19 7. The Department’s Audit concluded that the Paseo Taxpayer was improperly

20 deducting recreational vehicle (RV) parking spaces as real property leases on their Gross

21 Receipts Tax reports for the applicable period, further concluding that the reported income was

22 derived from a license to use the storage space rather than a lease of real property. [Taxpayer’s

23 Exhibit Paseo #1.1 through 1.8; Direct Examination of David Murphy, CD1 1:06:30-1:08:25].

In the Matter of the Protest of A Class RV Storage, page 3 of 42.
1 8. The Department, in denying the Paseo Taxpayer’s deduction, relied heavily on the

2 fact that land partitions were not enclosures, not self-contained, and were situated outside,

3 concluding that “the customer does not have exclusive possession, use or access to the property.”

4 [Taxpayer’s Exhibit Paseo #1.1 through 1.8; Direct Examination of David Murphy, CD1

5 1:06:30-1:07:10; Direct Examination of Nicholas Pacheco, CD2 2:40:00-2:45:35].

6 9. Taxpayer A Class RV Storage at Osuna (referred to by the parties and hereinafter

7 as “Osuna”) is a self-storage facility wholly owned and operated by A Class RV Storage at

8 Osuna, LLC, a New Mexico Limited Liability Corporation, owned by David Murphy, managing

9 member, and another partner. The business operates a self-storage facility. Mr. Murphy has been

10 managing member since 2014, when the facility opened. [Osuna Stipulation #1; Administrative

11 File; CD1 28:30-30:00].

12 10. The Department conducted an audit of the Osuna Taxpayer’s business for filing

13 periods beginning June 1, 2011 and ending June 30, 2017 [Taxpayer’s Exhibit Osuna #1.1

14 through 1.8; Direct Examination of David Murphy, CD1 47:10-47:45].

15 11. The Department’s Audit concluded that the Osuna Taxpayer was improperly

16 deducting recreational vehicle (RV) parking spaces as real property leases on their Gross

17 Receipts Tax reports for the applicable period, further concluding that the reported income was

18 derived from a license to use the storage space rather than a lease of real property. [Taxpayer’s

19 Exhibit Osuna #1.1 through 1.8; Direct Examination of David Murphy, CD1 47:10-50:00].

20 12. The Department, in denying the Osuna Taxpayer’s deduction, relied heavily on

21 the fact that land partitions were not enclosures, not self-contained, and were situated outside,

22 concluding that “the customer does not have exclusive possession, use or access to the property.”

In the Matter of the Protest of A Class RV Storage, page 4 of 42.
1 [Taxpayer’s Exhibit Osuna #1.4; Direct Examination of David Murphy, CD1 48:50-50:00;

2 Direct Examination of Nicholas Pacheco, CD2 2:40:00-2:45:35].

3 Substantive Findings for Combined Cases:

4 13. After each audit, the Department granted the Taxpayers’ deductions for rented

5 spaces that were fully enclosed. [Taxpayer Exhibit Second Street 1.4; Cross Examination of

6 David Murphy, CD2 3:15-5:35; Direct Examination of Nicholas Pacheco, CD2 2:40:00-2:45:35],

7 [Taxpayer Exhibit Paseo1.4; Cross Examination of David Murphy, CD2 3:15-5:35; Direct

8 Examination of Nicholas Pacheco, CD2 2:40:00-2:45:35], [Taxpayer’s Exhibit Osuna #1.4;

9 Cross Examination of David Murphy, CD2 3:15-5:35; Direct Examination of Nicholas Pacheco,

10 CD2 2:40:00-2:45:35].

11 14. The Taxpayers showed that the three facilities were enclosed by perimeter fences.

12 [Second Street Stipulation #3; Taxpayer’s Exhibit Second Street #6; Direct Examination of

13 David Murphy, CD1 1:15:30-1:16:00, 1:17:10-1:18:25], [Paseo Stipulation #5; Taxpayer’s

14 Exhibit Paseo #6; Direct Examination of David Murphy, CD1 58:10-58:40, CD1 1:00:00-

15 1:01:00], [Osuna Stipulation #4; Taxpayer’s Exhibit Osuna #6, Osuna #7.17; Direct Examination

16 of David Murphy, CD1 34:10-34:25; Cross Examination of David Murphy, CD2 8:00-8:45].

17 15. The Taxpayers showed that the three facilities were accessible only through a

18 locked gate. [Second Street Stipulation #5; Taxpayer’s Exhibit Second Street #6 and #7.1;

19 Direct Examination of David Murphy, CD1 1:15:30-1:16:00], [Paseo Stipulation #7; Taxpayer’s

20 Exhibit Paseo #6 and #7.1 through 7.3; Direct Examination of David Murphy, CD1 1:01:30-

21 1:02:45], [Osuna Stipulation #6; Taxpayer’s Exhibit Osuna #6 and #7.17; Direct Examination of

22 David Murphy, CD1 34:10-34:30].

In the Matter of the Protest of A Class RV Storage, page 5 of 42.
1 16. The Taxpayers showed that the facilities were accessible 24 hours-per-day, 7

2 days-per-week, 365 days-per-year by those customers who possessed an electronic key fob to

3 open the gate using an individualized code. [Direct Examination of David Murphy, CD1

4 1:18:00-1:19:45], [Direct Examination of David Murphy, CD1 1:00:55-1:02:45], [Direct

5 Examination of David Murphy, CD1 36:40-37:50].

6 17. The Taxpayers showed that the individual spaces were rented out on a month-to-

7 month contract, with the initial term of a month with a renewal or “evergreen” clause.

8 [Taxpayer’s Exhibit Second Street # 4.1 through 4.10; Direct Examination of David Murphy,

9 CD1 1:10:13-1:16:00; Direct Examination of Mark Styles, CD2 1:29:00-1:39:55], [Taxpayer’s

10 Exhibit Paseo # 4.1 through 4.17; Direct Examination of David Murphy, CD1 56:30-58:00;

11 Direct Examination of Mark Styles, CD2 1:13:00-1:29:05], [Taxpayer’s Exhibit Osuna # 4.1

12 through 4.7 and 4.8 through 4.13; Direct Examination of David Murphy, CD1 31:30-34:00;

13 Direct Examination of Mark Styles, CD2 56:45-1:04:00].

14 18. The Taxpayers showed that the individual rental spaces were alpha-numerically

15 identified in the rental contracts. The identified spaces were marked at the facility with fixed

16 signs and survey whiskers embedded in the ground, showing the boundaries of the designated

17 property. [Taxpayer’s Exhibit Second Street # 4.1 through 4.10, #5, #7.2; Direct Examination of

18 David Murphy, CD1 1:19:35-1:21:20], [Taxpayer’s Exhibit Paseo # 4.1 through 4.17, #5, #7.2,

19 #7.5, #7.6, and #7.7; Direct Examination of David Murphy, CD1 59:00-1:06:20], [Taxpayer’s

20 Exhibit Osuna # 4.1 through 4.13, #5, #6, #7.1 through 7.16; Direct Examination of David

21 Murphy, CD1 34:30-35:30, 40:30-45:50, Cross Examination of David Murphy, CD2 9:00-

22 13:30].

In the Matter of the Protest of A Class RV Storage, page 6 of 42.
1 19. The Taxpayers showed that each rental contract pertains to an individual space,

2 and that once the space is rented, the rental contract grants the tenant a right to exclude all other

3 persons from occupying the space. For example, the Osuna agreements (#4.2) provide language

4 “leased space(s): N060 (12.0 x 42.0)” which identifies the specific space, coupled with a grant of

5 access (#4.3) “Access: Unless in default, Occupant and any person having Occupant’s access

6 code, lock key, or gate remote control(s) shall have access to the Leased Space.” The right of

7 exclusivity is granted by both Taxpayers’ practice and within the contracts in (#4.6) and (#4.12)

8 “Identified vehicles only. No vehicle may be parked in the Leased Space at any time that has not

9 been fully identified on a signed Addendum such as this. Except as provided herein, only one

10 Vehicle may be parked in the Leased Space at one time unless Occupant has the written consent

11 of Operator. Unidentified Vehicles stored without such consent may be towed from the Facility

12 by Operator at Occupant’s expense, or be overlocked or restrained.” Similarly, the tenants are

13 given warnings that there is a misparking fee for violations of the exclusivity rights of other

14 tenants (#4.6 and #4.12): “3. Misparking. The Vehicle may only be parked with the boundaries

15 of the Leased Space. If Occupant parks a Vehicle: in an incorrect space, or, which exceeds the

16 boundaries of the Leased Space, or, which has not been identified to Operator in accordance with

17 this Addendum, Occupant may be charged the Misparking Fee for each day that the condition

18 persists.” Even the earliest version of the rental agreement (Second Street #4.1) contains the

19 language: “Please leave aisles clear and do not block another tenant’s space.” [Taxpayer Exhibit

20 Second Street #4.1 through 4.10; Direct Examination of David Murphy, CD1 1:19:45-1:22:00;

21 Direct Examination of Mark Styles, CD2 1:29:00-1:39:55], [Taxpayer Exhibit Paseo #4.1

22 through 4.17; Direct Examination of David Murphy, CD1 54:00-58:00, 1:06:00-1:06:40; Direct

23 Examination of Mark Styles, CD2 1:13:00-1:29:05], [Taxpayer Exhibit Osuna #4.1 through 4.13;

In the Matter of the Protest of A Class RV Storage, page 7 of 42.
1 Direct Examination of David Murphy, CD1 45:45- 47:10; Direct Examination of Mark Styles,

