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reaffirming the maxim that "[t]he question regarding what the General Assembly intended to enact will not be entertained when the meaning of what was enacted is clear and plainly expressed"
Summary of this case from State v. TuomalaOpinion
No. 88-1363
Submitted November 8, 1989 —
Decided January 10, 1990.
Taxation — Franchise fees of a nondomiciliary franchisor allocable to Ohio as "technical assistance fees," when — R.C. 5733.051(G), construed.
O.Jur 3d Taxation § 1074.
Franchise fees or royalties remitted to a nondomiciliary franchisor by its Ohio franchisees are allocable to Ohio as "technical assistance fees" if any part thereof was paid for "technical assistance" within the common meaning of the phrase, unless the taxpayer can establish that another specific part thereof was not for "technical assistance" and was thus apportionable. (R.C. 5733.051[G], construed and applied.)
APPEAL from the Board of Tax Appeals, Nos. 86-F-222 and 86-F-223.
Appellee, Holiday Inns, Inc. ("Holiday Inns"), is a nondomiciliary corporation engaged in the business of owning, managing and franchising hotel operations. In its franchising operations, appellee enters into licensing agreements with its licensees. In the years relevant to this appeal, 1975 and 1978, licensees were granted nonexclusive licenses to operate hotels as Holiday Inns and to utilize the Holiday Inn "system" in exchange for the payment of franchise fees or royalties to appellee.
Pursuant to the license agreements in effect during the years in question, the "system" which appellee licensed to its licensees provided:
"The System. The System at present includes the service marks `Holiday Inn' and `Holidex;' such other service marks and such copyrights, trademarks and similar property rights as may be designated from time to time by Licensor to be part of the System; a computerized reservation network operated under the name `Holidex;' advertising, publicity and other marketing programs and materials; training programs and materials; standards, specifications, policies and other requirements as stated or referred to in this agreement and from time to time in Licensor's Standards Manual (the `Manual'); and programs for inspecting the Inn and consulting with Licensee. * * *"
Testimony before the Board of Tax Appeals revealed that the agreement effective in 1975 was substantially similar to both the 1978 agreement quoted above and a current agreement as contained in an offering circular mandated by the Federal Trade Commission.
The agreements also required appellee to make its Holiday Inn officials and staff available to consult with licensees regarding problems with the construction and operation of licensees' hotels so that licensees would have the benefit of the experience of Holiday Inns. Further, under the 1975 agreement, appellee was required to supply licensees with sample plans and typical layouts, to recommend plans and layouts, and to inform licensees of prices of equipment, furnishings, furniture and supplies. Appellee was also responsible under the 1975 and 1978 agreements for training employees of licensees, and for consulting with and advising licensees in connection with their operations, facilities and marketing.
The fees paid by a licensee in exchange for the use of the "system" included as a "royalty" a percentage of the gross revenues attributable to or payable for rental of guest rooms at the licensee's hotel. Certain other fees payable to appellee in exchange for the use of the "system" were attributable to specific services within the system. As agreed by the parties, the latter fees are not at issue in the case at bar.
For tax years 1975 and 1978, appellant issued final determinations that the franchise royalties at issue were properly allocable to Ohio, as the fees were "akin to and in the nature of" patent and copyright royalties and technical assistance fees. Holiday Inns appealed this determination to the Board of Tax Appeals ("BTA").
On September 29, 1987, the BTA conducted a hearing in which Holiday Inns contended that the franchise royalties received from its licensees should be treated as apportionable income as provided for in R.C. 5733.051(H) and 5733.05(B)(2). In support of its contention, Holiday Inns produced witness David H. Gesell, Director of Federal and State Income Taxes for Holiday Inns.
Gesell testified that, pursuant to the license agreement, a licensee obtains a Manual. This Manual contains Holiday Inns' standards of operation which range from construction and furnishing to the operation of the front desk. Further, pursuant to its license agreements, Holiday Inns was required to consult with and advise its licensees. According to the testimony of Gesell, Holiday Inns was required to review plans for constructing hotels, advise licensees, and suggest improvements to the plans. Holiday Inns makes sure that a licensee's hotel conforms with Holiday Inns' standards. On an ongoing and regular basis, the licensees are advised as to how to operate the Holiday Inn system more efficiently to maximize their profits as well as the profits of Holiday Inns.
The BTA subsequently reversed the order of appellant and determined that the franchise fees were not properly allocable to Ohio. The BTA determined that the royalty fees remitted to Holiday Inns by its Ohio licensees were not patent, copyright or technical assistance fees and that the income received pursuant to the license agreements should be apportioned to Ohio rather than allocated.
The cause is now before this court upon an appeal as of right.
Strauss Troy and C. Christopher Muth, for appellee.
Anthony J. Celebrezze, Jr., attorney general, and Richard C. Farrin, for appellant.
