Is renting out space to others a tax-exempt real-property lease, or a taxable license to use my property?

Plain-English summary

Quantum Corporation remodeled three Albuquerque buildings (Casino Park, Freeway 7, and Route 66) into bingo halls and rented them to non-profit bingo operators for scheduled "sessions," under agreements it called "Bingo Leases." State licensing rules cap bingo-session rent at $100, so Quantum charged $150 per session — $100 for the premises and $50 for equipment — and also ran a snack bar in each hall. Quantum treated all of its rental receipts as exempt receipts from the lease of real property under § 7-9-53 and reported no gross receipts tax. The Department audited and assessed it. Hearing Officer Gerald B. Richardson decided four issues, granting the protest in part and denying it in part:

1. Lease vs. license — the receipts were a taxable license (denied)

The deduction in § 7-9-53 is for the lease of real property, but § 7-9-3(J) says that granting a license to use property is the sale of a license, not a lease. The label "Bingo Lease" doesn't control; the character comes from the intention of the parties (Transamerica Leasing). The decisive factor is exclusive possession and control (49 Am Jur 2d, Landlord and Tenant §§ 21–22; Cutter Flying Service; S.S. Kresge). Some features looked lease-like (a defined space, a one-year term, rent owed whether or not the hall was used, operators carrying their own insurance) — and the short "session" length didn't defeat a lease (Strebeck Properties). But the operators lacked exclusive possession: Quantum could enter the halls at any time without restriction and kept its own employees on site during sessions (running the snack bar and using the restrooms). Quantum also retained substantial control — dictating permitted uses, barring children and outside food, forbidding alterations or even thermostat adjustments, and overriding the operators' management committee. On balance, this was a license, so the receipts were taxable and the deduction was denied. (The subsidiary question of whether 85% of the equipment rent was for "fixtures" didn't need to be decided.)

2. Video security-system reimbursements — taxable, no agency (denied)

Quantum bought and installed a video surveillance system at Route 66 and recovered each operator's share over time. It argued it was acting as the operators' agent paying a vendor on their behalf, which would put the reimbursements outside gross receipts (the common-law trustee/agent exception, Westland). Applying Carlsberg Management and Brim Healthcare, the Hearing Officer found no agency: the operators were only obligated to provide security guards, not camera systems; only Route 66 had one; Quantum bought the system in its own name with no disclosure of any agency to the vendor; and it was recouping its own purchase, not acting as a conduit. So those receipts were taxable as a sale of the system to the operators.

3. The 1988 assessment was not time-barred (denied)

Because Quantum reported no gross receipts tax, it understated its liability by more than 25%, triggering the six-year assessment window (§ 7-1-18(D)). Quantum said the 1988 tax was barred because it didn't actually receive Assessment No. 1882465 (mailed December 28, 1994 to a P.O. box it used for another company) until January 1995. But an assessment is effective when mailed, not when received (§ 7-1-17(B)(2)), and a mailing is proper if sent to the last address on the taxpayer's registration record (§ 7-1-9(A)) — which was that P.O. box (per Quantum's own 1990 registration-change request). The mailing was proper and within six years, so the 1988 assessment stood.

4. Penalty abated — reasonable reliance on counsel (granted)

The negligence penalty (§ 7-1-69(A)) applies when a taxpayer fails to pay due to negligence. Quantum had not reported the tax on the advice of its attorney — who had also drafted the bingo lease agreements and therefore knew all the relevant facts — and similar oral advice from a Department employee. Under Regulation 3 NMAC 1.11.11 (formerly 69:4), reasonable reliance on competent tax counsel after full disclosure negates negligence. Quantum's reliance was reasonable, so the penalty was abated.

What this means for you

Calling it a "lease" doesn't make it one — exclusive possession is the test

If you rent out space, the gross receipts tax turns on whether your customer gets exclusive possession and control, not on what the contract is titled. Keep the right to walk in whenever you want, station your own staff on site, and tightly restrict how the space is used, and you likely have a taxable license, not an exempt real-property lease. If you want the § 7-9-53 lease deduction, the arrangement has to actually hand over exclusive possession of a defined space.

Short-term or session-based rentals can still be leases — or licenses

The brevity of a rental period, by itself, doesn't disqualify it from being a lease (a coin-op washing machine "lease" counts). The question remains exclusivity and control. Don't assume that hourly, daily, or "session" rentals are automatically one or the other; analyze possession.

Reimbursements are taxable unless you're a true agent

Collecting money to cover a cost doesn't make it non-taxable. The agent/trustee exception applies only when you're a genuine conduit paying someone else's obligation — ideally with the obligation contractually theirs, an agency designation, and disclosure to the vendor. If you buy something in your own name and recoup the cost, that's a taxable sale, even if the buyers benefit.

An assessment is effective when mailed to your address of record — keep it current

New Mexico assessments and notices are effective when mailed to the last address in your registration record, whether or not you actually receive them. Quantum lost its statute-of-limitations argument because the Department mailed to the P.O. box on its own most recent registration-change request. Update your registered address promptly and separately from the address you put on your returns.

Written reliance on a fully-informed tax adviser can defeat the penalty

Even when you owe the tax, the negligence penalty can be abated if your failure to pay rested on reasonable reliance on competent tax counsel after full disclosure. Quantum's attorney had drafted the very agreements at issue, so he knew the facts, and that reliance negated negligence. Get the advice from someone who has all the facts — and note that reliance on an agent does not excuse a late-filed return.

