Capitol Records, Inc. v. State Bd. of Equalization

• Decision Date: 24 July 1984
• Citation: 204 Cal.Rptr. 802,158 Cal.App.3d 582
• Court: California Court of Appeals Court of Appeals
• Parties: CAPITOL RECORDS, INC., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. Civ. 21260.

Page 802

204 Cal.Rptr. 802

158 Cal.App.3d 582

CAPITOL RECORDS, INC., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

Civ. 21260.

Court of Appeal, Third District, California.

July 24, 1984.

Hearing Denied Sept. 26, 1984.

Donovan Leisure Newton & Irvine, Hunton & Williams, John Cooley Baity, Theodore S. Hope, Jr., Richard H. Sayler, Edward L. Marx and Lloyd C. Blankfein, New York City, for plaintiff and appellant.

Irell & Manella, Kenneth I. Sidle and Lawrence E. Goldenhersh, Los Angeles, amici curiae for plaintiff and appellant.

George Deukmejian, Former Atty. Gen., John K. Van de Kamp, Atty. Gen., and Edward P. Hollingshead, Deputy Atty. Gen., for defendant and respondent.

SIMS, Associate Justice.

In this case, we hold, among other things, that the State Board of Equalization (Board) properly imposed use tax on plaintiff's acquisition of master sound tapes, made by independent producers and used in the production of phonograph records, even though the Board did not impose tax on the acquisition by major movie studios of movies made by independent film producers and also useful in the production of phonograph records.

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiff Capitol Records, Inc. (Capitol) appeals from a portion of a judgment entered after the court found the Board properly collected sales and use taxes on Capitol's acquisition and licensing of master tapes used to produce phonograph records.

Capitol (which maintains its principal place of business in Hollywood, California) is a full line record company which produces, manufactures, promotes and distributes records, record albums, and prerecorded cassette, eight-track, and reel-to-reel tapes.

The master tapes at issue here are the prototypes from which record companies, such as Capitol, manufacture their products. They are made by editing and "mixing down" multiple-track tape recordings of sounds generated by instruments, singers and/or speakers at studio recording sessions. For record production, the master tape is used to cut a "lacquer master" from which a "stamper" for use in compression molding machines is ultimately derived. Cassette and eight-track prerecorded tapes are made from a "duplicating master," which in turn is made from the master tape.

Original master tapes are acquired by Capitol in one of three ways: (1) Capitol hires the exclusive services of artists (via a contract denoted "type A" in this litigation), conducts recording sessions at its facilities, and makes its own master tapes; (2) Capitol purchases (via a "type B" contract) master tapes made by others before any copies or lacquer masters are made; and (3) Capitol finances costs of independent production companies (with whom artists have exclusive contracts) and pays royalties in exchange for ownership of master tapes produced by these independent companies (a "type C" contract). ¹

Capitol also engages in transactions involving duplicate master tapes or "copy tapes." Capitol sometimes agrees to license another company to manufacture, promote, and distribute records and/or tapes owned by Capitol. Pursuant to the license agreement, Capitol makes a duplicate master tape for the licensee. Duplicate master tapes are sometimes transferred to Capitol from other companies pursuant to similar licensing agreements.

At issue in this suit are use taxes assessed on amounts paid by Capitol to acquire original master tapes made outside the state in connection with "type B" and "type C" contracts for accounting periods in 1968, 1969, 1970 and 1971. ² (There is no issue as to "type A" contracts.) Also at issue are use taxes imposed on amounts paid by Capitol for its acquisition of duplicate master tapes from other record companies, located out of state, and sales taxes imposed on amounts received by Capitol for furnishing duplicate master tapes to other companies, all pursuant to licensing agreements. Capitol paid the amounts assessed and claimed a refund from the Board. It brought suit when the Board denied its claim. (See Rev. & Tax Code, § 6933; all further statutory references are to the Revenue and Taxation Code unless otherwise indicated.)

DISCUSSION

I

A

We begin with a brief overview of the California use tax law and of principles applicable to suits by taxpayers seeking refunds.

Section 6201 defines the use tax and section 6202 specifies who pays it. Section 6201 provides in pertinent part: "An excise tax is hereby imposed on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer on or after July 1, 1935, for storage, use or other consumption in this state ...." Section 6202 provides in relevant part: ³ "Every person storing, using, or otherwise consuming in this State tangible personal property purchased from a retailer is liable for the tax. His liability is not extinguished until the tax has been paid to this State ...."

