I leased out my restaurant and liquor license but collected no cash rent — do I still owe gross receipts tax on it?

Plain-English summary

A Santa Fe motel operating under a Quality Inn franchise was required to have a restaurant on the premises. In 1990 it leased the restaurant — together with its New Mexico liquor license — to a tenant, Santa Fe Cantina, Inc., for $500/month (rising later to the greater of $1,800 or 6% of the tenant's gross).

The tenant soon fell behind. Working through the back rent, the motel discovered the tenant owed about $10,000 to other creditors — including liquor distributors and the utility companies — and that, as the license holder and the party whose name the utilities were in, the motel itself was financially responsible for those bills. So in August 1991 the two agreed to waive the $500 cash rent and instead apply that money to paying off the tenant's (and effectively the motel's) creditors. The motel monitored the tenant to keep new debt from piling up. In late 1994 that tenant left and a new tenant took over the restaurant and license for $1.00/month.

Because it was collecting no cash rent, the motel reported and paid no gross receipts tax on the lease. The Department found this out when the motel applied for a liquor-license tax clearance, and in February 1995 assessed $1,045.56 in gross receipts tax and $240.80 interest for 1992–1994, based on an imputed value of $500/month. The motel protested, arguing it received no money and no real benefit. Hearing Officer Gerald B. Richardson denied the protest:

• Gross receipts tax reaches non-cash consideration, not just money. Section 7-9-4(A) taxes the privilege of doing business, and § 7-9-3(F) defines "gross receipts" to include "the value of other consideration received." The regulation defines consideration broadly (3 NMAC 2.1.7.2) as any benefit to one party or any detriment/forbearance by the other.
• The motel did receive a benefit. Letting the tenant keep using the license meant the tenant paid off liquor-distributor and utility debts the motel would otherwise have owed — a clear benefit. The motel also got its franchise-required restaurant operated by someone else, sparing it that management burden (and a restaurant on-site helped its motel business). The motel's argument that it "could have run the restaurant itself" didn't undo the benefit — it chose not to, for its own reasons.
• When cash doesn't reflect value, the Department taxes reasonable value. Section 7-9-3(F) and Regulation 3 NMAC 2.1.14.4 direct that the fair market value be included in gross receipts when the actual consideration doesn't represent it — illustrated by the reg's example of a $30,000 tractor "leased" for $1/month among affiliates.
• $500/month was reasonable — the taxpayer didn't rebut it. An assessment is presumed correct (§ 7-1-17(C)). A liquor broker put the Santa Fe going rate at at least $1,000/month; the Department used $500 to give the motel the benefit of the doubt. The motel offered only that it received no cash and now leases for $1 — not enough to overcome the presumption. The Hearing Officer called $500 "a very reasonable, if not low, estimate."

What this means for you

Getting paid in something other than cash is still a taxable receipt

New Mexico's gross receipts tax isn't limited to money you collect. If you're paid in other consideration — someone assuming your debts, providing a service, or delivering any real benefit — the value of that benefit is taxable. "I didn't receive any cash" is not, by itself, a defense.

A below-market or $0 lease can be taxed at fair market value

When rent (or any price) doesn't reflect a property's real value, the Department can impute the fair market value and tax that instead (§ 7-9-3(F); 3 NMAC 2.1.14.4). This is exactly why nominal "$1/month" arrangements — common between affiliated companies or to paper over a workout — don't escape the tax. Expect gross receipts tax on what the lease is genuinely worth.

Watch the tax angle when you restructure a lease to help a struggling tenant

The motel's rent waiver was a practical fix for a tenant in trouble, but by redirecting the rent to creditors it was responsible for, it received consideration all the same. Restructuring a deal to trade cash rent for debt relief, services, or other value can create a taxable receipt even though no money reaches you. Model the tax before you agree.

Once assessed, the burden is on you to prove the value is wrong

Because assessments are presumed correct, disputing an imputed value means bringing real evidence — comparable market rates, appraisals, broker testimony — not just pointing out that you collected no cash. The motel lost largely because it offered nothing to counter the Department's $500 figure.

Common questions

Q: I leased out property but collected no cash rent. Do I really owe gross receipts tax?
A: Potentially yes. Gross receipts tax covers the "value of other consideration," not just money. If you received a benefit — such as having your own debts paid or a required service performed — the Department can tax the value of that benefit.