2 CD2 56:45-1:04:00].

3 20. The Taxpayers showed that placement errors, which are when a tenant misplaces

4 their vehicle in another tenant’s space, rarely occur. In such an event, the matter is usually

5 resolved internally, by the facility manager calling the aberrant tenant to tell them to come move

6 the vehicle. Additional remedies at law include eviction, civil trespass, criminal trespass, and a

7 variety of other legal actions. [Taxpayer’s Exhibit Second Street #4.1 through 4.10; Direct

8 Examination of David Murphy, CD1 1:21:00-1:22:10, AHO Examination of David Murphy,

9 CD2 26:30-27:45, Re-Direct Examination of Mark Styles, CD2 2:18:45-2:21:10; AHO

10 Examination of Mark Styles, CD2 2:21:15-2:23:05], [Taxpayer’s Exhibit Paseo #4.1 through

11 4.17; Direct Examination of David Murphy, CD1 1:06:10-1:06:25, AHO Examination of David

12 Murphy, CD2 26:30-27:45; Re-Direct Examination of Mark Styles, CD2 2:18:45-2:21:10; AHO

13 Examination of Mark Styles, CD2 2:21:15-2:23:05], [Taxpayer’s Exhibit Osuna #4.1 through

14 4.13; Direct Examination of David Murphy, CD1 46:20- 46:30, AHO Examination of David

15 Murphy, CD2 26:30-27:45; Re-Direct Examination of Mark Styles, CD2 2:18:45-2:21:10; AHO

16 Examination of Mark Styles, CD2 2:21:15-2:23:05].

17 21. Pursuant to the contracts, in the event of a non-payment of rent, the Taxpayers

18 will lock out the tenant by denying access through the electronic key fob that operates the

19 perimeter entry gate. In such an event, the tenant may obtain renewed access by making full

20 payment during office hours. [Taxpayer’s Exhibit Second Street #4.4, #4.5; Cross Examination

21 of David Murphy, CD2 5:35-7:50; Re-Direct Examination of David Murphy CD2 34:10-35:00],

22 [Taxpayer’s Exhibit Paseo #4.4, #4.5; Cross Examination of David Murphy, CD2 5:35-7:50; Re-

23 Direct Examination of David Murphy CD2 34:10-35:00], [Taxpayer’s Exhibit Osuna #4.1, #4.2;

In the Matter of the Protest of A Class RV Storage, page 8 of 42.
1 Cross Examination of David Murphy, CD2 5:35-7:50; Re-Direct Examination of David Murphy

2 CD2 34:10-35:00].

3 22. The rental contracts limit the use of the rental space to “dead storage” of vehicles,

4 including recreational vehicles, campers, fifth wheels, boats, and other similar items. [Second

5 Street Stipulation #7; Taxpayer’s Exhibit Second Street #4.1 through #4.10], [Paseo Stipulation #

6 9; Taxpayer’s Exhibit Paseo #4.1 through 4.17], [Osuna Stipulation #8; Taxpayer’s Exhibit

7 Osuna #4.1 through 4.13].

8 23. The rental contracts used in the timeframes subject to audit contain provisions for

9 consideration, in the form of rent. [Taxpayer Exhibit Second Street #4.1 through 4.10; Direct

10 Examination of Mark Styles, CD2 1:29:00-1:39:55], [Taxpayer Exhibit Paseo #4.1 through 4.17;

11 Direct Examination of Mark Styles, CD2 1:13:00-1:29:05], [Taxpayer Exhibit Osuna #4.1

12 through 4.13; Direct Examination of Mark Styles, CD2 56:45-1:04:00].

13 24. Use of the word “lease” (and its derivatives) indicates that the parties to the

14 agreement intended the contracts to create a lessor/lessee arrangement. Contract provisions

15 include items such as security deposits, late fees, insurance, indemnity, and default, which are

16 typical of leases. [Direct Examination of Mark Styles CD2 40:30-42:00, CD2 1:29:00-1:39:55];

17 [Direct Examination of Mark Styles CD2 40:30-42:00, CD2 1:13:00-1:29:05], [Direct

18 Examination of Mark Styles CD2 40:30-42:00, CD2 1:03:30-1:11:15].

19 25. The rental contracts used in the timeframes subject to audit do not contain an

20 express reservation of a right of revocation in favor of the Taxpayers. [Taxpayer’s Exhibit

21 Second Street #4.1 through 4.10; Direct Examination of David Murphy, CD1 1:15:00-1:15:40;

22 Direct Examination of Mark Styles CD2 1:29:00-1:39:55], [Taxpayer’s Exhibit Paseo #4.1

23 through 4.17; Direct Examination of David Murphy, CD1 57:50-58:00; Direct Examination of

In the Matter of the Protest of A Class RV Storage, page 9 of 42.
1 Mark Styles, CD2 1:13:00-1:29:05], [Taxpayer’s Exhibit Osuna #4.1 through 4.13; Direct

2 Examination of David Murphy, CD1 33:55-34:10; Direct Examination of Mark Styles, CD2

3 56:45-1:04:00].

4 26. Taxpayers sought and obtained advice from their accountant, Kristena Malmgren,

5 CPA, about the business tax reporting. [Direct Examination of David Murphy, CD1 1:08:25-

6 1:09:45, CD1 1:24:00-1:25:00], [Direct Examination of David Murphy, CD1 1:08:25-1:09:45],

7 [Direct Examination of David Murphy, CD1 50:30- 51:40].

8 27. Taxpayers also sought advice from the Department, through a senior tax analyst

9 Mr. Mo Issa, concerning the Taxpayers’ gross receipts. Although the question presented to Mr.

10 Issa was unrelated to the issue at protest, Taxpayers believed that Mr. Issa would be reviewing

11 the entire business reporting. Two days after the initial meeting, Mr. Issa informed the

12 Taxpayers that the reporting was correct. Taxpayers did not recall receiving an opinion from Mr.

13 Issa specifically concerning the deduction for leases. [Direct Examination of David Murphy,

14 CD1 1:08:25-1:10:15, CD1 1:24:50-1:25:20; Cross Examination of David Murphy, CD2 14:30-

15 18:45], [Direct Examination of David Murphy, CD1 1:08:25-1:10:15; Cross Examination of

16 David Murphy, CD2 14:30-18:45], [Direct Examination of David Murphy, CD1 50:30- 53:20;

17 Cross Examination of David Murphy, CD2 14:30-18:45].

18 A Class RV Storage (“Second Street”)

19 Procedural findings:

20 28. On December 18, 2017, under letter id. no. L2055615280, the Department issued

21 a notice of assessment letter to Taxpayer, indicating that Taxpayer owed tax, penalty and interest

22 for tax periods from June 30, 2011 to December 31, 2016. The assessment included gross

23 receipts tax of $19,486.39, penalty of $3,897.29, and interest of $2,332.52, for a total assessment

In the Matter of the Protest of A Class RV Storage, page 10 of 42.
1 of $25,716.20. [Letter ID# L2055615280; Administrative File; Taxpayer’s Exhibit Second Street

2 #2.]

3 29. On February 12, 2018, Taxpayer submitted a formal protest letter to the

4 Department, laying out a brief factual basis for the claimed deductions, and challenging the

5 assessment, its penalties and interest. [Administrative File, Taxpayer’s Exhibit Second Street

6 #3.1 through #3.6].

7 30. On February 14, 2018, the Department issued a letter acknowledging the

8 Taxpayer’s protest. [Letter ID # L1872599856].

9 31. On March 20, 2018, the Department submitted a hearing request to the

10 Administrative Hearings Office. [Administrative File].

11 32. On March 21, 2018, the Administrative Hearings Office issued a Notice of

12 Telephonic Scheduling Hearing to be held on May 4, 2018. [Administrative File].

13 33. On May 4, 2018, a telephonic hearing was held before the undersigned Hearing

14 Officer Ignacio V. Gallegos, Esq., with the parties present. Parties did not object that the

15 scheduling hearing satisfied the 90-day hearing requirement of NMSA 1978, Section 7-1B-8 (A).

16 34. Based on the discussions at the telephonic scheduling hearing, on May 7, 2018,

17 the Administrative Hearings Office issued a Notice of Second Telephonic Scheduling Hearing,

18 setting the matter for August 10, 2018. [Administrative File].

19 35. On August 10, 2018, a second telephonic scheduling hearing was held before the

20 undersigned Hearing Officer with the parties present.

21 36. Based on the discussions at the second telephonic scheduling hearing, and

22 because two additional assessments had been issued by the Department which parties anticipated

In the Matter of the Protest of A Class RV Storage, page 11 of 42.
1 consolidating, on August 20, 2018, the Administrative Hearings Office issued a Notice of Third

2 Telephonic Scheduling Hearing, setting the matter for October 10, 2018. [Administrative File].

3 37. On October 10, 2018 a third telephonic scheduling hearing was held before the

4 undersigned Hearing Officer with the parties present.

5 38. On October 15, 2018, the Administrative Hearings Office issued a Scheduling

6 Order and Notice of Administrative Hearing, setting discovery and motions deadlines, and giving

7 the parties notice that the merits hearing would take place on July 10, 2019. [Administrative

8 File].

9 39. On June 19, 2019, the Department submitted its Prehearing Statement.

10 [Administrative File].