Common questions

Q: I signed a "lease," so my rental income is a tax-exempt real-property lease, right?
A: Not necessarily. The title doesn't control. New Mexico looks at whether the tenant has exclusive possession and control of a defined space. If you can enter at will, keep staff on site, and heavily restrict the tenant's use, it's likely a taxable license, and the § 7-9-53 deduction doesn't apply.

Q: My rentals are only for short sessions. Does that make them licenses automatically?
A: No. Short duration alone doesn't turn a lease into a license (or vice versa). The analysis still comes down to exclusive possession and control, not how long each rental lasts.

Q: I collected money from my tenants to pay for equipment they wanted. Is that taxable?
A: Usually yes, unless you were acting as their true agent — a mere conduit paying an obligation that was contractually theirs, typically with disclosure to the vendor. Here the company bought the system in its own name and recouped the cost, so the reimbursements were taxable receipts.

Q: The Department mailed my assessment to an old or wrong address and I never got it. Is it invalid?
A: Not if it was mailed to the last address in your registration record. An assessment is effective when mailed under § 7-1-17(B)(2), and § 7-1-9(A) makes a mailing to your address of record proper even if you don't receive it. Keep your registered address up to date.

Q: Can relying on my attorney or accountant get a penalty removed?
A: It can. Reasonable reliance on competent tax counsel after full disclosure of the facts negates negligence and abates the penalty (Regulation 3 NMAC 1.11.11). It helps if the adviser genuinely knew all the facts — as the attorney here did, having drafted the agreements. Reliance on an agent does not, however, excuse failing to file a return on time.

Citations and references

Statutes and regulations:

• § 7-9-53(A) NMSA 1978 — deduction from gross receipts for receipts from the sale or lease of real property
• § 7-9-3(J) NMSA 1978 — "leasing" means employing property, for consideration, for or by a person other than the owner, except that granting a license to use property is the sale of a license, not a lease
• § 7-9-4(A) NMSA 1978 — gross receipts tax imposed on any person engaging in business in New Mexico
• § 7-9-3(F) NMSA 1978 — "gross receipts" means the total money or value of other consideration received from selling property, leasing property employed in New Mexico, or performing services
• § 7-9-5 NMSA 1978 — presumption that all receipts of a person engaging in business are subject to gross receipts tax
• § 7-1-17(B)(2) NMSA 1978 — an assessment of taxes is effective when the notice of assessment is mailed or delivered in person to the taxpayer
• § 7-1-9(A) NMSA 1978 — a notice required to be given by mail is effective if mailed to the last address shown on the taxpayer's registration certificate or other record of the Department
• § 7-1-18(D) NMSA 1978 — where a return understates liability by more than 25%, assessment may be made within six years of the end of the calendar year in which the tax was due
• § 7-1-69(A) NMSA 1978 — 2%-per-month penalty (up to 10%) for failure to pay due to negligence or disregard of rules, without intent to defraud; Regulation TA 69:3 — defines negligence
• Regulation 3 NMAC 1.11.11 (formerly Regulation 69:4), No. 4 — reasonable reliance on the advice of competent tax counsel or accountant, after full disclosure of relevant facts, may show the taxpayer was not negligent (but does not excuse an untimely-filed return)
• § 7-1-24 NMSA 1978 — timely written protest of an assessment; § 7-9-11 NMSA 1978 — gross receipts tax return due dates

Cases and authorities cited:

• 49 Am Jur 2d, Landlord and Tenant §§ 21, 22 — lease vs. license; a lease requires exclusive possession of a defined space, while a license merely permits use subject to the owner's control
• New Mexico Sheriffs and Police Ass'n v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973) — undefined statutory terms take their ordinary meaning
• Transamerica Leasing v. Bureau of Revenue, 80 N.M. 48, 450 P.2d 934 (Ct. App. 1969) — the character of an instrument is determined by the parties' intention, not its form or label
• Strebeck Properties, Inc. v. Bureau of Revenue, 93 N.M. 262, 599 P.2d 1059 (Ct. App. 1979) — very short-term arrangements can still be "leases"
• Cutter Flying Service, Inc. v. Property Tax Department, 91 N.M. 215, 572 P.2d 943 (Ct. App. 1977) — exclusive-possession areas are leaseholds; jointly-used areas are mere licenses
• S.S. Kresge Company v. Bureau of Revenue, 87 N.M. 259, 531 P.2d 1232 (Ct. App. 1975) — agreements to use in-store space to retail goods were licenses, not deductible real-property leases
• Westland, Corp. v. Commissioner of Revenue, 83 N.M. 29, 487 P.2d 1099 (Ct. App.), cert. denied, 83 N.M. 22, 487 P.2d 1092 (1971) — common-law exclusion from gross receipts for amounts received as a trustee or agent
• Carlsberg Management Co. v. New Mexico Taxation and Revenue Department, 116 N.M. 247, 861 P.2d 288 (Ct. App. 1993) — agency exception where a party only receives advances or reimbursements for another's obligations
• Brim Healthcare, Inc. v. State, Taxation and Revenue Department, 119 N.M. 818, 896 P.2d 498 (Ct. App. 1995) — no agency where the taxpayer receives funds for its own account to meet its own responsibilities; the key is whose employees/obligations are at issue

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Quantum Corporation
• Decision PDF: D&O 96-24

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
QUANTUM CORPORATION,
ID. NO. 02-937837-00 8, No. 96-24
PROTEST TO ASSESSMENT NOS.
1882465 AND 1968349

DECISION AND ORDER

This matter came on for formal hearing before Gerald B. Richardson, Hearing Officer, on

October 1, 1996. Quantum Corporation, hereinafter, "Taxpayer," was represented by Robert D.