Discussing the purpose of the use tax, this court has said that, "The Use Tax Law (§§ 6201-7273 et seq.) was designed to reach transactions involving property purchased from outside the state, not subject to California sales tax so that an unfair burden would not be placed upon local retailers engaged in intrastate commerce; ... The use Tax Law is complemental to the California Retail Sales Act of 1933 so that all taxable property is taxed once for the support of the state government." (McConville v. State Bd. of Equalization (1978) 85 Cal.App.3d 156, 159, 149 Cal.Rptr. 194, citations omitted; see Burroughs Corp. v. State Bd. of Equalization (1984) 153 Cal.App.3d 1152, 1159, 200 Cal.Rptr. 816; Traynor, The California Use Tax (1936) 24 Cal.L.Rev. 175, 176.)

We also note that "In a suit for refund of tax, the burden of proof is on the taxpayer. (Flying Tiger Line v. State Bd. of Equal. (1958) 157 Cal.App.2d 85, 99 .) ... In an action for refund, 'the taxpayer has the burden of proof to show that he is entitled to his claim. He cannot assert error and thus shift to the state the burden to justify the tax....' (Hall v. Franchise Tax Board (1966) 244 Cal.App.2d 843, 848 .)" (Honeywell, Inc. v. State Bd. of Equalization (1982) 128 Cal.App.3d 739, 744, 180 Cal.Rptr. 479; see Paine v. State Bd. of Equalization (1982) 137 Cal.App.3d 438, 442, 187 Cal.Rptr. 47.)

B

Capitol first contends the Legislature specifically provided a retroactive exemption In 1975, the Legislature enacted section 6362.5, ⁴ which exempted from tax the gross receipts received for the sale, lease, storage or use of master tapes or master records. (Stats.1975, ch. 1116, § 1, p. 2708.) However, subdivision (a) of the statute provided that tax would continue to be due on "amounts ... paid by a customer in connection with the customer's production of master tapes or master records to a recording studio for the tangible elements of such master records or master tapes." (Ibid.) The 1975 enactment specifically provided, "The provisions of this act are not intended by the Legislature to support any inference about the meaning of the law prior to the operative date of this act." (Ibid.)

                from taxation for master tapes during the years in question when the Legislature amended section 6362.5 in 1982.  (Stats.1982, ch. 951, § 1, pp. 3442-3443.)   In order to evaluate Capitol's argument, we review the history of section 6362.5
                

The parties agree that the enactment of section 6362.5 in 1975 gave Capitol what it seeks in this suit for years after 1975--an exemption from taxation on transfer of master tapes. The parties further agree that the 1975 legislation operates prospectively only and cannot be a basis of upholding Capitol's position in this case.

In 1982, the Legislature enacted A.B. 2871. Section 1 of that act amended subdivision (b)(2) of section 6362.5 to add the following underscored language: "(2) 'Amounts paid for the furnishing of the tangible elements' shall not include any amounts paid for the copyrightable, artistic or intangible elements of such master tapes or master records, whether designated as royalties or otherwise including, but not limited to, services rendered in producing, fabricating, processing, or imprinting tangible personal property or any other services or production expenses in connection therewith which may otherwise be construed as constituting 'sale' under Section 6006." (Stats.1982, ch. 951, § 1, p. 3443.)

The 1982 amendment also included the following statement of legislative intent: "The Legislature finds and declares that Section 1 [quoted above] of this act is declaratory of, and not a change in, existing law. It is the intent of the Legislature in enacting this act to clarify the existing law and to affect all applicable pending proceedings." (Stats.1982, ch. 951, § 2, p. 3443.)

Capitol contends the 1982 amendment reflects an expression of legislative intent to apply all of section 6362.5 (including the explicit exception afforded master tapes in subdivision (a)) retroactively to all "pending proceedings," including this case. We are unpersuaded.

We have examined certain materials submitted to us by the parties containing indications of the collegial intent of the Legislature in enacting the 1982 amendment. (See Commodore Home Systems, Inc. v. Superior Court (1982) 32 Cal.3d 211, 222-223, 185 Cal.Rptr. 270, 649 P.2d 912.) ⁵

These [158 Cal.App.3d 591] materials are the staff commentaries of the Assembly and Senate Committees on Revenue and Taxation ⁶ and the Legislative Counsel's Digest. ⁷

These materials make it clear that the purpose of the 1982 amendment to section 6362.5 was to attempt to clarify whether fabrication costs of independent recording engineers and producers were subject to tax under the 1975 statute. There was no intent to apply the 1975 legislation retroactively. The amendment purports to reach back to 1975 and to affect claims subject to adjudication under the 1975 statute, but the amendment does not attempt to affect claims such as...