Q: How can the state tax me on money I never got?
A: When the consideration actually exchanged doesn't represent the value of what you leased or sold, § 7-9-3(F) and Regulation 3 NMAC 2.1.14.4 let the Department impute the fair market value and tax that. Here the motel received non-cash benefits, and $500/month was found to be a reasonable value.

Q: Does a $1-a-month lease avoid the tax?
A: No. A nominal rent that doesn't reflect real value is exactly what the fair-market-value rule targets — the regulation's own example is a $30,000 tractor "leased" for $1/month. The Department can tax the lease's true worth.

Q: The Department's value seems too high. Can I challenge it?
A: You can, but the assessment is presumed correct (§ 7-1-17(C)), so you must present evidence — comparable rates or appraisals — showing the value is wrong. Simply noting that you received no cash, as the motel did, generally won't overcome the presumption.

Citations and references

Statutes and regulations:

• § 7-9-4(A) NMSA 1978 — imposes the gross receipts tax (then 5%) on the privilege of engaging in business in New Mexico
• § 7-9-3(F) NMSA 1978 — "gross receipts" includes the value of other consideration received; where the money or consideration received does not represent the value of the property or service, gross receipts means its reasonable value
• Regulation 3 NMAC 2.1.7.2 — defines "consideration" broadly as any benefit to one party, or any detriment, forbearance, or service undertaken by the other
• Regulation 3 NMAC 2.1.14.4 — fair market value (the value in an arm's-length transaction between independent parties) is included in the lessor's gross receipts when the actual consideration does not represent it
• § 7-1-17(C) NMSA 1978 — a Department assessment is presumed correct; the taxpayer bears the burden of proving it incorrect
• § 7-1-24 NMSA 1978 — protest procedure and jurisdiction

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Quality Inn
• Decision PDF: D&O 96-30

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
QUALITY INN; I.D. No. 02-071104-00 2 No. 96-30
ASSESSMENT NO. 1900351

DECISION AND ORDER

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

December 18, 1996. The Quality Inn, hereinafter, "Taxpayer," was represented by Mr. Duane Gray,

its general manager. The Taxation and Revenue Department, hereinafter, "Department," was

represented by Margaret B. Alcock, 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 operates a motel in Santa Fe, New Mexico under a franchise agreement

with Quality Inn.

2. As part of its agreement with Quality Inn, the Taxpayer is required to have a

restaurant on the premises.

3. On January 15, 1990 the Taxpayer entered into a lease agreement with Santa Fe

Cantina, Inc., a New Mexico corporation, (hereinafter, the "tenant") for the lease of the restaurant

portion of the Quality Inn. The lease was for a term of five years, commencing February 1, 1990.

Included in the property leased was Liquor License No. 94, issued by the state of New Mexico. The

lease called for monthly rental payments of $500 per month for the first two years of the lease, with

rent to increase to 6% of the gross income of the tenant, or $1,800 per month, whichever is greater, for

the remaining term of the lease.

4. After a little more than a year into the lease, the tenant stopped making its monthly

rental payments. In the process of working with the tenant to resolve the back rent issue, the
Taxpayer also found out that the tenant owed various other creditors, about $10,000. Among those

creditors were the liquor distributors who supplied alcoholic beverages to the tenant for sale and the

companies supplying utilities, such as electricity and gas, to the tenant.

5. The Taxpayer, as owner of the liquor license, was financially responsible for the

unpaid bills owing to the liquor distributors.

6. Since the utilities for the restaurant were in the Taxpayer's name and not the tenant's,

the Taxpayer was also financially responsible for the unpaid utility bills.

7. In August of 1991, the Taxpayer and the tenant agreed to modify the terms of the

lease agreement whereby the $500 monthly rental payment to the Taxpayer would be waived and the

monies would be applied to paying off the tenant's other obligations, such as those to the liquor

distributors and the utility companies.

8. Under this arrangement, the tenant's creditors were paid off over time and the

Taxpayer monitored the tenant's activities so as to ensure that further indebtedness would not be

accumulated for which the Taxpayer would become liable.

9. Eventually, in November of 1994, the tenant agreed to vacate the leased premises

because it was not able to make a financial go of its restaurant and lounge operations.

10. In November of 1994, the Taxpayer entered into a new lease arrangement with a new

tenant for the lease of the restaurant premises and liquor license. Under the terms of this agreement,

the tenant pays a monthly rental of $1.00 per month.