Gorman, Esq. The Taxation and Revenue Department, hereinafter, "Department," was represented by

Gail MacQuesten, Special Assistant Attorney General. Based upon the evidence and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a New Mexico corporation whose business is to acquire buildings,

through lease agreements, which it remodels and customizes for purposes of conducting bingo games.

It then enters into "Bingo Lease" agreements with non-profit operations who conduct bingo games

during specified periods or "sessions" pursuant to the bingo lease agreements. The Taxpayer also

operates a snack bar operation in those buildings during the bingo sessions.

2. The Bingo Lease agreements describe the "premises" leased by describing the name of

the bingo hall building and giving its street location. The premises are described to include the

equipment located on the premises. The premises specifically exclude a designated amount of square

footage for the snack bar area.

3. The operation of bingo games is regulated by the Bingo and Raffle Act which is

administered by the New Mexico Regulation and Licensing Department. The Taxpayer is not licensed

to conduct bingo games under the Bingo and Raffle Act, but the non-profit entities, hereinafter "bingo
operators" which enter into Bingo Lease agreements with the Taxpayer are licensed to do so.

4. The Regulation and Licensing Department limits the amount of rent that bingo

operators may pay for bingo sessions to $100 per session. The Regulation and Licensing Department

does not regulate the rent that bingo licensees may pay for the rental of bingo equipment. In order to

adequately compensate the Taxpayer for providing the premises and equipment to the bingo operators

the Bingo Lease provides for rental payments of $150 per session, broken down into $100 per session

for rent for the premises and $50 for rent for equipment. The lease does not identify or otherwise

specify what is "equipment" under the lease.

5. The Taxpayer leases three buildings in Albuquerque which it customized for purposes

of conducting bingo games. Those bingo halls are called Casino Park, Freeway 7 and Route 66.

6. The Regulation and Licensing Department limits bingo licensees to five bingo sessions

per week and no more than two sessions per day. The Taxpayer, to maximize its rental revenues, has

found that what works best is to seek to have seven bingo operators per building, with four sessions per

week per operator.

7. The bingo halls are large open spaces, with tables and folding chairs set up for bingo

patrons. There is a bingo flashboard which shows the numbers pulled out from the blower machine,

which tumbles the balls upon which the bingo call numbers are written. There are television monitors

which display the balls and call numbers as they are pulled from the blower machine. There are

counters from which pull tabs are sold. There is a manager's office, which is available for use by each

bingo operator during its bingo session. Each bingo operator has a floor safe which is located in the

manager's office for its exclusive use. Each building also has a public address system and speakers.

There are secure storage closets at each bingo hall, with the bingo operators having exclusive access to

their storage closets in which they can store all of their bingo supplies.

8. The Taxpayer operates a snack bar in each bingo hall during bingo sessions. Each

bingo lease agreement specifically excludes from the premises leased the square footage allocated for

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operation of the snack bar. The snack bars are staffed by employees of the Taxpayer.

9. The Taxpayer enters into a Bingo Lease agreement with each bingo operator for a one

year term. The lease term is further limited to specified "sessions," which range in length from two

and one half hours to twenty-five minutes. The rent of $150 per session is the same regardless of the

length of the session. The bingo operator is given access to the bingo hall one-half hour before and

after each session for purposes of setting up and closing their bingo operation. Bingo operators may

also make reasonable requests to the Taxpayer for access at other times. Each bingo operator is given

a building key and the alarm code for the building.

10. The bingo leases establish a management committee, consisting of the managers of

each bingo operator, as well as a representative from the Taxpayer. The management committee may

set policies for the building. The bingo leases also provide that the Taxpayer, in its sole discretion may

also establish building policies and in the event of a conflict or inconsistency between the policy set by

the building committee and the Taxpayer, the Taxpayer's policy will control.

11. Under the bingo leases, rent is due for all designated sessions during the lease term

even if a bingo operator does not actually use the building for the operator's designated sessions.

12. The bingo leases prohibit the bingo operators from assigning or subletting their interest

under the lease and prohibit them from making alterations, improvements or additions to the premises

without the written consent of the Taxpayer.

13. The bingo leases require the bingo operators to allow the Taxpayer to enter the

premises at any time. The leases impose no restrictions on the purposes for which the Taxpayer may

enter the premises.

14. Under the bingo leases, the costs of utilities and janitorial supplies are equally divided,

in pro-rata shares, between the various bingo operators and the Taxpayer, as operator of the snack bar.

The Taxpayer handles the payment of these expenses and obtains pro-rata reimbursement of these

expenses from the various bingo operators.

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15. The bingo operators are limited in their use of the bingo halls under the bingo lease

agreements. The operators may only use the premises for operating bingo sessions and related

services. The operators may not permit their children or their employees children under the age of 14

in the building. Operators may not allow food or drink to be brought into the building from the

outside. The operators and their employees are prohibited from adjusting the heating or air

conditioning systems and must refer requests to adjust those systems to the Taxpayer. Shopping carts

and bicycles are not allowed in the building. Operators may not permit solicitation to be conducted in

the bingo halls.

16. The bingo operators are required to carry public liability insurance covering bodily

injury and property damage liability arising from the use of the bingo halls.