11 40. On June 19, 2019, the Taxpayer submitted its Prehearing Statement, along with a

12 Certificate of Service. [Administrative File].

13 41. On July 8, 2019, the parties filed stipulations (hereinafter “Second Street

14 Stipulations”) of fact and sample space rental agreement forms. [Administrative File].

15 42. On July 10, 2019, a merits hearing was held in Santa Fe, New Mexico. At the

16 outset of the hearing, the matter was consolidated with the other above-captioned matters.

17 43. The Administrative Hearings Office issued a formal Order Consolidating Cases

18 nunc pro tunc on July 17, 2019. [Administrative File].

19 A Class RV Storage at Journal Center (“Paseo”)

20 Procedural findings:

21 44. On April 5, 2018, under letter id. no. L0446191408, the Department issued a

22 notice of assessment letter to Taxpayer, indicating that Taxpayers owed tax, penalty and interest

23 for tax periods from June 30, 2011 to June 30, 2017. Assessment included gross receipts tax of

In the Matter of the Protest of A Class RV Storage, page 12 of 42.
1 $23,408.10, penalty of $4,657.56, and interest of $3,748.71, for a total assessment of $31,814.37.

2 [Letter ID# L0446191408; Administrative File; Taxpayer’s Exhibit Paseo 2.]

3 45. On June 26, 2018, Taxpayer submitted a formal protest letter to the Department,

4 laying out a brief factual basis for the claimed deductions, and challenging the assessment, its

5 penalties and interest. [Administrative File, Taxpayer Exhibit Paseo 3.1 through 3.6].

6 46. On July 9, 2018, the Department issued a letter acknowledging the Taxpayer’s

7 protest. [Letter ID # L0256098096].

8 47. On August 22, 2018, the Department submitted a hearing request to the

9 Administrative Hearings Office. [Administrative File].

10 48. On August 24, 2018, the Administrative Hearings Office issued a Notice of

11 Telephonic Scheduling Hearing to be held on September 10, 2018. [Administrative File].

12 49. On September 10, 2018, a telephonic hearing was held before the undersigned

13 Hearing Officer Ignacio V. Gallegos, Esq., with the parties present. Parties did not object that the

14 scheduling hearing satisfied the 90-day hearing requirement of NMSA 1978, Section 7-1B-8 (A).

15 50. Based on the discussions at the telephonic scheduling hearing, on September 10,

16 2018, the Administrative Hearings Office issued a Scheduling Order and Notice of

17 Administrative Hearing, setting discovery and motions deadlines, and giving the parties notice

18 that the merits hearing would take place on July 10, 2019. [Administrative File].

19 51. On June 19, 2019, the Department submitted its Prehearing Statement.

20 [Administrative File].

21 52. On June 19, 2019, the Taxpayer submitted its Prehearing Statement, along with a

22 Certificate of Service. [Administrative File].

In the Matter of the Protest of A Class RV Storage, page 13 of 42.
1 53. On July 8, 2019, the parties filed stipulations (hereinafter “Paseo Stipulations”) of

2 fact and sample space rental agreement forms. [Administrative File].

3 54. On July 10, 2019 a merits hearing was held in Santa Fe, New Mexico. At the

4 outset of the hearing, the matter was consolidated with the other above-captioned matters.

5 55. The Administrative Hearings Office issued a formal Order Consolidating Cases

6 nunc pro tunc on July 17, 2019. [Administrative File].

7 A Class RV Storage at Osuna (“Osuna”):

8 Procedural findings:

9 56. On April 5, 2018, under letter id. no. L2042133296, the Department issued a

10 notice of assessment letter to Taxpayer, indicating that Taxpayer owed tax, penalty and interest

11 for tax periods from June 30, 2011 to June 30, 2017. Assessment included gross receipts tax of

12 $58,917.06, penalty of $11,758.14, and interest of $5,383.74, for a total assessment of

13 $76,058.94. [Letter ID# L2042133296; Administrative File; Taxpayer’s Exhibit Osuna 2.]

14 57. On June 26, 2018, Taxpayer submitted a formal protest letter to the Department,

15 laying out a brief factual basis for the claimed deductions, and challenging the assessment, its

16 penalties and interest. [Administrative File, Taxpayer Exhibit Osuna 3.1 through 3.6].

17 58. On July 9, 2018, the Department issued a letter acknowledging the Taxpayer’s

18 protest. [Letter ID # L1489448752].

19 59. On August 22, 2018, the Department submitted a hearing request to the

20 Administrative Hearings Office. [Administrative File].

21 60. On August 24, 2018, the Administrative Hearings Office issued a Notice of

22 Telephonic Scheduling Hearing to be held on September 10, 2018. [Administrative File].

In the Matter of the Protest of A Class RV Storage, page 14 of 42.
1 61. On September 10, 2018, a telephonic hearing was held before the undersigned

2 Hearing Officer Ignacio V. Gallegos, Esq., with the parties present. Parties did not object that the

3 scheduling hearing satisfied the 90-day hearing requirement of NMSA 1978, Section 7-1B-8 (A).

4 62. Based on the discussions at the telephonic scheduling hearing, on September 10,

5 2018, the Administrative Hearings Office issued a Scheduling Order and Notice of

6 Administrative Hearing, setting discovery and motions deadlines, and giving the parties notice

7 that the merits hearing would take place on July 10, 2019. [Administrative File].

8 63. On June 19, 2019, the Department submitted its Prehearing Statement.

9 [Administrative File].

10 64. On June 19, 2019, the Taxpayer submitted its Prehearing Statement, along with a

11 Certificate of Service. [Administrative File].

12 65. On July 8, 2019, the parties filed stipulations (hereinafter “Osuna Stipulations”)

13 of fact and sample space rental agreement forms. [Administrative File].

14 66. On July 10, 2019 a merits hearing was held in Santa Fe, New Mexico. At the

15 outset of the hearing, the matter was consolidated with the other above-captioned matters.

16 67. The Administrative Hearings Office issued a formal Order Consolidating Cases

17 nunc pro tunc on July 17, 2019. [Administrative File].

18 DISCUSSION

19 Taxpayer contends that the storage facilities it operates are entitled to deductions from

20 Gross Receipts Tax, pursuant to NMSA 1978, Section 7-9-53, for receipts pursuant to leases of

21 real property. At hearing, Taxpayer contended that the rental contracts were in fact intended to

22 be and operated as land leases. The Department, disputing whether the contracts were leases,

23 cited Taxpayer’s draconian restrictions on the tenant’s ability to use the land, limiting its use to

In the Matter of the Protest of A Class RV Storage, page 15 of 42.
1 only storage, stressed the tenants’ inability to secure the space against others, and emphasized the

2 fact that the same language used to create a lease could also be used to create a license. The

3 testimony of all witnesses was highly credible. Although a close case, the hearing officer agrees

4 with the Department, since the absence of any enclosed structure prevents the Taxpayer from

5 providing exclusive possession, use and access to the units, therefore the denial of a deduction of

6 receipts under Section 7-9-53 was proper.

7 Presumption of correctness

8 Under NMSA 1978, Section 7-1-17 (C) (2007), the assessments issued in this case are

9 presumed correct. Consequently, Taxpayers have the burden to overcome the assessments. See

10 Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Unless otherwise specified, for the

11 purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

12 NMSA 1978, §7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the presumption of

13 correctness under Section 7-1-17 (C) extends to the Department’s assessment of penalty and

14 interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50,

15 ¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

16 given substantial weight). Accordingly, it is Taxpayers’ burden to present some countervailing

17 evidence or legal argument to show that they are entitled to an abatement, in full or in part, of the

18 assessment issued in the protest. See N.M. Taxation & Revenue Dep't v. Casias Trucking, 2014-

19 NMCA-099, ¶8. When a taxpayer presents sufficient evidence to rebut the presumption, the

20 burden shifts to the Department to show that the assessment is correct. See MPC Ltd. v. N.M.

21 Taxation & Revenue Dep't, 2003-NMCA-21, ¶13, 133 N.M. 217.

22 The burden is also on Taxpayers to prove that they are entitled to an exemption or

23 deduction, if one should potentially apply. See Pub. Serv. Co. v. N.M. Taxation & Revenue Dep't,

In the Matter of the Protest of A Class RV Storage, page 16 of 42.
1 2007-NMCA-050, ¶141 N.M. 520, 157 P.3d 85; See also Till v. Jones, 1972-NMCA-046, 83

2 N.M. 743, 497 P.2d 745. “Where an exemption or deduction from tax is claimed, the statute must

3 be construed strictly in favor of the taxing authority, the right to the exemption or deduction must

4 be clearly and unambiguously expressed in the statute, and the right must be clearly established

5 by the taxpayer.” See Sec. Escrow Corp. v. State Taxation & Revenue Dep't, 1988-NMCA-068,

6 ¶8, 107 N.M. 540, 760 P.2d 1306. See also Wing Pawn Shop v. Taxation & Revenue Dep't, 1991-

7 NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649. See also Chavez v. Comm'r of Revenue, 1970-

8 NMCA-116, ¶7, 82 N.M. 97, 476 P.2d 67.

9 Receipts under the Gross Receipts and Compensating Tax Act.

10 The assessments in these protests arise from an application of the Gross Receipts and

11 Compensating Tax Act, NMSA 1978, Sections 7-9-1 through 7-9-115, which imposes a tax for the

12 privilege of engaging in business, on the receipts of any person engaged in business in New Mexico.

13 See NMSA 1978, Section 7-9-4 (2002). The pertinent part of the statutory definition of “gross

14 receipts” under Section 7-9-3.5 (2007), includes “the total amount of money or the value of other

15 consideration received from selling property in New Mexico, from leasing or licensing property

16 employed in New Mexico.” There is no doubt that Taxpayers engage in business of leasing or

17 licensing property for monetary gain in New Mexico.

