A&m Records, Inc. v. State Bd. of Equalization
| Decision Date | 01 September 1988 |
| Docket Number | No. B024836,B024836 |
| Citation | 250 Cal.Rptr. 915,204 Cal.App.3d 358 |
| Court | California Court of Appeals Court of Appeals |
| Parties | A & M RECORDS, INC., A & M Pacific, Inc. and Mr. Lou Adler, Plaintiffs and Appellants, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. |
John K. Van de Kamp, Atty. Gen., Edmond B. Mamer, Supervising Deputy Atty. Gen., Richard E. Nielsen, Deputy Atty. Gen., for defendant and respondent.
Appellants, A & M Records, Inc. ("A & M"), A & M Pacific, Inc. ("Pacific") and Lou Adler ("Adler"), who are plaintiffs in two consolidated cases (collectively "plaintiffs"), 1 appeal from a summary judgment granted in favor of defendant, the State Board of Equalization of the State of California, ("the Board") and from an order which granted the Board's motion in limine. 2 In both of the cases, the respective plaintiffs sought a refund, plus interest, of certain sales and use taxes 3 which they had paid to the Board. The trial court determined that plaintiffs are not entitled to any refunds and awarded summary judgment in favor of the Board. For the reasons discussed below, we affirm.
On March 17, 1978 plaintiff A & M filed its complaint for refund of certain sales and use taxes which it paid for the period July 1, 1970 through March 31, 1974. The Board filed its answer, denying A & M's alleged right to a refund. 4 Stipulations of facts, together with exhibits thereto, were filed by the parties in both cases. The Board filed a motion in limine by which it sought to preclude plaintiffs from using at trial any evidence which they had not previously presented to the Board at the administrative hearings which preceded the contested tax payments and from using any evidence in support of any legal theories not contained in plaintiffs' claims for refund which they filed after paying the taxes. The trial court granted the Board's motion. Thereafter, the Board filed a motion for summary judgment which the
court also granted. Summary judgment was entered and plaintiffs filed a timely appeal.
The following recitation of facts is taken from the parties' own stipulations of facts.
Plaintiffs are engaged in the business of creating for sale, phonograph records, eight-track cartridge tapes and cassette tapes which contain performances of various recording artists. Pursuant to an audit by the Board for the subject period, plaintiffs paid certain sales and use taxes, plus interest, nearly all of which they protested. 5 The taxes which were assessed against plaintiffs fall into three categories:
a. A use tax on plaintiffs' use of "master tapes," (discussed infra ), which the Board contends were used in California and produced outside of California. The amount of this tax was measured by payments made by plaintiffs, ("royalties"), during the subject period, pursuant to agreements between themselves and corporations known as "artist companies." 6 These agreements are hereafter referred to as "type B contracts." In connection with the type B contracts, the artist also entered into an agreement ("inducement letter") directly with plaintiffs.
b. A sales tax, measured by payments made to plaintiffs during the subject period pursuant to agreements executed between them and two record clubs, Columbia Record Club and Capitol Record Club. These are hereafter referred to as "record club contracts."
c. A use tax, measured by payments made by A & M during the subject period pursuant to agreements executed by said plaintiff and plaintiff's wholly-owned subsidiaries, A & M Records Limited and A & M Records of Canada Limited. These are hereafter referred to as "subsidiary contracts." 7
To produce records and tapes, the artist and musicians record the words and music on multiple-track tape in a recording studio, working under the direction and control of a producer, who may also be the artist. The producers are generally independent The multiple-track tape on which the words and music have been recorded is processed into a "master tape" by "mixing" the tracks (sounds) to the producer's desire. It is this product (the master tape) which is delivered to plaintiffs for the next steps in producing records and tapes for sale. 8 For records, the next step is to use the master tape (or a duplicate master tape) to make an "acetate master." For eight-track cartridge tapes and cassette tapes, the next step is to use the master tape (or a duplicate master tape) to make an "EQ copy."
contractors rather than plaintiffs' employees. They contract with the artist or the artist company and are paid royalties based on sales of the record and tapes they produce.
It is these "uses" of master tapes upon which the Board based its assessment of use taxes for the type B contracts. The Board contends that all of the acetate masters and all of the EQ copies which plaintiffs made from certain master tapes were made in California; i.e., the Board contends that the master tapes acquired from outside of California were used exclusively in California to make the acetate masters and EQ copies and therefore those uses were subject to California use taxes.
After they filed these actions, plaintiffs for the first time contended that certain of the acetate masters and EQ copies were made outside of California; i.e., plaintiffs now contend that the master tapes, from which those certain acetate masters and EQ copies came, were used outside of California and therefore those uses were not subject to the California use tax. 9
In accordance with the subsidiary contracts between A & M and its subsidiaries, A & M was granted an exclusive license to use master tapes and duplicate master tapes owned by the subsidiaries. A & M agreed to use its best efforts to manufacture, distribute and sell records and tapes made from those master tapes and duplicate master tapes. All of the acetate masters and EQ copies which were made from these master tapes and duplicate master tapes were made in California. The subsidiary contracts obligated A & M to pay royalties to the subsidiaries based upon sales of records and tapes and these royalty payments were used to measure the amount of taxes assessed against A & M. The Board's position is that the royalties paid by A & M are similar to those paid by all plaintiffs to the artist companies under the type B contracts; i.e., that they were paid for the acquisition and use of the master tapes.
Pursuant to the record club contracts, plaintiffs leased duplicate master tapes or acetate masters to the record clubs who in turn used them to produce records and tapes. Royalties were paid to plaintiffs on the basis of the number of records and tapes sold by the record clubs and those royalty payments were used by the Board to measure the amount of sales taxes assessed against plaintiffs as retailers. 4. After-discovered Evidence 10
Plaintiffs contend it was not until May 16, 1982 that they discovered that some of the record albums at issue in these actions were "mastered" outside of California. That is, the master tapes were used outside of California and therefore no use taxes should have been imposed on those uses. Plaintiffs assert they notified the Board of their discovery and, on May 27, 1982, a representative of the Board stated that she would find out what position the Board would take if plaintiffs could prove that such uses of the master tapes had not occurred in California. On July 23, 1982, the Board informed plaintiffs that its position would be that plaintiffs' failure to raise the "out-of-state use" defense at the administrative hearings constitutes a failure to exhaust their administrative remedies and this failure would preclude plaintiffs from raising that defense at trial. In the meantime, on June 3, 1982, at a meeting arranged by plaintiffs, plaintiffs presented preliminary evidence on the issue and the Board's auditor stated that certain additional evidence was needed to conclusively prove plaintiff's position.
On August 10, 1982, the Board informed plaintiffs that it would accept their offer of proof but that if it found the proof insufficient, the Board would take the position that plaintiffs had failed to exhaust their administrative remedies. 11 Thereafter, plaintiffs gathered additional evidence and forwarded it to the Board. After reviewing the evidence, the Board notified plaintiffs that it would take the position at trial that plaintiffs had failed to exhaust their administrative remedies and therefore should be precluded from presenting evidence on out-of-state uses at trial. It was this position which prompted the Board to file its motion in limine, by which the Board sought to preclude just such evidence.
On appeal plaintiffs contend the trial court erred in granting the Board's motion in limine. They argue they were not required to assert their "out-of-state use" defense at the administrative hearings in order to be able to assert it in this action.
Plaintiffs also contend the court erred in granting the motion for summary judgment. They assert that a triable issue of material fact exists concerning the nature and purpose of the type B contracts.
Finally, plaintiffs contend that taxing the royalties which they received from their record club contracts constitutes a double taxation which is prohibited by the Revenue and Taxation Code.
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