17. The bingo operators at the Route 66 bingo hall desired that a security camera system be

purchased and installed in the bingo hall. The Taxpayer secured a loan and with the loan proceeds it

purchased a security camera system and had it installed. The Taxpayer charges each bingo operator a

proportionate share of the cost of purchase and financing the security camera system and obtains

reimbursement of those costs in monthly increments from the bingo operators.

18. The bingo operators are required to provide security guards for their bingo sessions.

19. The bingo lease provides that the lease shall not be deemed an asset of the lessee as a

result of an assignment for the benefit of creditors, the adjudication of bankruptcy, the appointment of a

receiver or the issuance of various writs or other court orders against the lessee or the lessee's property.

20. The Taxpayer was advised by its attorney, Peter Lindborg, that it was not liable for

gross receipts tax upon its rental receipts from the bingo operators because such receipts were exempt

from taxation as receipts from the lease of real property.

21. An employee of the Taxpayer had a telephonic discussion with an unknown

Department employee and was advised that the receipts from the lease of real property are exempt from

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gross receipts tax. It was also explained that to the extent that equipment is a fixture to real property,

receipts from leasing such equipment would also be exempt as receipts from the lease of real property.

The Taxpayer never sought a written ruling from the Department with regard to its taxability under the

specific terms of the bingo lease agreements with the bingo operators.

22. The Taxpayer did not report or pay gross receipts tax upon its receipts under the terms

of the bingo lease agreements.

23. The Taxpayer was audited by the Department.

24. The Taxpayer's business location, since it started business in 1984 is 5700 Harper, NE,

Suite 390, Albuquerque, NM 87103.

25. Mr. Rick Archuleta owns both the Taxpayer and Mentor Corporation. Mentor

Corporation's mailing address, since 1978, has been PO Box 343, Albuquerque, NM 87103.

26. On December 28, 1994, the Department mailed the Taxpayer Assessment No. 1882465

using PO Box 343, Albuquerque, NM 87103 as the mailing address for the Taxpayer.

27. The Taxpayer never received the copy of Assessment No. 1882465 mailed on

December 28, 1994.

28. The Taxpayer learned of Assessment No. 1882465 when it received a billing notice

from the Department which was postmarked on January 5, 1995 which was mailed to the Taxpayer at

the 5700 Harper address.

29. Assessment No. 1882465 assessed $58,947.07 in gross receipts tax, $5,894.71 in

penalty and $42,998.86 in interest for the reporting period of January 1, 1988 through December 31,

1991.

30. The Taxpayer requested an extension of time to protest Assessment No. 1882465 and

was granted an extension of time until March 28, 1995 by the Department.

31. On March 23, 1995 the Taxpayer filed a written protest to Assessment No. 1882465

with the Department.

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32. The Department later adjusted Assessment No. 1882465 to reduce the gross receipts tax

assessed to $49,093.86, to reduce the penalty to $4,909.39 and reduce the interest (through the

assessment date) to $42,317.05.

33. On October 30, 1995 the Department mailed Assessment No. 1968349 to the Taxpayer,

assessing $73,223.86 in gross receipts tax, $7,322.40 in penalty and $ 25,340.47 in interest.

34. On November 12, 1995 the Taxpayer filed a written protest to Assessment No.

1968349 with the Department.

35. The Department's registration records at the time that Assessment No. 1882465 was

mailed to the Taxpayer reflected that the Taxpayer's mailing address was PO Box 343, Albuquerque,

NM 87103.

36. On March 8, 1990, the Taxpayer mailed the Department a registration change request

which reflected the Taxpayer's current mailing address to be PO Box 343, Albuquerque, NM 87103.

The registration change request was signed by Dave Hill, whose title was listed as "Bookkeeper."

37. The Department had no record of receiving anything from the Taxpayer subsequent to

the March 8, 1990 registration change request which requested that the Department change its records

to reflect a different address for the Taxpayer than the PO Box 343 address.

38. The Taxpayer uses the 5700 Harper address when filing its monthly CRS-1 returns with

the Department.

DISCUSSION

The primary issue for determination herein is whether the Taxpayer's rental receipts from the

bingo operators are receipts from the lease of real property, which are deductible from gross receipts

tax pursuant to Section 7-9-53 NMSA 1978 or whether they are receipts from granting a license to use

real property, which receipts would be subject to tax.

Section 7-9-53(A) provides in pertinent part as follows:
Receipts from the sale or lease of real property and from the lease of a manufactured home as
provided in Subsection B of this section, ... may be deducted from gross receipts.

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Although "lease" is not defined in the Gross Receipts and Compensating Tax Act, Chapter 7, Article 9

NMSA 1978, "leasing" is defined as follows:
"leasing" means any arrangement whereby, for a consideration, property is employed for or by
any person other than the owner of the property, except that the granting of a license to
use property is the sale of a license and not a lease; (emphasis added).

Section 7-9-3(J) NMSA 1978. Although the definition of leasing appears to be quite broad, the

inclusion of language specifically excepting licenses makes it clear that mere licenses to use property

do not amount to a lease of property. Licenses are not defined under the Gross Receipts and

Compensating Tax Act. In the absence of a statutory definition, the term "license" is to be given its

ordinary meaning. New Mexico Sheriffs and Police Ass'n v. Bureau of Revenue, 85 N.M. 565, 514

P.2d 616 (Ct. App. 1973).