11. In the process of applying for a tax clearance from the Department for Liquor License

No. 94 to be leased to another person, the Department learned from the Taxpayer that because it was

not receiving any rental payments from its tenant under its lease agreement, that the Taxpayer had not

reported and paid any gross receipts taxes on the value of leasing its liquor license and restaurant

premises.

12. The fair market value for leasing a liquor license in Santa Fe during the time period at

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issue was at least $1,000 per month.

13. Based upon the information the Department received from the Taxpayer, on February

13, 1995 the Department issued Assessment No. 1900351 to the Taxpayer, assessing $1,045.56 in

gross receipts taxes, and $240.80 in interest for the reporting periods of January, 1992 through

December, 1994. The Department's assessment was based upon an imputed value of $500 per month

for the lease of the liquor license.

14. On February 14, 1995 the Taxpayer filed a written protest with the Department to

Assessment No. 1900351.

DISCUSSION

The issue to be determined herein is the propriety of the Department's assessment of gross

receipts tax upon an imputed value to the Taxpayer of gross receipts from the rental of its liquor

license.

Mr. Gray, the Taxpayer's general manager, has diligently and honestly paid gross receipts

taxes with respect to actual money received from the operation of the Quality Inn in Santa Fe, but he

disputes that there was any benefit to the Taxpayer or any value gained by the Taxpayer upon which

gross receipts tax is due with respect to its lease of its liquor license, where no rental payments were

received from his tenant.

The gross receipts tax is imposed, pursuant to NMSA 1978, § 7-9-4(A) (1995 Repl. Pamp.),

which provides:
For the privilege of engaging in business, an excise tax equal to five percent of gross receipts
is imposed on any person engaging in business in New Mexico. (emphasis added)

"Gross receipts" is defined at NMSA 1978, § 7-9-3(F) in pertinent part as follows:
"gross receipts" 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. In an
exchange in which the money or other consideration received does not represent the
value of the property or service exchanged, "gross receipts" means the reasonable
value of the property or service exchanged.. . . (emphasis added)

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The Department bases its assessment of gross receipts tax on the basis that the actual money

exchanged for the lease of the liquor license, in this case, nothing, does not represent the reasonable

value of the lease of a liquor license. It has attempted to arrive at what it considered to be a

reasonable value for the lease of the liquor license between the tenant and the Taxpayer, and imputed

a value as gross receipts to the Taxpayer. Essentially, the issues presented for resolution are whether

the Department may assess gross receipts tax on a basis other than actual money exchanged and

whether the value determined by the Department as the value of the liquor license lease is reasonable

as a value upon which to assess gross receipts tax.

The answer to the first issue presented is clear from the language of Section 7-9-3(F) which

authorizes the Department to treat as "gross receipts" not only any money exchanged, but also "the

value of other consideration" received. "Consideration" is defined in the regulations issued by the

Department interpreting the gross receipts tax statutes at 3 NMAC 2.1.7.2 as follows:
"Consideration" is any benefit, interest, gain or advantage to one party, usually the seller, or
any detriment, forbearance, prejudice, inconvenience, disadvantage, loss of
responsibility, act or service given, suffered, or undertaken by the other party, usually
the buyer.

In this case, the Department argues that although the Taxpayer did not receive any money in

consideration of its lease of the liquor license, it has received a benefit, which qualifies as

consideration. It argues that the Taxpayer benefitted in several respects by allowing its tenant to

continue to lease the Taxpayer's liquor license. It received the benefit of having the tenant pay off its

liquor distributor and utility creditors. If those liabilities had not been satisfied by the tenant, the

Taxpayer would have been responsible for payment of those liabilities. The Department argues that

the Taxpayer also benefitted by having someone else operate the restaurant, relieving the Taxpayer of

that responsibility, which it would have otherwise had to shoulder in order to fulfill its obligations

under its franchise agreement with Quality Inn.

I have no doubt that the Taxpayer did receive some benefit from allowing the tenant to

continue to have the use of the Taxpayer's liquor license. Clearly, having the liabilities for which it

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could be held responsible satisfied, was a benefit to the Taxpayer. The Taxpayer was also benefitted

by having the tenant operate the restaurant. The Taxpayer needs to have a restaurant on its premises

to fulfill its franchise agreement with Quality Inn. Mr. Gray also admitted that potential customers of

the motel also regularly inquire whether the motel has a restaurant on premises. Thus, the presence

of the restaurant is of benefit to the Taxpayer's overall motel business. In response to this argument,

the Taxpayer argued that it wasn't really benefitted, because it could have chosen to operate the

restaurant itself. While the Taxpayer could have done so, it chose not to do so, presumably for some

good reason. It certainly would have involved some more management responsibility to oversee not

only the operation of the motel, but also to operate the restaurant. Thus, there was at least some

administrative convenience to having an outside party take responsibility for operating the restaurant.

