170 Cal.App.3d 665, 24154, Atari Inc. v. State Bd. of Equalization

Docket Nº:24154
Citation:170 Cal.App.3d 665, 216 Cal.Rptr. 267
Opinion Judge:[10] Evans
Party Name:Atari Inc. v. State Bd. of Equalization
Attorney:[7] Kadison, Pfaelzer, Woodard, Quinn & Rossi, Richard S. Cohen, Richard K. Simon and Monica Bachner for Plaintiff, Appellant and Cross-respondent. [8] John K. Van de Kamp, Attorney General, Edward P. Hollingshead and Charles C. Kobayashi, Deputy Attorneys General, for Defendant, Respondent and C...
Case Date:July 25, 1985
Court:California Court of Appeals

Page 665

170 Cal.App.3d 665

216 Cal.Rptr. 267

ATARI, INC., a corporation, Plaintiff, Appellant, and Cross-Respondent,


STATE BOARD OF EQUALIZATION, Defendant, Respondent, and Cross-Appellant.

Civ. 24154.

California Court of Appeal, Third District

July 25, 1985.

Certified for Partial Publication [*]

Page 666

[Copyrighted Material Omitted]

Page 667

[Copyrighted Material Omitted]

Page 668

Kadison, Pfaelzer, Woodard, Quinn & Rossi, Richard S. Cohen, Richard K. Simon, and Monica Bachner, Los Angeles, for plaintiff, appellant, and cross-respondent.

John K. Van de Kamp, Atty. Gen., and Edward P. Hollingshead and Charles C. Kobayashi, Deputy Attys. Gen., for defendant, respondent, and cross-appellant.

EVANS, Acting Presiding Justice.

Plaintiff (Atari) brought an action for recovery of sales and use taxes, and was awarded a partial refund. Atari appeals from that portion of the judgment holding it liable for a use tax on the consumption of catalogs used to promote its product. Defendant State Board of Equalization (Board) cross-appeals from that portion of the judgment holding that neither royalties paid by plaintiff to the designer of a pinball machine nor royalties paid for the acquisition of "master tapes" were subject to taxation. Board also contends the trial court erred in refusing to allow one of its witnesses to testify about its administrative practices and policies in applying a certain tax regulation. We shall affirm the judgment.

Page 669


Atari designs, manufactures, and sells coin-operated video and pinball games, and video games designed for home use in conjunction with the purchaser's television set. The Atari 2600 Video Computer System is designed for home use. The system uses game cartridges, which are purchased separately by the computer owner. During the audit period Atari purchased, under resale certificates, 7,532,065 catalogs from various printers. Each system and cartridge sold contains a catalog in the package. The catalog is entitled "The Atari Video Computer System Catalog.... More Games, More Fun." Each page contains a description of a cartridge and the games which can be played with it. The descriptions are written in such a manner as to pique the interest of a consumer in a certain game, sport, or academic challenge. 1 The catalog does not include prices, serial numbers, or information regarding where the cartridges may be purchased.

The catalog is sealed in the cartridge package; the consumer receives it whether he wants it or not. One hundred thousand of the catalogs were distributed separate from the cartridges free of charge to distributors and company representatives, and at the company store. Approximately 542,744 catalogs were destroyed as obsolete. 2


Stephen Bristow, vice-president of engineering for the Atari Tel Division, testified he drafted a letter of agreement between Atari and one Ron Haliburton, the designer of a "giant" pinball machine. A standard pinball machine has a playing field of 28 inches by 48-60 inches and uses a large ball bearing for the game ball. Haliburton's "Bigfoot" pinball machine had a playing field of 4 feet by 8 feet, and used a billiard ball as the game ball. He built a prototype machine which was not marketable in that form. The machine was attractive to Atari because, despite the large playing field, the Bigfoot "played" the same as a standard size machine.

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The agreement called for Haliburton to provide the prototype machine, flippers, slingshots, ball shooters, and stand-up targets 3 to Atari. Haliburton also agreed to provide no more than 100 hours of consulting services and sketches of the components. In return, Atari was to pay Haliburton a 5 percent royalty on the selling price of the giant machines, and a $10,000 cash advance against the royalties. Haliburton received in excess of $88,000 during the audit period.

Bristow testified his intent in entering into the contract with Haliburton was to purchase the concept of the Bigfoot machine. His only reasons for purchasing the prototype machine were so other Atari management personnel could test play it and for purposes of stress testing. The prototype was helpful but not essential to Atari's development of a large scale machine. Eventually, Atari did manufacture a large scale game called "Hercules." Atari designed its own internal parts for the Hercules machine. Haliburton provided the consulting services and sketches as required.


In 1978, Atari entered into an agreement with Dorsett Educational Systems for a series of taped "self-taught" lessons. The lessons were recorded on metallic oxide recording tapes on seven-inch reels, identical to the type of recording tape used in cassettes manufactured for home stereo system use. Atari copied the Dorsett tapes onto another tape which became Atari's master tape for purposes of mass reproduction. It was necessary for Atari to develop a computer program which would allow the tapes to be played on Atari computers, as the Dorsett tapes were not compatible with the Atari system in the form in which they were purchased.

The Dorsett tapes were neither video tapes nor computer programs. If the master tape made by Atari was played on a conventional stereo system, the listener would hear the audio portion of the tape and a squealing noise, representing the video portion of the tape. The...

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