The distinction between a lease of real property and a license to use real property is discussed at

49 Am Jur 2d, Landlord and Tenant §21, wherein it is stated:
Whether an instrument is a license or a lease depends on the intention of the parties as
ascertained from the instrument itself. A license is an agreement which merely entitles
a party to use the land of another for a specific purpose, subject to the management and
control retained by the owner; a license conveys no interest in the land, is ordinarily not
assignable, and may be contracted for or given orally. In contrast, a lease conveys an
interest in land, must be in writing in order to comply with the statute of frauds, and
transfers possession of the land. Exclusive possession of the leased premises is
essential to the character of a lease; if the instrument does not grant possession, but
grants only the privilege to use the premises under the owner, the instrument is a
license, not a lease. There must be a conveyance of a definite space in order for a
lease, rather than a license to exist; both the extension and the location of the space
within the lessor's premises must be specified. In addition, a lease may also be
distinguished from a license in that the terms of a lease is limited to endure for a
definite and ascertained period, however short or long the period may be.

Examining the Bingo Lease Agreement at issue herein, it appears that there are elements indicating

both the existence of a lease and the existence of a license, making the determination of this issue a

difficult task.

The Bingo Lease Agreement calls itself a "lease," but that is not determinative in itself. This is

because the character of the instrument is not to be determined by its form but from the intention of the

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parties as shown by the contents of the instrument. Transamerica Leasing v. Bureau of Revenue, 80

N.M. 48, 450 P.2d 934 (Ct. App. 1969). The elements of this agreement which are consistent with its

characterization as a lease of real property follow. There is a conveyance of a definite space, the bingo

hall, less the square footage for the snack bar area. There is also a definite term to the lease, one year,

although it is broken down into rather short sessions, ranging from a little over one hour (including set

up and break down time) to several hours at a time during each week of the lease term. In this regard,

the Department argues that the fact that the property is leased during these short "sessions" is a factor

which indicates a license rather than a lease. Although I must admit that I find it conceptually difficult

to conceive of a lease of real property for such short periods of time, I found nothing in my research to

support this conclusion, and in fact, the Court of Appeals decision in Strebeck Properties, Inc. v.

Bureau of Revenue, 93 N.M. 262, 599 P.2d 1059 (Ct. App. 1979) indicates that one can "lease" a coin

operated washing machine by paying for a wash cycle, although this case dealt with a lease of tangible

personal property rather than a lease of real property. Thus, I am unable to conclude that the short

nature of the sessions precludes consideration of the bingo leases as leases. Other factors indicating a

lease are that the bingo operators are liable for rent regardless of whether they actually use the bingo

hall during their allotted sessions, that the bingo operators are required to carry public liability

insurance for damages arising from their use of the bingo halls, and the bingo operators are required to

provide their own security guards during their bingo sessions.

There are also factors which are indicative of a license rather than a lease, however. Perhaps

the most significant factor in determining whether a lease or a license exists is whether the tenant's

possession of the premises is exclusive. As stated in 49 Am Jur 2d Landlord and Tenant, §22:
The lessee's possession of the leased premises is essential to the character of a lease. To create
a leasehold estate, the tenant must be vested with exclusive possession of the property
to the lessee, even against the owner of the fee. In addition, there is authority for the
view that although a person may be in possession of the premises, he or she is not a
"lessee" unless he or she also has exclusive control of the premises.

In determining the existence of a lease or a license with respect to real property, New Mexico's courts

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have based their determination on the issue of the exclusivity of possession. Cutter Flying Service,

Inc. v. Property Tax Department, 91 N.M. 215, 572 P.2d 943 (Ct. App. 1977), involved the

determination of whether certain leasehold interests acquired by airlines and airport operators from the

City of Albuquerque were subject to ad valorem taxation as interests in real property or whether they

were personal property exempt from taxation. The court ruled that for areas where the tenants had

exclusive possession, such as an airline's ticket counter, baggage handling counter and operations space

the tenants interests were leasehold interests in real property and were subject to tax, but for areas used

jointly with other airlines such as passenger gates and holding areas, baggage claim areas, runways and

ground areas used for parking, taxiing, loading and unloading aircraft, the tenants held mere licenses to

use property, which were not subject to taxation. Id. 91 N.M. at 219-220. Similarly, in a case

involving the same deduction at issue herein for receipts from leasing real property, the Court of

Appeals ruled that the taxpayer's receipts from companies pursuant to agreements which provided for

the use of space in the taxpayer's department stores for the purpose of retailing certain items were not

deductible because there were licenses to use property and not leases of real property. S.S. Kresge

Company v. Bureau of Revenue, 87 N.M. 259, 531 P.2d 1232 (Ct. App. 1975).

In this case, although the Taxpayer argues that the bingo operators are given exclusive

possession of the premises during their sessions, the facts show otherwise. The bingo leases require

the bingo operators to allow the Taxpayer to enter the premises at any time and impose no restrictions

(such as a limited right of entry for purposes of inspecting the premises) on the Taxpayer's right of

entry. In fact, the Taxpayer has its employees in the bingo halls during the bingo operator's sessions

because the Taxpayer's employees manage the snack bar during the sessions. The Taxpayer admitted

that its employees would have access to areas other than just the snack bar during sessions, such as the

restrooms in the building.

The issue of control of the premises is also indicative of a license rather than a lease of the

bingo halls. The Taxpayer manages the building, ensuring that utility bills are paid and janitorial

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supplies are stocked and provided, and it obtains a pro-rata reimbursement from each bingo operator.