The Department is also clearly authorized to impute a value as gross receipts by the language

in Section 7-9-3(F) quoted above which provides that gross receipts means the "reasonable value of

the property or service exchanged" when the money or other consideration exchanged does not

represent the value of the property or service exchanged. Thus, the remaining issue to be determined

is whether the Department's determination of a value of $500 per month is reasonable. The

Department has a regulation and an example which illustrate the operation of this provision of Section

7-9-3(F). Regulation 3 NMAC 2.1.14.4 provides as follows:
In a transaction where the actual consideration received does not represent the fair market
value of the property sold or leased or of the service sold, the fair market value shall
be included in the gross receipts of the seller or lessor. Fair market value is the value
which the property or service can command in an arms length transaction between
two independent parties in an open market.

The example given to illustrate the application of Section 7-9-3(F) with respect to consideration less

than fair market value follows:
Example: X, a land and cattle company, is a corporation which is affiliated with Y, an
equipment company. Because of their affiliation, X leases a $30,000 tractor from Y
for $1.00 a month. Y reports that its gross receipts from this transaction are $1.00.
Y's gross receipts are the market value of a monthly lease of a $30,000 tractor. Y
must pay gross receipts tax on the adjusted amount.

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The Department presented the testimony of Mr. David Fergeson, an Assistant Bureau Chief

who is responsible for issuing liquor license tax clearances for the Department. Mr. Fergeson

testified that he consulted with Mr. Hill Davidson, a broker for liquor licenses, as to the going rate in

Santa Fe during the assessment period to lease a liquor license. Mr. Davidson said that it was at least

$1,000 per month. Mr. Fergeson testified that he also took the lease agreement between the

Taxpayer and its tenant into consideration in setting the value for purposes of the Department's

assessment and to be on the safe side, and to give the Taxpayer the benefit of the doubt, he used the

$500 per month amount.

Mr. Gray presented no evidence to dispute the figures testified to by Mr. Fergeson other than

that he did not receive the $500 a month and that he presently leases the license and the premises for

$1.00 per month. While this evidence is some evidence of value, it fails to prove that Mr. Davidson's

figure was erroneous for the Santa Fe market and it fails to take into consideration the well known

fact that liquor licenses in New Mexico are a highly valuable commodity. Additionally, it fails to

account for the other benefit which the Taxpayer received by its forbearance from collecting its lease

revenues, the payment of the liquor distributor and utility liabilities which it could be held responsible

for. Taxpayer's Exhibit 2 established that at the time the Taxpayer and the Tenant arrived at their

agreement to waive the cash rental, the liquor distributor creditors were owed approximately $4,700.

The utility bills were mentioned in the exhibit but the amounts owed were not noted. The Taxpayer

did not present any quantification of those amounts other than to note his general recollection that

about $10,000 was owed by the tenant to its various creditors at the time the agreement to waive the

monthly rental was made.

NMSA 1978, § 7-1-17(C) provides that there is a presumption of correctness to an assessment

of taxes by the Department. This means that a taxpayer disputing the assessment bears the burden of

proving that the assessment is incorrect. In this case, the Department presented evidence to support

the reasonableness of its determination of value for the lease of the Taxpayer's liquor license. The

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Taxpayer has failed to present sufficient evidence to dispute the value determined by the Department

and to overcome the presumption of correctness. Based upon the evidence presented, the $500 per

month of imputed value appears to be a very reasonable, if not low, estimate of the value of the liquor

license leased by the Taxpayer.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 1900351, pursuant to

NMSA 1978, § 7-1-24 and jurisdiction lies over both the parties and the subject matter of this protest.

2. When the money exchanged in a transaction does not represent the reasonable value

of the good or service exchanged, the Department is authorized to determine a reasonable value as

consideration for the transaction and to impose gross receipts tax on such value.

3. The Department's determination that the reasonable value of the Taxpayer's gross

receipts from the lease of its liquor license is $500 per month is supported by substantial evidence

which the Taxpayer has failed to sufficiently rebut.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

DONE, this 30th day of December, 1996.

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