18 There is a statutory presumption that all receipts of a person engaged in business activities

19 are taxable. See NMSA 1978, Section 7-9-5 (2002). Yet, despite the general presumption of

20 taxability, a taxpayer may qualify for the benefits of various deductions and exemptions.

21 Taxpayers here claim they are entitled to the deduction for receipts from leases of real property,

22 pursuant to NMSA 1978, Section 7-9-53 (1998).

23 The deduction of receipts from leases of real property.

In the Matter of the Protest of A Class RV Storage, page 17 of 42.
1 Section 7-9-53 provides that (A) “[r]eceipts from the sale or lease of real property … may be

2 deducted from gross receipts.” Section 7-9-3 (E)(2007) gives a definition of “leasing.” Leasing is

3 “an arrangement whereby, for a consideration, property is employed for or by any person other than

4 the owner of the property, except that the granting of a license to use property is licensing and is not

5 a lease.” Id. The term “property” is defined to be “real property, tangible personal property,

6 licenses other than the licenses of copyrights, trademarks or patents and franchises.” Section 7-9-3

7 (J). The terms “license” or “licensing” are not defined under the Tax Administration Act, or within

8 the Gross Receipts and Compensating Tax Act. The term “use” is defined by statute in this context.

9 See Section 7-9-3 (N). The definition of “use” includes “storage” which is what is at issue here. Id.

10 The Department does not dispute that arrangements existed, or that property was employed by a

11 person other than the owner of the property, for terms in excess of one month, for consideration in

12 the form of monthly payments of rent. The sole dispute is whether this arrangement is a lease or a

13 license to use.

14 The lease-license dispute is not foreign to the courts, which have widely discussed the issue

15 in New Mexico and beyond. Nevertheless, this particular issue as described below is one of first

16 impression in New Mexico. “Generally speaking, this Court has defined a lease as an agreement

17 under which the owner gives up the possession and use of his property for a valuable

18 consideration and for a definite term. The tenant must acquire some definite control and

19 dominion of the premises.” Quantum Corp. v. State Tax. and Rev. Dep’t., 1998-NMCA-050, ¶ 9,

20 125 N.M. 49, 956 P.2d 848 (internal citations and quotation marks omitted). “The difference

21 between a license and a lease is that a lease gives to the tenant the right of possession against the

22 world, while a license creates no interest in the land, but it is simply the authority or power to use it

23 in some specific way. For a lease to exist, the lessee must acquire some definite control of and

In the Matter of the Protest of A Class RV Storage, page 18 of 42.
1 dominion over the premises.” Grogan v. N.M. Taxation and Revenue Dep’t., 2003-NMCA-033,

2 ¶27, 133 N.M. 354, 62 P.3d 1236 (internal citations and quotation marks omitted). The

3 resolution of the dispute herein hinges on the question of whether a lease can be created simply by

4 the agreement providing a right to exclusivity of possession, or whether some physical barrier is

5 also required to perfect the tenant’s possession with “definite control and dominion of the

6 premises.” Quantum Corp., ¶ 9.

7 Leasing

8 The general rule of Section 7-9-3 (E) defines leasing as “an arrangement whereby, for a

9 consideration, property is employed for or by any person other than the owner of the property.”

10 Under the plain meaning of this definition, there is no dispute as to the existence of the necessary

11 elements: the self-storage facilities and their tenants have entered written agreements whereby for

12 payment of rent, the property located at the facility is employed by the tenant, who is not also the

13 owner of the property. New Mexico Courts have also interpreted what leasing is. As indicated

14 above, “a lease [is] an agreement under which the owner gives up the possession and use of his

15 property for a valuable consideration and for a definite term. The tenant must acquire some

16 definite control and dominion of the premises.” Quantum Corp. v. State Tax. and Rev. Dep’t.,

17 1998-NMCA-050, ¶ 9, 125 N.M. 49, 956 P.2d 848 (internal citations and quotation marks

18 omitted). Similarly, “a lease gives the tenant the right of possession against the world… For a

19 lease to exist, the lessee must acquire some definite control of and dominion over the premises.”

20 Grogan v. N.M. Taxation and Revenue Dep’t., 2003-NMCA-033, ¶27, 133 N.M. 354, 62 P.3d

21 1236 (internal citations and quotation marks omitted). There is no evidence or argument that the

22 enactment of the statutory definition was intended to supplant the common law definition. “A

23 statute will be interpreted as supplanting the common law only if there is an explicit indication

In the Matter of the Protest of A Class RV Storage, page 19 of 42.
1 that the legislature so intended.” Sims v. Sims, 1996-NMSC-078, ¶ 25, 122 N.M. 618, 930 P.2d

2 153. I should nevertheless note that under the statutory definition, there is no explicit

3 requirement of “definite control and dominion of the premises,” as in the common law, but the

4 requirement is simply that property is “employed.”

5 Department rulings have summarized what are typical indicia of a lease. “A lease of real

6 property is a possessory interest in real property. Indicia of a lease typically include: the

7 exclusive rights of the lessee to occupy a specific portion of property and to restrict others’ entry

8 thereon; ability to mortgage or assign; survival and succession; responsibility of lessee for

9 maintenance and repair; unrestricted use of the property; and duration longer than day-to-day.”

10 Ruling 440-95-3. Accord Ruling 440-92-1, Ruling 440-01-1, and Ruling 440-96-1.

11 Licensing

12 When the statute contains an undefined term, in this case “license,” some statutory

13 interpretation is required. “As a starting point for interpreting undefined terms contained in a

14 statute, our courts often use dictionary definitions to ascertain the ordinary meaning of words that

15 form the basis of statutory construction inquiries.” State v. Lindsey, 2007-NMCA-048, ¶ 14, 396

16 P.3d 199. In 1973, the Court of Appeals turned to Black’s Law Dictionary of 1951 to define

17 “license” as “[a] permission, by a competent authority to do some act which without such

18 authorization would be illegal or would be a trespass or a tort…” N.M. Sheriffs & Police Ass'n v.

19 Bureau of Revenue, 1973-NMCA-130, ¶7, 85 N.M. 565; See also Quantum Corp., ¶10 (Citing to

20 the Sixth edition, 1990 publication of Black’s Law Dictionary).1 As such, the agreements at issue

1
Since that time, the ninth edition of Black’s Law Dictionary, published in 2009, has redefined the
word to be “[a] permission, usu. revocable, to commit some act that would otherwise be unlawful;
esp., an agreement (not amounting to a lease or profit à prendre) that it is lawful for the licensee to
enter the licensor’s land to do some act that would otherwise be illegal, such as hunting game.” The
dictionary definition now contains the clause “usually revocable.” Yet statutory interpretation

In the Matter of the Protest of A Class RV Storage, page 20 of 42.
1 would also create a license. The self-storage facility, a competent authority, has granted permission

2 to the tenant to park a recreational vehicle in a particular space, which would be trespassing if no

3 permission was granted.

4 Next, we consider guidance from Rulings issued by the Department, which have

5 summarized the typical indicia of a license. The regulations and rulings issued by the Secretary of

6 the Taxation and Revenue Department are presumed to be an accurate implementation of the law.

7 See NMSA 1978, Section 9-11-6.2 (G) (2015). Rulings, although given deference, are intended for

8 a limited application to a particular taxpayer or a small group of taxpayers seeking a clarification

9 and interpretation in special circumstances. See NMSA 1978, Section 9-11-6.2 (B)(2). Under the

10 rulings published by the Department, “a license is a non-possessory interest that authorizes one to

11 act on the land of another. It is typically revocable, personal, not assignable or mortgageable, not

12 subject to succession upon death of the licensee, paid for on the basis of each use or as a

13 percentage of income from its use, limited to specific purposes, and non-exclusive.” Ruling 440-

14 95-3. Accord Ruling 440-92-1, Ruling 440-01-1, and Ruling 440-96-1.

15 Comparison of Department’s criteria for leasing and licensing

16 When determining whether a lease or license is created, courts analyze the contents of the

17 instrument employed, the subject matter, and the surrounding circumstances to determine the

18 intention of the parties. See Quantum Corp., ¶12. In order to secure licensing permission, “[t]he

19 creation of a license requires no particular formality: A license may be created by parol, a

20 writing, or can be implied from the acts of the parties, from their relations, and from usage and

21 custom.” Tarin’s Inc. v. Tinley, 2000-NMCA-048, ¶ 20, 129 N.M. 185, 3 P.3d 680 (internal

prevents using new definitions alone as basis for substantive changes in common law interpretation.
See Salazar v. St. Vincent Hospital, 1980-NMCA-081, ¶ 13, 95 N.M. 150, 619 P.2d 826.

In the Matter of the Protest of A Class RV Storage, page 21 of 42.
1 quotation marks omitted). “Under general law, the character of the instrument is not to be

2 determined by its form, but from the intention of the parties as shown by the contents of the

3 instrument.” Transamerica Leasing Corp. v Bureau of Revenue, 1969-NMCA-011, ¶ 17, 80

4 N.M. 48, 450 P.2d 934. Yet, written instruments that purport to be leases can be reconstrued by

5 the courts if their true intention is otherwise. Id. (citing cases in which purported leases have

6 been construed as conditional sales contracts or security agreements).