The Taxpayer admitted that if a water pipe burst in the building, it would be responsible for taking care

of the situation. Under the Bingo Lease Agreements, the Taxpayer retains substantial control over the

bingo halls. The agreements limit the use of the buildings to conducting bingo and related services.

Children are not allowed in the building, nor may the operators allow their customers to bring food and

drink into the building from outside. Shopping carts and bicycles are not allowed in the building. The

bingo operators cannot make any alterations or improvements to the bingo halls without the Taxpayer's

consent. The bingo operators cannot even adjust the heating or cooling systems in the building, but

must request any adjustments through the Taxpayer. Also, although the bingo operators form a

management committee to set building policies, those policies are subject to and subservient to any

policies determined by the Taxpayer. Thus, the Taxpayer retains a substantial amount of control over

the bingo halls even during the bingo sessions.

The Bingo Lease Agreements also provide that the lease is not to be considered an asset of the

bingo operator which could be assigned to creditors or treated as an asset of the operator in the event of

a bankruptcy. This provision is consistent with the concept that licenses are terminable or revocable,

in contrast to a lease which, because it constitutes an interest in real property during its term, would

qualify as an asset of a debtor.

Weighing the indicia of a lease against the indicia of a license to use the property, I find that the

absence of exclusive possession and control of the bingo halls by the bingo operators indicative of a

license to use property rather than the lease of real property, and therefore the Taxpayer's receipts from

rental of the bingo halls are subject to gross receipts. Having determined this, the subsidiary issue of

whether the portion of the rent attributable to the rental of equipment is subject to tax need not be

determined, because this issue turned on the Taxpayer's contention that 85 percent of the equipment

rental receipts were for equipment which could be considered a fixture to the real estate being leased,

which would also render those receipts deductible pursuant to Section 7-9-53(A) NMSA 1978.

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  The next issue to be determined is whether the amounts that the Taxpayer received from the

bingo operators to reimburse it for the cost of purchasing and installing a video surveillance system in

the Route 66 bingo hall are gross receipts which are subject to tax. Apparently, the bingo operators

decided that they wanted a video surveillance system which they could use during their bingo sessions.

The building management committee met and determined which system they wanted. The Taxpayer

agreed to purchase and install the system and to recoup its costs for doing so by spreading each bingo

operator's share of the cost over time, receiving monthly payments to repay those costs. The Taxpayer

purchased the system from a vendor and had it installed in the building.

The Taxpayer argues that because the bingo operators are responsible for providing security

and since the video camera system is for the purposes of satisfying their obligation to provide security

and is for their benefit, that the payments to the Taxpayer were received by the Taxpayer as an agent for

the operators in satisfying their obligation to the vendor of the system.

The gross receipts tax "is imposed on any person engaging in business in New Mexico."

Section 7-9-4(A) NMSA 1978 (1995 Repl. Pamp.). The tax is imposed upon gross receipts, which

means "the total amount of money or the value of other consideration received from selling property in

New Mexico, from leasing property employed in New Mexico, from selling services performed outside

New Mexico the product of which is initially used in New Mexico or from performing services in New

Mexico." Section 7-9-3(F) NMSA 1978 (1995 Repl. Pamp.). There is a presumption that all receipts

of a person engaging in business are subject to the gross receipts tax. Section 7-9-5 NMSA 1978 (1995

Repl. Pamp.). The taxpayer therefore has the burden of overcoming this presumption that all of its

receipts are subject to tax.

There is no statutory exclusion in the Gross Receipts and Compensating Tax Act, Chapter 7,

Article 9 NMSA 1978 for money received as reimbursement for business expenses. The courts have

recognized a common law exception, however, to exclude from gross receipts amounts which are

received in the capacity of a trustee or agent. See, Westland, Corp. v. Commissioner of Revenue, 83

• 11 -
  N.M. 29, 33, 487 P.2d 1099 (Ct. App.), cert. denied, 83 N.M. 22, 487 P.2d 1092 (1971).

The issue of determining when a taxpayer's reimbursed expenses qualify for the agency

exception to the imposition of gross receipts tax is a difficult one which has been the subject of

extensive discussion by our courts in recent years. See, Carlsberg Management Co. v. New Mexico

Taxation and Revenue Department, 116 N.M. 247, 861 P.2d 288 (Ct. App. 1993), and Brim

Healthcare, Inc. v. State, Taxation and Revenue Department, 119 N.M. 818, 896 P.2d. 498 (Ct. App.

1995). The Carlsberg case involved a determination of whether a property management company

which managed apartments in a federally subsidized rent program on behalf of the apartment owner

was liable for gross receipts tax upon its reimbursements of employment expenses incurred with respect

to employees retained to manage and operate the apartments. The rule adopted by the court in its

decision is if a party only receives money either as an advance for future payment of or reimbursement

for past payment of another's employment related obligations, then an agency relationship exists

sufficient to avoid taxation of those funds as gross receipts. Id. at 251, 861 P.2d at 292. In that case,

the court then examined the contractual agreement between the apartment owner and the management

company (the taxpayer), looking at the degree of control retained by the owner with respect to the

taxpayer's payment of employee related expenses. Because the apartment rents were federally

subsidized, there were extensive federal requirements which the court concluded left the taxpayer with

no discretion concerning the timing of payroll, the wages to be paid, etc. The court also concluded that

the broad indemnification clause in the contract requiring the owner to pay the taxpayer for these

employment expenses was an indication that the payment of wages to these on-site employees was

ultimately the duty of the owner and not the manager. Based on these considerations, the court

concluded that an agency relationship existed and that the taxpayer was not subject to gross receipts

taxes upon its reimbursements of employee related expenses.

