In re Advance Schools, Inc.

• Decision Date: 16 January 1980
• Docket Number: Bankruptcy No. 75 B 4169.
• Citation: 2 BR 231
• Parties: In re ADVANCE SCHOOLS, INC., a Delaware Corporation, a/k/a Advance Trade Schools, Debtor. CALIFORNIA STATE BOARD OF EQUALIZATION, Claimant, v. ADVANCE SCHOOLS, INC., a Delaware Corporation, a/k/a Advance Trade Schools, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

2 B.R. 231 (1980)

In re ADVANCE SCHOOLS, INC., a Delaware Corporation, a/k/a Advance Trade Schools, Debtor CALIFORNIA STATE BOARD OF EQUALIZATION, Claimant, v. ADVANCE SCHOOLS, INC., a Delaware Corporation, a/k/a Advance Trade Schools, Debtor.

Bankruptcy No. 75 B 4169.

United States Bankruptcy Court, N.D. Illinois, E.D.

January 16, 1980.

Whitman H. Brisky and Robert O. Case of Walsh, Case & Coale, Chicago, Ill., for debtor.

Ben H. Kessler, Chicago, Ill., for claimant.

ORDER

LAWRENCE FISHER, Bankruptcy Judge.

This matter coming on to be heard upon the Objection of Advance Schools, Inc., Debtor, to Claim No. 95 as amended filed by the California State Board of Equalization in the amount of $69,056.54, and

The Court having examined the Claim and the Objection thereto filed in this matter, and having received and examined the evidence adduced and the Stipulation of Facts entered into by the parties, and having heard the testimony of a witness and arguments of counsel, and having received and examined Memoranda of Law in support of the respective positions of the parties, and the Court being fully advised in the premises;

The Court Finds:

1. Advance Schools, Inc., is a Delaware corporation having its principal place of business in Chicago, Illinois.

2. Beginning October 1, 1970 and ending March 31, 1975, Advance Schools, Inc. offered correspondence courses throughout the country in a number of trades, such as drafting, electrical service, and radio and television repair, and maintained several sales offices and sales representatives within the State of California. During this period, students residing in the State of California enrolled, for consideration designated as tuition, in thousands of the courses offered by the Debtor. As a part of each course, the student received certain materials, which generally included books, printed lessons, training kits, and tools, when applicable. No separate charge was made for these items.

3. Cal.Rev. & Tax.Code § 6201 provides:

"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 at the rate of 3 percent of the sales price of the property, and at the rate of 2½ percent on and after July 1, 1943, and to and including June 30, 1949, and at the rate of 3 percent on and after July 1, 1949, and to and including July 31, 1967, and at the rate of 4 percent on and after August 1, 1967, and to and including June 30, 1972, and at the rate of 3¾ percent on and after July 1, 1972, and to and including June 30, 1973, and at the rate of 4¾ percent on the after July 1, 1973, and to and including September 30, 1973, and at the rate of 3¾ percent on and after October 1, 1973, and to and including March 31, 1974, and at the rate of 4¾ percent thereafter."

4. Cal.Rev. & Tax.Code § 6203 provides in part as follows:

". . . every retailer engaged in business in this state and making sales of tangible personal property for storage, use, or other consumption in this state,. . . . shall, at the time of making the sales. . . . collect the tax from the purchaser and give to the purchaser a receipt therefor in the manner and form prescribed by the board.

. . . . .

. . . `Retailer engaged in business in this state\' as used in this and the preceding section means and includes any of the following:

(a) Any retailer maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business.

(b) Any retailer having any representative, agent, salesman, canvasser or solicitor operating in this state under the authority of the retailer or its subsidiary for the purpose of selling, delivering, or the taking of orders for any tangible personal property. . . . "

5. Cal.Rev. & Tax.Code § 6204 provides:

"The tax required to be collected by the retailer and any amount unreturned to the customer which is not tax but was collected from the customer under the representation by the retailer that it was tax constitutes debts owed by the retailer to this state."

