Caseflicks

Court of Appeals of Arizona • 1979

Wenner v. Dayton-Hudson Corp.

598 P.2d 1022 | 123 Ariz. 203 | 1979 Ariz. App. LEXIS 536

Full access

Unlock the video and quiz

The written brief is free to read below. Subscribe to watch the video explainer and take the quiz.

Create an account Log in

Takeaway

In short, this case holds that a department-store concession is not taxable as a real-property lease when the retailer receives only a revocable, nonexclusive license to operate within the store, not possession or an interest in the premises.

Background

Dayton-Hudson operated Phoenix department stores under the name “Diamonds.” It entered agreements allowing independent retailers to operate specialized departments, including beauty, shoes, furs, and furniture, within its stores. The retailers paid Dayton-Hudson a percentage of gross receipts, subject to a monthly minimum, in return for store space, use of the Diamonds name, and extensive services such as utilities, cashier and charge-account services, supplies, telephone service, and janitorial service.

The agreements expressly described the arrangement as a license rather than a lease. They gave retailers no exclusive possession or interest in the real property; the store could change the space assigned, and retailers could operate only while the store was open to the public. Phoenix assessed a one-percent privilege tax on Dayton-Hudson’s income under City Code § 14-2(a)(12), which taxes leasing or renting the use or occupancy of real property. Dayton-Hudson paid under protest, exhausted its administrative remedies, and prevailed on summary judgment in superior court. The City appealed.

Issues

Issue #1

Whether the department-store concession agreements created leases taxable as interests in real property, rather than mere licenses.

Holding

No. The agreements created licenses, not leases or leasehold interests.

Reasoning

The court looked beyond the agreement’s label, while treating the parties’ express statement that it was a license as persuasive evidence of intent. The agreement consistently supported that stated intent: the retailer received only permission to operate a specified type of department in the store, not a grant of real-property rights.

A lease ordinarily involves an interest in land and exclusive possession of identifiable premises. Here, no particular space was fixed in the agreement, Dayton-Hudson could relocate the retailer’s department, and the retailer had neither exclusive possession of any part of the building nor access outside the store’s public business hours.

The arrangement was principally an integrated retail-business relationship rather than a transfer of premises. Dayton-Hudson required use of its trade name and supplied substantial operational services, while the retailer paid a percentage of sales for the business opportunity and those services.

The authorities invoked by the City were distinguishable. In the cited cases, the agreements used lease terminology, treated payments as rent, conveyed more substantial possessory rights, or contained provisions characteristic of a landlord-tenant relationship. The nonassignment clause here instead reflected the personal and generally nonassignable character of a license.

Although a license may be subject to a contract term and may expose the licensor to damages if wrongfully terminated, those contractual protections do not transform the personal privilege into a leasehold estate. The retailers therefore held licenses to conduct business, not possessory interests in Dayton-Hudson’s property.

Issue #2

Whether Phoenix City Code § 14-2(a)(12), including the presumption that gross receipts are taxable until shown otherwise, taxed income from these license agreements.

Holding

No. The ordinance covered leasing or renting real property, and Dayton-Hudson established that its receipts arose from licenses outside that taxable activity.

Reasoning

The ordinance specifically imposed the privilege tax on income from leasing or renting the use or occupancy of real property, including interests in property held by a person in actual possession or occupation of leased premises. Because the agreements conveyed no leased premises, possessory interest, or other interest in real property, their receipts did not fall within the ordinance’s stated reach.

Phoenix could not expand the ordinance through a broad reading to reach licenses. Arizona tax-imposition provisions are construed strictly against the government and in favor of the taxpayer; courts will give statutory language its fair meaning but will not create new taxable objects by strained construction or implication.

The City’s rule that exemptions from tax are strictly construed did not control. Dayton-Hudson was not seeking an exemption from an otherwise applicable tax; it argued that the taxed activity was never included in the ordinance. Likewise, any Code presumption that gross receipts are taxable was rebutted once Dayton-Hudson showed that its receipts came from licenses rather than real-property leases.