In the Carlsberg decision, the Court of Appeals was careful to limit its holding based upon the

facts of that case and left for another day its ruling on a "less-pervasive agency relationship." Id. at

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  252, 862 P.2d at 293. That day arrived on May 1, 1995 when the Court of Appeals issued its decision

in Brim Healthcare. That case also involved the reimbursement of employee related expenses, but in

the context of a taxpayer providing hospital management services and key hospital employees, rather

than apartment management services involving employees who operate and maintain the apartment

complexes. The court found the facts in Brim Healthcare to be distinguishable from those in

Carlsberg and found that no agency relationship existed with respect to the employees, but found,

rather, that the employees were Brim Healthcare employees and that rather than being a mere conduit

for funds to be paid to third parties, Brim was receiving payments from the hospitals for its own

account and then expending them to meet its own responsibilities. Id., 896 P.2d at 500. It based this

conclusion upon the degree of control which the management company retained over the employees

and the employment costs at issue, the lack of an agency designation in the contract which had existed

in Carlsberg, and the absence of the broad indemnification clause in the contract which had existed in

Carlsberg. In deciding Brim, the court also went on to carefully analyze the California authority upon

which it had relied in deciding Carlsberg. That analysis revealed that the determinative factor in

determining taxability was whether the personnel for whom the cost reimbursements were received

were actually employees of the client of the taxpayer (in which case, the reimbursements were treated

as merely receipts of an agent as a conduit of funds for the principal client) or whether the personnel

were employees of the taxpayer and the reimbursements were received as a cost of performing the

taxpayer's contractual obligations for the client, and were taxable gross receipts. Id., 896 P.2d at

500-502.

I fail to see the applicability of the agency theory to the facts of this case. In the first place, the

bingo lease agreements only require that the bingo operators provide security guards during their

respective sessions. See, paragraph 17(d) of the Bingo Lease Agreement. They are not obligated to

provide security camera systems, and the fact that the system at issue was only for the Route 66 bingo

hall and the other halls did not have such systems provides further support for this interpretation.

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  Additionally, the system was purchased by the Taxpayer and there was no evidence presented that the

vendor of the system had any knowledge or information that the system was for the benefit of anyone

other than the Taxpayer. Thus, there was no disclosure of an agency relationship to the vendor at the

time of the purchase.

Even if we apply the agency analysis applied by the court in the Carlsberg and Brim

Healthcare decisions to the case at hand, it is apparent that the Taxpayer was not a mere conduit of

funds for the payment of the bingo operators' obligations to the vendor of the system, but that the

Taxpayer was receiving reimbursement for the payment of its own obligations with respect to its

purchase of the video camera system. Under these circumstances, the Taxpayer's receipts are simply

receipts from the sale of the video camera system to the bingo operators which would be subject to

gross receipts tax.

The next issue to be determined is the validity of the portion of Assessment No. 1882465,

which assesses taxes, penalty and interest for January through December, 1988. The basis for the

Taxpayer's argument that the assessment for 1988 is invalid is that although the Notice of Assessment

was mailed on December 28, 1994, the Taxpayer did not receive a copy of the assessment until early

January, 1995. The Taxpayer argues that the assessment is not effective until it is mailed or delivered

to the Taxpayer, that because the assessment was mailed to an improper address and it was not

delivered to the Taxpayer until 1995, that the assessment of taxes for 1988 was barred by the operation

of Section 7-1-18 NMSA 1978, the statute of limitations on the assessment of tax by the Department.

The pertinent provision of Section 7-1-18, subsection D, provides as follows:
If a taxpayer in a return understates by more than twenty-five percent the amount of his liability
for any tax for the period to which the return relates, appropriate assessments may be
made by the department at any time within six years from the end of the calendar year
in which payment of the tax was due. (emphasis added).

In this case, since the Taxpayer failed to report any gross receipts tax on the basis of its erroneous belief

that its receipts were deductible, the six year statute of limitations period is applicable. If the

assessment cannot be considered as valid until it was actually received by the Taxpayer, then all

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  amounts assessed for the January through November, 1988 reporting periods would be beyond the

statute of limitations.1

In this case, the Department mailed the assessment to the Taxpayer using a PO Box 343,

Albuquerque, New Mexico 87103 address (the "post office" address). Although the Mr. Archuleta, the

president of the Taxpayer, uses that address for another corporation he owns, I found his testimony to

be quite credible when he testified that he did not receive the Department's mailing of the assessment,

and only found out about it when he received the Department's billing notice the following month.

Because of the short notice that the Department had that the Taxpayer was raising this statute of

limitations issue, the Department was unable to locate a copy of the Taxpayer's original registration

request to the Department, from which it could be ascertained which address the Taxpayer used when

initially registering with the Department. The Department was able to produce a registration change

request from the Taxpayer, however, dated March 8, 1990, which used the post office address. The

Department also produced other evidence that the Department's registration records at the time the

assessment was mailed indicated the post office address as the Taxpayer's address.

Section 7-1-17(B)(2) provides as follows:
Assessments of tax are effective ... when a document denominated "notice of assessment of
taxes", issued in the name of the secretary, is mailed or delivered in person to the
taxpayer against whom the liability for tax is asserted, stating the nature and amount of
the taxes assertedly owed by the taxpayer to the state, demanding of the taxpayer the
immediate payment of the taxes and briefly informing the taxpayer of the remedies
available to the taxpayer; (emphasis added).