7 Turning to the evidence at hand, here the Department’s indicia common to a lease (as

8 published by rulings) are examined in detail. To reiterate, “Indicia of a lease typically include: the

9 exclusive rights of the lessee to occupy a specific portion of property and to restrict others' entry

10 thereon; ability to mortgage or assign; survival and succession; responsibility of lessee for

11 maintenance and repair; unrestricted use of the property; and duration longer than day-to-day. In

12 contrast, a license is a non-possessory interest that authorizes one to act on the land of another. It

13 is typically revocable, personal, not assignable or mortgageable, not subject to succession upon

14 death of the licensee, paid for on the basis of each use or as a percentage of income from its use,

15 limited to specific purposes, and non-exclusive.” See Ruling 440-95-3.

16 The term of occupancy and rent. The agreements contain provisions for a specified

17 monthly rent, and a term of one month, extended monthly if not terminated with proper notice.

18 The term of one month is the minimal amount of time required for leases. The tenant gets

19 charged for the space whether the RV is parked at the facility or has been taken on a road trip.

20 The provisions for monthly rent, rather than daily use fees, or per use fees also weighs in favor of

21 finding a lease existed. See NMSA 1978, Section 7-9-53 (B) (1998) (minimum of one-month

22 rental period needed to qualify for deduction for rental of manufactured home). See Regulation

23 3.2.211.8 NMAC (11/30/05) (trailer park receipts for rental of a space for less than one month are

In the Matter of the Protest of A Class RV Storage, page 22 of 42.
1 taxable, receipts for rental of space for more than one month are deductible). See also Corr. Corp.

2 of Am. of Tenn. v. State, 2007-NMCA-148, ¶ 27 (the existence of contract term setting a “per diem

3 rate” disqualified corrections facility for deduction for lease of real property). See The protest of

4 Tiller Design, Decision and Order #16-38 (N.M. Admin. Hearings Office, July 21, 2016, non-

5 precedential), affirmed, Tiller Design v. N.M. Taxation & Revenue Dep’t., Mem. Op.#A-1-CA-

6 36090, March 18, 2019 (tax treatment of short-term vacation rental of a home is licensing, similar to

7 hotels, motels, rooming houses, campgrounds, guest ranches, and trailer parks) (non-precedential).

8 Use restrictions. Concerning use, the agreements provide for unlimited access every day of

9 the year, but very limited, not unrestricted, use of the property for storage. While use restrictions

10 and access restrictions have been the subject of much litigation, the Self-Service Storage Lien Act,

11 NMSA 1978, Sections 48-11-1 to 48-11-9 (2015), precludes granting weight to use restrictions in

12 the context of the self-storage industry. “[T]he provisions of a statute must be read together with

13 other statutes in pari materia under the presumption that the legislature acted with full knowledge of

14 relevant statutory and common law.” N.M. Indus. Energy Consumers v. Pub. Regulation Comm’n,

15 2007-NMCA-053, ¶ 20, 142 N.M. 533, 168 P.3d 105. The Self-Service Storage Lien Act provides

16 that such facilities are non-residential, for example, contemplating the precise sort of use restriction

17 complained of by the Department. See NMSA 1978, Section 48-11-4 (1987). Use restrictions

18 contemplated by statute do not diminish the exclusive possessory rights of the occupant to use the

19 space as intended. See Wattson Pac. Ventures v. Valley Fed. Sav. & Loan (In re Safeguard Self-

20 Storage Trust), 2 F.3d 967, 972 (9th Cir, 1997). The contemplated use strictly for storage does not

21 of itself weigh for or against finding in favor of a lease.

22 Ability to assign, succession and mortgageability. The evidence presented also shows that

23 the written agreements restrict the tenant’s ability to assign the space, granting assignment only with

In the Matter of the Protest of A Class RV Storage, page 23 of 42.
1 written permission of the management. The earliest agreements are silent as to succession, but later

2 agreements refer to succession, by noting “[t]he person(s) identified as an Alternate Contact shall

3 have the same access to the Leased Space as the Occupant if the Occupant dies, becomes legally

4 incapacitated (as determined by a court), is incarcerated or is on active military duty.” Also, since

5 the applicable law, explicitly under the revised contracts and implicitly for all contracts due to the

6 fact that the Taxpayers are in the self-storage industry, is that of the Self-Service Storage Lien Act,

7 the definition of an “occupant” under that Act is “a person or the person’s sublessee, successor or

8 assign who is entitled to the use of storage space, to the exclusion of others.” Section 48-11-2 (D).

9 The law in this area of business activity contemplates succession and assignment. In light of the

10 statutory context, the agreement for the space transfers upon succession. This indicator weighs

11 slightly in favor of concluding a lease existed. There is no mortgageability, either within the

12 contracts or by act of law, so that factor weighs slightly against concluding a lease existed.

13 Maintenance. Concerning maintenance, the agreements place responsibility for maintenance

14 on the tenant, requiring that once the tenancy ends the tenant must return “peaceable possession of

15 the premises… in as good condition as they are now, normal wear, inevitable accidents and loss by

16 fire excepted.” This indicator weighs slightly in favor of finding a lease.

17 Revocability. The written agreements contain no clause giving either the tenant or the

18 facility an express right to revoke the agreement. “The most salient feature of a license is its

19 revocability… it may be revoked without notice and without cause, because a licensee has no

20 possessory interest in the property.” Tarin’s Inc., ¶ 21 (internal citations and quotation marks

21 omitted). Furthermore, “[r]evocation can either be express or implied, as by conduct of the

22 licensor that is inconsistent with the continued exercise of the privilege.” Id. Since there is no

23 clause providing expressly for revocation within any of the agreements, the surrounding

In the Matter of the Protest of A Class RV Storage, page 24 of 42.
1 circumstances should be analyzed to determine if there is an implied right to revoke. Assuming,

2 arguendo, that revocability is required to form a license, not a consequence of being a license,

3 the question becomes whether the landowner or facility manager has retained a degree of control

4 of the premises to constitute a constructive or implied right of revocation.

5 The Department argued that the management’s ability to deny tenant’s access to the

6 facility amounts to express revocation. Turning again to the written agreements, the agreements

7 contain default provisions, if rent is unpaid or late, and allows for termination if the leased space

8 is used in connection with criminal activity. The agreements permit entry by the owner, in cases

9 of inclement weather or emergency. In the case of unpaid rent, the owner may deny access by

10 deactivating the key fob which opens the main entry gate. The default and emergency entry

11 terms are not inconsistent with the Self-Service Storage Lien Act nor under the comparable

12 Uniform Owner-Resident Relations Act. See Self-Service Storage Lien Act, Section 48-11-2 (A)

13 (definition of “default”), Section 48-11-4 (placing limitations on permitted use for only non-

14 residential purposes), Section 48-11-5 (establishing that a lien attaches on the personal property

15 stored as of the date of occupant default), Section 48-11-7 (establishing that after five days of

16 default, the owner has the right to deny access). See also Uniform Owner-Resident Relations

17 Act, NMSA Sections 47-8-1 through 52 (1995), Section 47-8-3 (T) (providing a definition of

18 “substantial violation”), Section 47-8-24 (B) (providing owner the right to entry in case of

19 emergency), Section 47-8-33(D) (requiring immediate delivery of possession after notice of

20 intent to terminate for non-payment of rent), and Section 47-8-33(I) (allowing termination after

21 notice of substantial violation). The landlord default and entry provisions do not of themselves

22 create an implied right of revocation.

In the Matter of the Protest of A Class RV Storage, page 25 of 42.
1 Specificity of the property. The agreements are specific as to the size and location of the

2 property, e.g., “CS02 (13.0x 37.0).” Survey whiskers embedded in the ground provide visual cues

3 to show the tenants the boundaries, and the facility manager provides a map indicating the spaces

4 that are taken or available. There is a wall around the entirety of each facility, but individual spaces

5 are not walled-in, and only one facility offers overhead covered spaces. Nevertheless, the spaces are

6 marked individually with a unique alpha-numeric identifier. The Taxpayers presented the contrast

7 of its degree specificity and individuality with that of “concierge” facilities. Concierge facilities, on

8 the other hand, are those which do not provide an individualized space, but take possession of the

9 RV at the gate, parking it in whichever space is available. The specificity factor weighs in favor of

10 finding a lease existed. This indicator will be discussed in greater detail below as it relates to

11 “definite control and dominion.”

12 Exclusive right to occupy. Finally, and perhaps most importantly, the agreements contain a

13 grant of an exclusive right to occupy a specific portion of land, i.e., “MANAGEMENT does hereby

14 rent to TENANT storage unit number CS02.” There is only one tenant and one rental agreement for

15 each space. By assigning a space, the agreements give the right to restrict other’s entry not by

16 means of an individually encased space secured by one’s own padlock, but by informing the

17 management of the trespass, or by going to a competent authority to report the violation and enforce

18 the right. This evidence tends to weigh heavily toward a conclusion that the agreements gave “the

19 exclusive rights of the lessee to occupy a specific portion of property and to restrict others’ entry

20 thereon.” See Ruling 440-95-3 (indicia of a lease). This indicator will be discussed in greater

21 detail below as it relates to “definite control and dominion.”

22 Intent. It should be first noted that each space rental agreement for each of the facilities are

23 written, signed by the manager of the facility and the tenant or occupant. This formality weighs

In the Matter of the Protest of A Class RV Storage, page 26 of 42.
1 slightly in favor of the establishment of a lease, since “[t]he creation of a license requires no

2 particular formality.” Tarin’s Inc., ¶ 20. Within the written agreements, the intent of the parties to

3 create a lease can be inferred initially by the use of the term “lease” and its derivatives in the

4 agreement, and the documents themselves contain elements that reflect the intent of the parties to

5 create a lease of real property, as noted by the discussion of the factors above. Additionally, the

6 provisions on security deposits, late fees, insurance, indemnity, and default tend to suggest a lease

7 was intended. “Under general law, the character of the instrument is not to be determined by its

8 form, but from the intention of the parties as shown by the contents of the instrument.”