Appellant argues that the royalties paid for the use of the "system" were payments to use Holiday Inns' trademarks and service marks and that such payments are closely "akin to" income from patents and copyrights. Specifically, appellant contends that trademarks are intellectual property like patents and copyrights and that the clear intent of the General Assembly was to have the income from such property allocated to Ohio pursuant to R.C. 5733.051(G) (formerly R.C. 5733.051[A][7]). Further, appellant argues that at least part of the income received by appellee constituted technical assistance fees and, therefore, that all the subject royalties were properly allocable to Ohio, pursuant to R.C. 5733.051(G).
The sole issue before us is whether the royalty fees remitted to appellee from its Ohio licensees are allocable to Ohio pursuant to R.C. 5733.051(G), or apportionable to Ohio pursuant to R.C. 5733.051(H) and 5733.05(B)(2).
R.C. 5733.051(G) provides in relevant part:
"Patent and copyright royalties and technical assistance fees, not representing the principal source of gross receipts of the taxpayer, are allocable to this state to the extent that the activity of the payor thereof giving rise to the payment takes place in this state. * * *" (Emphasis added.)
In construing this statute, the intent of the legislature is clear. Patent and copyright royalties and technical assistance fees are allocable to this state. Appellant's contention that trademark royalties are "akin to" patent and copyright royalties and, as a result, that the General Assembly intended trademark royalties to be allocable to Ohio pursuant to R.C. 5733.051(G) is not well-taken. The question regarding what the General Assembly intended to enact will not be entertained when the meaning of what was enacted is clear and plainly expressed. Slingluff v. Weaver (1902), 66 Ohio St. 621, 64 N.E. 574, paragraph two of the syllabus. In ascertaining legislative intent, this court will give effect to the words used in the statute and it is not the duty of this court to insert words not used. Cleveland Elec. Illum. Co. v. Cleveland (1988), 37 Ohio St.3d 50, 524 N.E.2d 441, paragraph three of the syllabus. We must assume the General Assembly knew the differences between a patent, a copyright and a trademark. As the term "trademark" does not appear in R.C. 5733.051(G), appellant's intellectual property argument is not persuasive. The BTA correctly concluded that the subject royalties are not patent or copyright royalties as those terms are commonly used.
With regard to the language "technical assistance fees," the BTA defined the term as "* * * payment for mechanical, industrial, scientific or practical aid, expertise or services." (Emphasis added.) The BTA concluded the subject royalties did not fall within this definition. We do not agree.
The BTA's determination was unreasonable in that licensees obtained a right to use the "system" in return for the payment of royalties. The "system" included, inter alia, the right to consultation and advice and the use of an operation manual detailing nearly every aspect of the hotel operation. Further, Gesell testified that licensees were given continuing advice on the effective use of the Holiday Inn "system" so as to improve the profitability of the licensees' operations, as well as the profitability of Holiday Inns. These services provided by Holiday Inns pursuant to the license agreements clearly fit within the BTA's own definition of "technical assistance." This ongoing consultation provided licensees with practical aid in improving the quality of their services and their profitability. The agreements required consultation and advice regarding problems with the operation of a licensee's hotel so that Holiday Inns' expertise would be available in the event of such problems. Such practical aid and expertise fit the BTA's definition of "technical assistance" and it was unreasonable to conclude otherwise. Therefore, we hold the royalties were allocable to Ohio, pursuant to R.C. 5733.051(G), to the extent the activity of the payor giving rise to the payment took place in Ohio.
R.C. 1.42 requires that words and phrases contained in the Revised Code are to be construed according to their common usage. While the BTA did set forth a definition of the term "technical assistance fees" consistent with common usage, it erred in not including the subject royalties within such definition. At least part of the royalties paid were for the consultation and advice given licensees. While some part of the payments may have been for the use of the name "Holiday Inn" and the reputation for quality and service associated therewith, appellee failed to make the requisite showing as to what part of the fees was for consultation and advice and what part was not. As such, all such fees, as a matter of law, must be allocable to Ohio as technical assistance fees pursuant to R.C. 5733.051(G). It is the burden of the taxpayer to show the segregation of such payments. See Alcan Aluminum Corp. v. Limbach (1989), 42 Ohio St.3d 121, 124, 537 N.E.2d 1302, 1304.
Therefore, we hold that, pursuant to R.C. 5733.051(G), franchise fees or royalties remitted to a nondomiciliary franchisor by its Ohio franchisees are allocable to Ohio as "technical assistance fees" if any part thereof was paid for "technical assistance" within the common meaning of the phrase, unless the taxpayer can establish that another specific part thereof was not for "technical assistance" and was thus apportionable.
Accordingly, the decision of the BTA is reversed.
Decision reversed.
MOYER, C.J., SWEENEY, WRIGHT, H. BROWN and RESNICK, JJ., concur.
HOLMES, J., dissents.