Thus, an assessment is effective if it is mailed, and actual receipt of that mailing is not required under

this provision. To determine if the mailing at issue was a proper mailing to render the assessment

effective, reference to Section 7-1-9(A) NMSA 1978 is necessary. It provides as follows:
Any notice required or authorized by the Tax Administration Act to be given by mail is
effective if mailed or served by the secretary or the secretary's delegate to the taxpayer
or person at the last address shown on his registration certificate or other record of the
department. ... (emphasis added).

1
Since the December, 1988 return would not have been due until January 25, 1989, pursuant to
Section 7-9-11 NMSA 1978, assessment for that period would not be barred.

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  In this case, the Department apparently had two addresses for the Taxpayer, since it sent the billing

notice to the 5700 Harper address which was the Taxpayer's business location address and was also the

address the Taxpayer used when filing its monthly tax returns. Nonetheless, the post office address

was the last address on the most recent registration record the Taxpayer provided to the Department and

was a proper address for the Department's mailing. Having determined that the Department's mailing

was proper, and the mailing was done within the applicable six year statute of limitations, the

assessment for 1988 was proper.

The final issue to be determined is whether the assessment of penalty was proper. The

imposition of penalty is governed by the provisions of Section 7-1-69(A) NMSA 1978 (1990 Repl.

Pamp.), which provides as follows:
In the case of failure, due to negligence or disregard of rules and regulations, but without intent
to defraud, to pay when due any amount of tax required to be paid ..., there shall be
added to the amount two percent per month or a fraction thereof...not to exceed ten
percent of the tax...as penalty,....

This statute imposes penalty based upon negligence (as opposed to fraud) for failure to timely pay tax.

Thus, the good faith of the Taxpayer in fairly reporting its taxes is not at issue. What remains to be

determined is whether the Taxpayer was negligent in failing to report its taxes properly. Taxpayer

"negligence" for purposes of assessing penalty is defined in Regulation TA 69:3 as:
1) failure to exercise that degree of ordinary business care and prudence which reasonable
taxpayers would exercise under like circumstances;
2) inaction by taxpayers where action is required;
3) inadvertence, indifference thoughtlessness, carelessness, erroneous belief or inattention.

In this case the Taxpayer's failure to report and pay tax with respect to its receipts from its bingo

operators for rental of the bingo hall and equipment was based upon advice the Taxpayer had received

from its attorney, that the receipts were not subject to tax under Section 7-9-53(A). The Taxpayer's

also received similar advice over the telephone from an unidentified Department employee.

Regulation 3NMAC 1.11.11 (formerly Regulation 69:4) provides a list of situations which may indicate

• 16 -
  that a taxpayer has not been negligent for purposes of the imposition of penalty. Number 4 provides:
  the taxpayer proves that the failure to pay tax or to file a return was caused by reasonable
  reliance on the advice of competent tax counsel or accountant as to the taxpayer's
  liability after full disclosure of all relevant facts; failure to make a timely filing of a tax
  return, however, is not excused by the taxpayer's reliance on an agent;

In this case, the attorney providing the Taxpayer the advice was also the attorney who prepared the

bingo lease agreements. On that basis it is fair to assume that he would have been fully informed of all

relevant facts regarding the nature of the arrangements between the Taxpayer and the bingo operators

with respect to the rental of the bingo halls. In these circumstances, the Taxpayer's reliance on the

advice of its attorney was quite reasonable and negates any inference of negligence in the Taxpayer's

failure to report tax with respect to its rental receipts. For this reason the penalty attributable to the

Taxpayer's failure to report its rental receipts should be abated.

CONCLUSIONS OF LAW

1. The Taxpayer filed timely protests to Assessment Nos. 1882465 and 1968349 pursuant

to Section 7-1-24 NMSA 1978 and jurisdiction lies over both the parties and the subject matter of this

protest.

2. The Taxpayer's receipts from renting of bingo hall space to various bingo operators

under the terms of the Bingo Lease Agreements are receipts from granting a license to use real property

and are not receipts from leasing real property. As such, said receipts are not deductible pursuant to

Section 7-9-53(A) NMSA 1978.

3. The Taxpayer's receipts from the rental of bingo hall equipment are not deductible as

receipts from the lease of fixtures to real property pursuant to Section 7-9-53(A) NMSA 1978.

4. The Taxpayer's receipts from the bingo operators for their pro-rata share of the cost of a

video camera system were not received while acting as an agent of the bingo operators and such

receipts are subject to gross receipts tax.

5. The Department properly mailed Assessment No. 1882465 to the Taxpayer at the

address in the Department's registration records for the Taxpayer, and said assessment is effective even

• 17 -
  if the Taxpayer did not receive the copy of the assessment which was so mailed.

6. The portion of Assessment No. 1882465 which assesses tax for the reporting periods of

January through November, 1988 is not barred by the application of Section 7-1-18 NMSA 1978.

7. The Taxpayer was not negligent in failing to report gross receipts tax upon its rental

receipts from the bingo operators received pursuant to the Bingo Lease Agreements and penalty on that

portion of the tax assessed should be abated.

For the foregoing reasons, the Taxpayer's protest is hereby granted in part and denied in part.

DONE, this 28th day of October, 1996.

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