9 Transamerica Leasing Corp. v Bureau of Revenue, 1969-NMCA-011, ¶ 17, 80 N.M. 48, 450 P.2d

10 934.

11 Turning again to the statutory context, the statutory scheme of the Self-Service Storage Lien

12 Act, NMSA 1978 Sections 48-11-1 through -9 (1987), contemplates that self-storage facilities can

13 grant leases or other agreement types. Section 48-11-2 (F) defines a “rental agreement” as meaning

14 “any written agreement or lease.” And Section 48-11-7 (K) provides for special treatment of stored

15 property subject to a lien, if the property “is a vehicle, watercraft or trailer.” The statutory

16 framework governing self-storage facilities requires that agreements between the facility and tenants

17 must be in writing and could be leases, and stored property can be vehicles, watercraft and trailers.

18 Nevertheless, since the statute contemplates not only the possibility of the creation of a lease, it does

19 not preclude the possibility of a license as an “other agreement.” The self-storage industry’s

20 statutory scheme provides no additional guidance as to whether the agreements at issue here are

21 leases or licenses.

22 Dominion and control.

In the Matter of the Protest of A Class RV Storage, page 27 of 42.
1 Returning to the common law construction of the difference between a lease and a

2 license, it bears repeating that “[t]he difference between a license and a lease is that a lease gives

3 to the tenant the right of possession against the world, while a license creates no interest in the

4 land, but it is simply the authority or power to use it in some specific way. For a lease to exist,

5 the lessee must acquire some definite control of and dominion over the premises.” Grogan, at

6 ¶27. This concept of definite control and dominion is one which has been the subject of

7 litigation in the past.

8 The closest case on the topic of storage comes from the Fifth Circuit Court of Appeals,

9 on an appeal from the U.S. District Court for the Southern District of Texas. In Tips et al. v.

10 United States, 70 F.2d 525, 1934 U.S. App. LEXIS 4214, the government granted to Tips and a

11 partner, 3,101 square feet of floor space in a large warehouse owned by the government, with use

12 and access restrictions, subject to revocation. The floor space was used to store small airplane

13 engines, which subsequently became obsolete, so they were left unsold at the warehouse after

14 approximately three years. The government sold the warehouse as part of the dissolution and

15 abandonment of the locale, and the new owner sold the engines to recuperate the unpaid storage

16 charges due from the partners. Tips and his partner sued the government for the disposition of

17 the stored airplane engines. The Court, to decide the case, turned to the concept of exclusive

18 possession, stating:

19 to constitute a lease or a tenancy there ought always to be a definite, certain place
20 demised or rented. 16 R.C.L., Landlord &Tenant, §32. Thus in Selby v. Greaves,
21 L.R. 3 C.P. 594, where the contract was to rent half the room called No. 7, in the
22 third story of the factory on Station street in the town of Nottingham, with heat
23 and power to drive lace machines, there was held to be a tenancy which would
24 sustain a distraint for rent, it appearing that the space was partitioned off, the court
25 saying: “The letting was not a mere letting of an onstand for the lace machines,
26 but a letting of a defined portion of the room separated from the remaining
27 portion, with exclusive possession by the person taking it, and that possession was

In the Matter of the Protest of A Class RV Storage, page 28 of 42.
1 taken under that demise.” On the contrary, in Hancock v. Austin, 14 C.B. (N.S.)
2 634, where there was no demise of a room nor a partitioned portion of one, but the
3 lacemaker had three machines running in a room with others, a contrary
4 conclusion was reached; the court saying there was “no demise of the room, but
5 only a bargain for the standing of the plaintiff’s machines.” Id. at 527.
6
7 The Court went on to determine that the purported lease of storage space to Tips was a mere

8 license, because the airplane engines stored at the warehouse were at the leisure of the

9 commanding officer, and the floor space was not “permanently assigned, much less partitioned

10 off, so that exclusive possession of it might be taken and maintained.” Id. The Court concluded

11 that “[t]he dominion and control of the whole building remained in the commanding officer.” Id.

12 With this in mind, we turn now away from the written agreements and toward the

13 practical conditions of the rental spaces. Evidence showed there is no physical barrier between

14 rental spaces. It is possible that a tenant (X) of one space parks their recreational vehicle over

15 the border survey whiskers separating the tenant’s space from the adjoining space, rented to a

16 different tenant (Y). In such an instance, Y can enforce Y’s right of occupancy. In doing so, the

17 facility manager is the first line of defense, tasked with enforcing the Y’s right to exclude the

18 aberrant vehicle of X and any other person. Ultimately, Y could seek assistance from other

19 authorities, including lawyers, police, and the courts to enforce his possessory interest in the

20 property. Practically, it is the duty of the facility manager to make the call, as the facility

21 manager is the person in control of the list of tenants and their phone numbers. Yet, the facility

22 owner or facility manager is only accessible during regular business hours. The facility manager

23 enforces the parking placement, and there is no physical barrier between parking spaces. Under

24 this circumstance, the facility manager retains some degree of control, since control of the entire

25 premises remains with the facility manager. Rather than giving the tenant exclusive possession

26 of the property “against the world,” this parol evidence suggests that the facility manager retains

In the Matter of the Protest of A Class RV Storage, page 29 of 42.
1 some control over the premises. It is the duty of a landlord under a lease to deliver actual

2 possession to a lessee when the right accrues, as part of the implied covenant of quiet enjoyment.

3 See Barfield v. Damon, 1952-NMSC-069, ¶6, 56 N.M. 515, 245 P.2d 1032. As such, it is also the

4 duty of the landlord to expel any holdover tenant that prevents the new tenant from possession of

5 the leasehold, or be held liable to the new lessee. Id. So, although the facility manager in this

6 instance holds this responsibility to evict aberrant vehicles from the rightful tenant’s space, this

7 is required under existing law. Nevertheless, the absence of a physical barrier between spaces is

8 evidence that the grant of possession provides less than complete dominion and control,

9 weighing in favor of finding a license.

10 Other courts also have more recently considered a similar question. Most recently was

11 the United States Court of Appeals for the Ninth Circuit, when it considered the bankruptcy case

12 of Wattson Pac. Ventures v. Valley Fed. Sav. & Loan (In re Safeguard Self-Storage Trust), 2 F.3d

13 967, 972 (9th Cir, 1997). The storage facility management (debtor) in that case argued for the

14 proposition that the rental agreements for its self-storage facility were licenses, and therefore not to

15 be considered as cash collateral in a bankruptcy proceeding. The previous owner, lienholder

16 (creditor), sold the facility on contract to the debtor who then operated the facility and collected

17 rents. The debtor then defaulted on payments to the creditor and kept the rents. The creditor argued

18 for the proposition that the rental agreements were leases, under which revenue received for the

19 leases under the bankruptcy code were considered cash collateral (and therefore due to be

20 distributed to creditors). The Court formulated the question in these terms: “In short, we must

21 determine whether an animal which looks like a duck, walks like a duck, and quacks like a duck, is

22 in fact a duck.” Id. at 970. Ultimately the Court determined that:

23 Safeguard's self-storage tenants secure their storage spaces with their own
24 lock and have exclusive access to the spaces. The Rental Agreement provides that

In the Matter of the Protest of A Class RV Storage, page 30 of 42.
1 "Landlord does not have any liability for Tenant's stored goods, and that the care,
2 custody and control of said goods is with the Tenant and not the Landlord."
3 Furthermore, the Rental Agreement uses lease language, provides a definite
4 description of the storage space by number, provides for payment of periodic rent,
5 and requires notice of termination.
6 Safeguard argues that self-storage tenants do not have exclusive occupancy
7 rights because the facility owner restricts access during certain hours, that license
8 agreements and leases of personal property may also require notice of termination,
9 and that licenses, such as the right to use a hotel room, may also describe the
10 relevant property with specificity. While Safeguard is again correct that the self-
11 storage Rental Agreement is an atypical lease in some respects, the agreement
12 nevertheless meets the definition of a lease under California law.
13
14 Id. at 972. The court stressed the ability to secure the storage spaces with their own lock and having

15 exclusive access. The court was willing to overlook the fact that time of access was controlled by

16 the facility owner. In ruling that the agreements were leases, the court stressed the importance of a

17 case-by-case approach when it warned against an industry-wide categorical approach to allow all

18 storage spaces and facilities to be treated the same. Id. at 973. In context here, the substantive

19 reasons why an agreement that looks like a lease, was intended to be a lease, and acts like a lease

20 should not be considered a lease, are the physical openness and the absence of the ability to secure

21 the space with a lock, which was argued by the Department and is considered below as it relates to

22 Departmental regulations.

23 Regulations and rulings issued by the Department

24 Regulations and rulings promulgated by the Department have provided guidance concerning

25 lease/license questions over the years. While no regulation or ruling considers the exact situation

26 presented by the Taxpayers, there are several that approximate it. The regulations and rulings at

27 issue here focus on the open air/enclosed space question. The focus on exclusive use, possession

28 and access includes the concept of dominion and control, as described above.