6. On or about February 25, 1971, the president of Advance Schools, Inc. signed and submitted to the California State Board of Equalization an Application for Certificate of Registration—Use Tax. The Debtor herein paid $2.50 per course as California sales or use taxes until on or about October 1, 1974. Thereafter, the Debtor charged each student $9.14 per course as California sales or use taxes and paid these amounts over to the California State Board of Equalization.

7. On April 24, 1975, Advance Schools, Inc. filed its voluntary petition for relief under Chapter XI of the Bankruptcy Act.

8. On March 31, 1977, the California State Board of Equalization filed its Second Amended Claim for use taxes owed by the Debtor herein for the period beginning October 1, 1970 and ending March 31, 1975.

9. Advance Schools, Inc. objects to the Second Amended Claim of the California State Board of Equalization on three grounds: (1) that the California Sales and Use Tax is in violation of the Constitutions of the United States and of the State of California both on its face and as applied to the Debtor herein; (2) that the Claim was improperly calculated in that the measure of the tax should have been the cost of the subject property to Advance Schools, Inc.; and (3) that Advance Schools, Inc. does not owe any part of the Claim for use taxes, as the Debtor herein was engaged primarily in rendering a service, and that any property transferred was merely incidental to the performance of that service.

10. Cal.Admin.Code, tit. 18 § 1501 provides as follows:

"Persons engaged in the business of rendering service are consumers, not retailers, of the tangible personal property which they use incidentally in rendering the service. Tax, accordingly, applies to the sale of the property to them. If in addition to rendering service they regularly sell tangible personal property to consumers, they are retailers with respect to such sales and they must obtain permits, file returns and remit tax measured by such sales. If their purchases of tangible personal property are predominantly for consumption rather than for resale, they should not give resale certificates covering such purchases but should follow the procedure prescribed in the regulation governing `Tax-paid Purchases Resold\'. The basic distinction in determining whether a particular transaction involves a sale of tangible personal property or the transfer of tangible personal property incidental to the performance of a service is one of the true objects of the contract; that is, is the real object sought by the buyer the service per se or the property produced by the service. If the true object of the contract is the service per se, the transaction is not subject to tax even though some tangible personal property is transferred. For example, a firm which performs business advisory, record keeping, payroll and tax services for small businesses and furnishes forms, binders, and other property to its clients as an incident to the rendition of its services is the consumer and not the retailer of such tangible personal property. The true object of the contract between the firm and its client is the performance of a service and not the furnishing of tangible personal property. Similarly, an idea may be expressed in the form of tangible personal property and that property may be transferred for a consideration from one person to another; however, the person transferring the property may still be regarded as the consumer of the property. Thus, the transfer to a publisher of an original manuscript by the author thereof for the purpose of publication is not subject to taxation. The author is the consumer of the paper on which he has recorded the text of his creation. However, the tax would apply to the sale of mere copies of an author\'s works or the sale of manuscripts written by other authors where the manuscript itself is of particular value as an item of tangible personal property and the purchaser\'s primary interest is in the physical property. Tax would also apply to the sale of artistic expressions in the form of paintings and sculptures even though the work of art may express an original idea since the purchaser desires the tangible object itself; that is, since the true object of the contract is the work of art in its physical form.

When a transaction is regarded as a sale of tangible personal property, tax applies to the gross receipts from the furnishing thereof, without any deduction on account of the work, labor, skill, thought, time spent, or other expense of producing the property.

Examples of service enterprises and regulations pertaining thereto will be found in regulations which follow."

11. Howard Hoogesteger, Vice President of Education of Advance Schools, Inc., testified at a hearing held on August 11, 1977 that the students enrolled in Debtor's correspondence courses received the lessons, kits, and other materials at varying times throughout each course. He further testified that Advance Schools, Inc. did not sell the subject items of tangible personal property other than providing the same in connection with correspondence courses, with the possible exception of occasional replacement sales to active students whose materials had been destroyed, damaged, or otherwise lost. These infrequent replacement sales would be made at cost plus shipping charges.

Mr. Hoogesteger also testified as to the school's refund policy in connection with partially completed courses. A refund was calculated on a pro rata basis whereby the student was charged only for those lessons which he had completed. The amount of personal property transferred prior to the...