Wenner v. Dayton-Hudson Corp.
598 P.2d 1022 (1979)
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Rule of Law:
An agreement that grants a party a non-exclusive, revocable personal privilege to conduct business on a property, without conveying an interest in the land or exclusive possession of a specific area, constitutes a license, not a lease.
Facts:
- Appellee, Diamonds, operates department stores within the city of Phoenix.
- Diamonds enters into agreements with other retailers to operate certain departments, such as beauty salons and shoe departments, within its stores.
- Under the agreements, the retailers pay Diamonds a percentage of their gross receipts with a designated monthly minimum.
- Diamonds provides the retailers with an agreeable amount of space, but this space is not specifically delineated and may be changed at Diamonds' discretion.
- The agreement explicitly states the retailer has no interest in the real property and no right to exclusive possession of any portion of the store.
- The retailers must use the Diamonds trade name and only have access to the store when it is open to the public.
- Diamonds provides numerous services to the retailers, including lighting, air-conditioning, cashier services, charge account services, and janitorial services.
Procedural Posture:
- The City of Phoenix assessed a one percent privilege tax on the income Diamonds received from its agreements with retailers.
- Diamonds paid the tax under protest and, after an unsuccessful administrative hearing, exhausted its administrative remedies.
- Diamonds filed an action in the Superior Court of Maricopa County (trial court) challenging the tax.
- The trial court granted summary judgment in favor of Diamonds, ordering a refund of the taxes paid.
- The City of Phoenix, as appellant, appealed the trial court's judgment to the Court of Appeals of Arizona.
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Issue:
Does an agreement granting a retailer the right to operate a department within a larger store, where the store retains control over the space and provides significant services, constitute a 'lease or rental of real property' taxable under the Phoenix City Code § 14-2(a)(12)?
Opinions:
Majority - Donofrio, Acting Presiding Judge
No. The agreement between Diamonds and the retailers is a license, not a lease, and therefore the income derived from it is not taxable under the city ordinance that specifically targets the leasing or renting of real property. The court determined the true nature of the agreement by looking at the parties' intent and the substance of the arrangement, rather than just its form. Several factors indicated a license: the agreement itself explicitly disclaimed being a lease; it did not grant the retailer exclusive possession of a specifically delineated area; Diamonds retained the right to change the department's location at will; and Diamonds maintained significant control and provided extensive services. Unlike cases cited by the City where lease-like language was used (e.g., 'lessor,' 'lessee,' 'rent'), this agreement was carefully drafted to create only a personal privilege to operate on the premises. Applying the principle that tax statutes must be construed strictly against the government and in favor of the taxpayer, the court found the ordinance did not extend to this type of license agreement.
Analysis:
This decision provides a clear judicial framework for distinguishing a lease from a license in the context of commercial 'store-within-a-store' arrangements. It emphasizes that control and the absence of exclusive possession of a defined space are key determinants of a license, even when regular payments are made. The case serves as a precedent for structuring commercial agreements to avoid tax liability under ordinances that specifically target rental income from real property. It reinforces the legal principle that substance and the intent of the parties, as evidenced by the entire agreement, will override any single label or characteristic in determining the legal nature of the relationship.
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