In the Matter of the Protest of A Class RV Storage, page 31 of 42.
1 Regulation 3.2.211.16 NMAC (5/31/01) indicates that receipts from renting locker rooms in

2 a self-storage warehouse are receipts from granting a license if access to the building is only through

3 the owner, but are deductible if the tenant has “exclusive possession, use and access” to a self-

4 contained unit and rent is for a specific period or term. It was under this regulation that the

5 Department, per the audit, justified its denial of the deduction of open-air spaces and allowed the

6 deduction of enclosed spaces.

7 Regulation 3.2.211.16 NMAC provides two scenarios. In the first scenario, a warehouse

8 facility provides individual locker rooms, but access to the building is limited by the landowner. In

9 the second scenario, a warehouse storage facility provides individual, self-contained units, and the

10 tenant has exclusive possession, use and access. By its focus on the control of access, this

11 regulation seems intended to illustrate the difference between owner-control and tenant-control of

12 the space. It does not explicitly require that the space is covered on all sides, but both scenarios

13 contain spaces which are the functional equivalent: either “individual locker rooms” or “individual,

14 self-contained storage warehouse units.” One might infer, as the Department does, that to be self-

15 contained, a space has to be enclosed. But, by contrast, the scenario also indicates that even though

16 the individual locker rooms grant exclusive possession, the right to use them may still be considered

17 a grant of licenses, because the owner’s control of access is a determining factor. Cf. Wattson, 2

18 F.3d 967.

19 Similarly, the Department cited to Regulation 3.2.211.17 NMAC (8/15/12) in denying the

20 deduction. The regulation gives the example of a parking lot:

21 C. Example 2: X owns an unlighted dirt parking lot in Albuquerque. Y enters into
22 an agreement with X whereby Y agrees to pay a monthly fee and X agrees to permit
23 Y to park Y’s car in an assigned space for a period of one month. Z brings an
24 automobile to X’s parking lot and parks it there for a daily fee. Z does so only once.
25 X’s receipts from providing the service of supplying parking spaces or selling a

In the Matter of the Protest of A Class RV Storage, page 32 of 42.
1 license to use the parking spaces to Y and Z are not deductible from gross receipts as
2 a lease of real property pursuant to Section 7 9 53 [sic] NMSA 1978.
3
4 The hypothetical of the regulation seems to place importance on the allowance of both daily use as

5 well as a one-month agreement. This stress on the duration of the term of the agreement is not

6 misplaced, since the statutes and interpretations tend to place a minimum of one-month terms on

7 agreements to be considered leases. See NMSA 1978, Section 7-9-53 (B) (1998); see Regulation

8 3.2.211.8 NMAC (11/30/05). See also Corr. Corp. of Am. of Tenn. v. State, 2007-NMCA-148, ¶

9 27; See also The protest of Tiller Design, Decision and Order #16-38 (N.M. Admin. Hearings

10 Office, July 21, 2016, non-precedential), affirmed, Tiller Design v. N.M. Taxation & Revenue

11 Dep’t., Mem. Op.#A-1-CA-36090, March 18, 2019.

12 More closely related is the hypothetical scenario of the airplane flying service providing

13 hangar space. See Regulation 3.2.211.17 (D). Under each of the three scenarios presented in the

14 regulation’s hypothetical, the flying service which rents out hangar space to tenants on a month-to-

15 month basis for a stall, a month-to-month basis for an assigned tie-down space, and a day-to-day

16 basis for an assigned tie-down space, tax is due.

17 Example 3:
18 (1) S owns a flying service and related facilities. S enters into several types of
19 agreements with its customers:
20 (a) an agreement with A on a month-to-month basis, permitting A to store an
21 aircraft in an assigned "stall" in one of several hangars each containing eight to
22 twelve such "stalls", in return for a monthly fee. S specifically limits A's use of the
23 premises to storage of the aircraft in the conduct of A's business in an adjacent
24 airport;
25 (b) an agreement with B, on a month-to-month basis, permitting B to store an
26 aircraft in an assigned "tie-down" space in a large open-span hangar containing
27 spaces for eight such aircraft, in return for a monthly fee;
28 (c) an agreement with C, a transient customer, on an overnight or day-to-day basis,
29 permitting C to store an aircraft in a specified "tie-down" space in the open-span
30 hangar described above, in return for a daily fee.

In the Matter of the Protest of A Class RV Storage, page 33 of 42.
1 (2) S's receipts from providing the service of supplying hangar space and open
2 storage space for aircraft, or of granting a license to use such space, to A, B and C
3 are subject to the gross receipts tax. S's receipts are not deductible from gross
4 receipts as a lease of real property pursuant to Section 7-9-53 NMSA 1978.
5
6 The stated reason for taxing this transaction is that the flying service’s receipts are “from providing

7 the service of supplying hangar space and open storage space for aircraft, or of granting a license to

8 use such space.” The Department considered this either a service or a grant of a license, regardless

9 of the length of time the tenant used the space, and regardless of the assignment of an identified

10 space. Again, as with the parking lot scenario of Regulation 3.2.211.16 NMAC, the flying service

11 has mixed daily use and monthly use rentals. This appears to be one of the two apparent rationales

12 to prevent the month-to-month assigned hangar space tenancies from the application of a lease

13 deduction. This is a rational application of the minimum of one-month rental period term limits

14 imposed on leases, as discussed above. The second apparent rationale to deny the lease exemption

15 comes from the fact that the spaces are in an open-air group hangar. The regulation hypothetical

16 illustrates the difference between types of spaces and the term of rentals, but in each, the tax is due.

17 Under this regulation read broadly enough to include other vehicle storage facilities, renting

18 comparable assigned open-air RV spaces or partially covered RV spaces could be either a service or

19 a license, regardless of the length of the term or whether the tenancy is revocable at will. Under a

20 strictly limited view, the regulation regards mixed daily and monthly use of hangar space as taxable.

21 Regulations are meant to provide guidance to tax practitioners, therefore, the broader view is

22 adopted here.

23 Similar to the airplane hangar scenario, Revenue Ruling 440-01-1 is the ruling with factual

24 scenarios that most closely mirror the case at hand. The ruling focused on boat storage, both on

25 land and in the water. There were three different types of storage facilities at issue. Under one

26 scenario, the boats are placed in trailers, and placed within a covered, enclosed garage on land for an

In the Matter of the Protest of A Class RV Storage, page 34 of 42.
1 annual term with in-and-out privileges 24 hours a day using a personal key. This was clearly a lease

2 of real property, although the Department advised that rental terms of less than a month would

3 suggest a license. Under the second scenario, boats on trailers were stored in an open, fenced

4 storage yard for an annual term, with the owners able to access the yard 24 hours a day, with a key

5 to the main gate. The Department determined that the second scenario did not allow exclusive

6 access to the owner, because storage was out in the open. Under the third scenario, the boats were

7 left on the water, in an unwalled “slip” with a roof, also with 24-hour access and under an annual

8 contract. The Department determined that because access was not exclusive to the tenant under the

9 second and third scenarios, the receipts were from a license not a lease. Having eliminated the

10 question of mixed day-to-day and long-term use, the regulation stresses the openness and

11 accessibility of the rental space. Under this ruling, applied to the situation at hand, the rental of RV

12 spaces in an open-air lot, even with some roof covering, would seem to be the granting of a license,

13 regardless of whether the tenancy is revocable at will.

14 An application of Ruling 440-01-1 reinforces the statutory interpretation and common law

15 interpretations above. And, as with Regulation 3.2.211.17(D) NMAC, the sole reason I see to

16 prevent the year-long assigned space tenancies from the application of a lease deduction stems from

17 the fact that the spaces are in an open-air lot rather than individually enclosed, a deciding factor

18 based on the physical inability to provide dominion and control of the rented space, despite a grant

19 of a right to possession and the ability to use the vehicle storage space.

20 The regulations and rulings issued by the Secretary of the Taxation and Revenue

21 Department are presumed to be an accurate implementation of the law. NMSA 1978, Section 9-11-

22 6.2 (G) (2015) indicates: “[a]ny regulation, ruling, instruction or order issued by the secretary or

23 delegate of the secretary is presumed to be a proper implementation of the provisions of the laws

In the Matter of the Protest of A Class RV Storage, page 35 of 42.
1 that are charged to the department, the secretary, any division of the department or any director of

2 any division of the department.” The Department may interpret a tax statute without adopting a rule

3 or regulation related to that statute. See Id. Rulings, although given deference, are intended for a

4 limited application to a particular taxpayer or a small group of taxpayers seeking a clarification and

5 interpretation in special circumstances. See NMSA 1978, Section 9-11-6.2 (B)(2).

6 The Taxpayers urged the Hearing Officer to disregard the regulations’ reliance on the

7 open/enclosed distinctions because the distinction is not part of the governing statute. “The

8 legislature may not delegate authority to a board or commission to adopt rules or regulations which

9 abridge, enlarge, extend or modify the statute creating the right or imposing the duty.” Rainbo

10 Banking Co. of El Paso, Tex. v. Comm’r of Revenue, 1972 NMCA-139, 84 N.M. 303, 502 p.2d 406.

11 When an agency is charged with the application of a statute, its construction is given some

12 deference, but its construction will be disregarded if its interpretation of the statute is found to be

13 unreasonable or unlawful. See N.M. AG v. N.M. Pub. Regulation Comm’n, 2013-NMSC-042, ¶ 12.

14 When statutes and regulations are inconsistent, the statute prevails. See Picket Ranch, LLC v.

15 Curry, 2006-NMCA-082, ¶ 10, 140 N.M. 49. A regulation cannot overrule a statute. See Jones v.

16 Employment Servs. Div., 1980-NMSC-120, 95 N.M. 97.

17 The regulations in contention here, Regulation 3.2.211.17 NMAC, Regulation 3.2.211.16

18 NMAC, and Revenue Ruling 440-01-1, place great emphasis on a tenant’s “exclusive possession,

19 use and access.” The illustrations in the regulations seem more concerned with mixed daily and

20 monthly usage, but it is impossible to ignore the additional distinction between open air and

21 enclosed spaces. Neither the tenancy term limits, nor the enclosure limits are unreasonable

22 interpretations of the common law’s definition of a license. The Department’s interpretation is not

23 based in statute, because the term “license” is undefined. But the Department’s interpretation does

In the Matter of the Protest of A Class RV Storage, page 36 of 42.
1 not unreasonably abridge, enlarge, extend or modify the statute at issue. Thus, the exception for

2 licensing interpreted narrowly does not swallow the rule. See First Nat’l Bank v. Woods (In re

3 Woods), 743 F.3d 689, 698 (“exceptions must not be interpreted so broadly as to swallow the rule”).

4 The Department’s rationale that the absence of the ability to place a padlock on the outside

5 of the storage space prevents the creation of a lease is grounded in the Department’s own

6 regulations, and caselaw. The Quantum court determined a lease existed when various

7 organizations entered into year-long contracts with a bingo hall owner, for specific time-periods

8 during which the organizations used the same space for bingo games, and the landlord maintained

9 control over the premises, but each of the tenant organizations had exclusive possession of their

10 own floor safes and secure storage closets where they were able to keep their own property under

11 lock and key. See Quantum Corp., ¶ 21. The regulations offer a reasonable interpretation of

12 applicable law based in statute and common law.

13 Here, the Taxpayers provided evidence that the designated spaces were indeed marked on a

14 map of the property, marked with signs, identified in the written contracts, and the tenant had the

15 contractual right to exclude any other person or vehicle from the designated space, nevertheless the

16 Department showed the fact of the physical, practical ability to actually exclude was elusory

17 because the spaces were not enclosed. The agreements at issue appear to create leases, yet the

18 physical attributes of the property, most notably the absence of enclosure of that property, suggest

19 the common law requirements of a lease have not been met, therefore the agreement can only be a

20 mere license to use the space. Therefore, the self-storage facilities here may create leases of real

21 property if there is both a “permanently assigned” space and some improved enclosure (provided

22 that the term, rent and access provisions are also met) by being physically “partitioned off.” See

23 Tips, at 527. But by providing assigned open-air and overhead covered parking spaces at issue here,

In the Matter of the Protest of A Class RV Storage, page 37 of 42.
1 with only survey whiskers showing the bounds of assigned space, the Department was correct in

2 determining that a license is created. “Where an exemption or deduction from tax is claimed, the

3 statute must be construed strictly in favor of the taxing authority, the right to the exemption or

4 deduction must be clearly and unambiguously expressed in the statute, and the right must be

5 clearly established by the taxpayer.” See Sec. Escrow Corp. v. State Taxation & Revenue Dep't,

6 1988-NMCA-068, ¶8, 107 N.M. 540, 760 P.2d 1306.

7 Interest and Civil Penalty

8 When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

9 paid to the state on that amount from the first day following the day on which the tax becomes

10 due...until it is paid.” NMSA 1978, § 7-1-67 (2007) (italics for emphasis). Under the statute,

11 regardless of the reason for non-payment of the tax, the Department has no discretion in the

12 imposition of interest, as the statutory use of the word “shall” makes the imposition of interest

13 mandatory. See Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22,

14 146 N.M. 24 (use of the word “shall” in a statute indicates provision is mandatory absent clear

15 indication to the contrary). The language of the statute also makes it clear that interest begins to run

16 from the original due date of the tax and continues until the tax principal is paid in full.

17 Under NMSA 1978, Section 7-1-69 (2007), when a taxpayer fails to pay taxes due to the

18 State because of negligence or disregard of rules and regulations, but without intent to evade or

19 defeat a tax, the Department must impose a civil negligence penalty on that taxpayer.

20 As discussed above, Section 7-1-69 use of the word “shall” makes the imposition of penalty

21 mandatory in all instances where a taxpayer’s actions or inactions meets the legal definition of

22 “negligence.” See Marbob, ¶22.

In the Matter of the Protest of A Class RV Storage, page 38 of 42.
1 Taxpayers provided adequate evidence that the failure to pay taxes in this case was not only

2 unintentional but was after seeking advice from a CPA. Taxpayers’ reliance on advice of a trained

3 tax professional, after disclosure of the business model and the proposed deductions, proved that it

4 made a mistake of law in good faith and on reasonable grounds under Section 7-1-69 (B) by

5 showing the reporting error was nonnegligence, allowing for abatement of penalty under Regulation

6 3.1.11.11 NMAC (01/15/01).

7 The evidence presented indicated that the Taxpayers’ principal owner relied on advice of a

8 CPA when determining whether the deduction applied. See C & D Trailer Sales v. Taxation and

9 Revenue Dep’t, 1979-NMCA-151, ¶8-9, 93 N.M. 697 (penalty upheld where there was no evidence

10 that the taxpayer “relied on any informed consultation” in deciding not to pay tax). Because the

11 matter is decided on the basis of conference with a CPA, the Taxpayer’s other contention that they

12 also sought advice from a departmental employee is not considered. Therefore, the Department’s

13 imposition of civil penalty shall be abated.

14 CONCLUSIONS OF LAW

15 A. Taxpayers filed timely, written protests of the Department’s assessments and

16 jurisdiction lies over the parties and the subject matter of this protest.

17 B. The initial hearings were timely set and held within 90-days of protest under NMSA

18 1978, Section 7-1B-8 (A) (2015). Parties did not object that the initial scheduling hearings

19 satisfied the 90-day hearing requirement of Section 7-1B-8 (A).

20 C. The parties to the rental agreements at issue here intended to create leases of real

21 property, “an arrangement whereby, for a consideration, property is employed for or by any person

22 other than the owner of the property.” NMSA 1978, Section 7-9-3 (E).

In the Matter of the Protest of A Class RV Storage, page 39 of 42.
1 D. The rental agreements at issue here have no express or implied right of revocation in

2 favor of the landowner, although the landowner maintains some degree of control over the premises.

3 Tarin’s Inc. v. Tinley, 2000-NMCA-048.

4 E. The physical attributes of the open-air rental spaces prevented the formation of a

5 lease for lack partition and of exclusivity. Grogan v. N.M. Taxation and Revenue Dep’t., 2003-

6 NMCA-033, ¶27 (“A lease gives the tenant the right of possession against the world… For a

7 lease to exist, the lessee must acquire some definite control of and dominion over the

8 premises.”). Tips et al. v. United States, 70 F.2d 525, 1934 U.S. App. LEXIS 4214 (dominion

9 and control requires both a permanently assigned space and a physical partition).

10 F. The physical attributes of the open-air rental space prohibited the Taxpayers from

11 granting exclusive possession, use, and access to the rental spaces. Regulation 3.2.211.17 NMAC

12 (8/15/12).

13 G. Penalties should be abated because by obtaining advice from a CPA Taxpayers

14 were not negligent in reporting Gross Receipts as they did. NMSA 1978, Section 7-1-69 (B);

15 Regulation 3.1.11.11 NMAC (01/15/01).

16 For the foregoing reasons, the Taxpayer’s protest IS DENIED IN PART and GRANTED

17 IN PART. Therefore, it is hereby ORDERED that the Taxpayers are liable for the underlying tax

18 and interest, and the Department shall abate all accrued penalties for all three entities. A Class RV

19 Storage (Second Street) is liable for tax of $19,486.39 and interest of $2,332.52 (plus additional

20 accrued interest). A Class RV Storage (Second Street) civil penalty in the amount of $3,897.29 is

21 ordered abated. A Class RV Storage at Journal Center (Paseo) is liable for tax of $23,408.10 and

22 interest of $3,748.71 (plus additional accrued interest). A Class RV Storage at Journal Center

23 (Paseo) civil penalty in the amount of $4,657.56 is ordered abated. A Class RV Storage at Osuna

In the Matter of the Protest of A Class RV Storage, page 40 of 42.
1 (Osuna) is liable for tax of $58,917.06 and interest of $5,383.74 (plus additional accrued interest).

2 A Class RV Storage at Osuna (Osuna) civil penalty in the amount of $11,758.14 is ordered abated.

3 DATED: October 24, 2019.

4
5 Ignacio V. Gallegos
6 Hearing Officer
7 Administrative Hearings Office
8 P.O. Box 6400
9 Santa Fe, NM 87502

10 NOTICE OF RIGHT TO APPEAL

11 Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

12 decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

13 date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

14 Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

15 the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

16 Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

17 Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

18 Hearings Office may begin preparing the record proper. The parties will each be provided with a

19 copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

20 which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

21 statement from the appealing party. See Rule 12-209 NMRA.

22 CERTIFICATE OF SERVICE

In the Matter of the Protest of A Class RV Storage, page 41 of 42.
1 On October 24, 2019, a copy of the foregoing Decision and Order was submitted to the

2 parties listed below in the following manner:

3 First Class Mail Interdepartmental Mail

4 INTENTIONALLY BLANK
5
6 John Griego
7 Legal Assistant
8 Administrative Hearings Office
9 P.O. Box 6400
10 Santa Fe, NM 87502

In the Matter of the Protest of A Class RV Storage, page 42 of 42.