Preston v. State Bd. of Equalization
| Decision Date | 02 April 2001 |
| Docket Number | No. S083632.,S083632. |
| Citation | 25 Cal.4th 197,105 Cal.Rptr.2d 407,19 P.3d 1148 |
| Court | California Supreme Court |
| Parties | Heather PRESTON, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. |
Nicholas Blonder, Mill Valley, for Plaintiff and Appellant.
Daniel E. Abraham; Nielsen, Merksamer, Parrinello, Mueller & Naylor, John E. Mueller and Eric J. Miethke, Mill Valley, for Graphic Artists Guild as Amicus Curiae on behalf of Plaintiff and Appellant.
Bill Lockyer, Attorney General, and Paul D. Gifford, Assistant Attorney General, for Defendant and Respondent.
In this case, we consider whether: (1) a taxpayer who fails to explicitly raise a contention in her claim for refund may still raise that contention in a subsequent lawsuit for that refund; and (2) a copyright interest in artwork, transferred in conjunction with the temporary transfer of the tangible artwork itself, is subject to sales tax. We conclude that a refund claim sufficiently raises any contention that is intertwined with or clearly implied from contentions explicitly raised in the claim. We further conclude that Revenue and Taxation Code 1 sections 6011, subdivision (c)(10) and 6012, subdivision (c)(10) () apply to the transactions at issue in this case and exempt the copyright transfers from taxation.
Heather Preston is a professional artist. From 1981 to 1993, Preston entered into a number of written agreements to provide artwork for use as book illustrations and rubber stamp designs (collectively, Agreements).
Under the terms of the first agreement, dated August 11, 1981, Preston provided Celestial Arts, a book publisher, with eight illustrations for Remember the Secret, a children's book. Celestial Arts received "the right to reproduce the artwork in the book and in publicity and promotion connected with the book." In return, Celestial Arts gave Preston "a 5% of cash received royalty on books sold" and paid her $1,500 as an advance against future royalties.
From 1988 to 1993, Preston entered into a series of agreements with All Night Media, a rubber stamp manufacturer. The agreements encompassed 54 designs created by Preston and gave All Night Media "[a]ll rights for the use of [Preston's] artwork on any and all rubber stamp products...." In return, Preston received a flat fee upon publication of the first All Night Media catalog containing the designs and an additional amount in the form of either a flat fee for each publication of the designs in a subsequent catalog or a 5 percent royalty on sales.
In the last agreement, Preston contracted with Enchante, a book publisher, to supply illustrations for a children's book, The Rainbow Fields. Enchante acquired "all of the exclusive rights comprised in the copyrights" contained in these illustrations, including the "unlimited perpetual right to sell, license, distribute, and otherwise use" these copyrights in any media. In return, Preston received a royalty from Enchante on all book, calendar and poster sales containing the illustrations and a $7,500 advance on these royalties. Preston also retained the right to reproduce the illustrations "solely for portfolio and self-promotion purposes."
Pursuant to these Agreements, Preston transferred "finished artwork in tangible form...." The clients "then copied or reproduced images from this finished artwork" for use in their products and returned the tangible artwork to Preston. Aside from those rights in the artwork expressly transferred under the Agreements, Preston retained all other rights in the artwork, including title.
In 1994, the State Board of Equalization (Board) conducted a sales and use tax audit of Preston's business records for the period of January 1, 1990, through December 31, 1993 (the audit period). The Board eventually determined that Preston owed sales tax in the amount of $1,711.82 and interest in the amount of $321.44 based on the amount of royalties she received from the Agreements during the audit period.
Preston paid the tax claimed due and filed a petition for redetermination of her tax liability. One month later, Preston timely submitted a claim for refund. In her six-page claim, Preston raised a number of objections to the assessed tax. For example, she argued that California Code of Regulations, title 18, section 1501 (hereafter Regulation 1501)—which specifically exempts a manuscript submitted for publication from sales tax—precludes taxation of the proceeds from her Agreements. She also claimed that these proceeds were not taxable because she only transferred
After a hearing, the Board concluded that the royalties were taxable gross receipts and denied Preston's petition for redetermination. Preston then paid the interest due. Soon after, the Board denied her claim for refund. Preston then filed the instant action, seeking a refund of the sales tax and interest that she paid. In her complaint, Preston alleged that "[t]he sales tax paid by plaintiff [Preston] should be refunded because the use rights transferred by her were intangible property." After a one-day hearing, the trial court found that "the items sold by Plaintiff [Preston] were tangible personal property, and not intangible property" and entered judgment for the Board.
The Court of Appeal affirmed. In support, the court concluded that: (1) Preston waived any claim premised on the nontax-ability of the Agreements' transfer of copyrights; (2) attainment of the tangible artwork was the true object of the Agreements because they "would have been worthless" without the tangible artwork; and (3) the Agreements transferred "possession ... of tangible personal property for a consideration" as understood in section 6006, subdivision (a).
We granted review to determine whether: (1) an administrative claim alleging that the taxpayer transferred only the right to reproduce and did not sell her artwork sufficiently raises a claim that the transaction involved the transfer of nontaxable copyrights; and (2) a taxpayer who temporarily transfers possession of tangible artwork solely for reproduction in books and merchandise but otherwise retains ownership of the artwork has to pay sales tax.
As a preliminary matter, we must determine whether Preston has exhausted her administrative remedies by sufficiently raising the copyright issue in her claim for refund. Although the Board concedes that Preston "alleges that she transferred solely intangible property," it contends she did not sufficiently allege that the transactions were nontaxable transfers of copyrights. Thus, she failed to exhaust her remedies as to any claim premised on federal copyright law. We disagree.
Before filing suit for a tax refund, a taxpayer must present a claim for refund to the Board. (§ 6932.) The claim "shall be in writing and shall state the specific grounds upon which the claim is founded." (§ 6904, subd. (a).) The purpose of these statutory requirements is to ensure that the Board receives sufficient notice of the claim and its basis. (See Wertin v. Franchise Tax Bd. (1998) 68 Cal. App.4th 961, 977, 80 Cal.Rptr.2d 644 [].) The Board then has an opportunity to correct any mistakes, thereby conserving judicial resources. (See Atari, Inc. v. State Bd. of Equalization (1985) 170 Cal.App.3d 665, 673, 216 Cal.Rptr. 267 (Atari).)
Despite these limits on actions against the Board, a taxpayer need not expressly raise a contention in order to meet the statutory exhaustion requirements. Where the contention is intertwined with contentions expressly raised in the refund claim, courts may consider that contention even though the claim did not explicitly raise it. (See Montgomery Ward & Co. v. Franchise Tax Bd. (1970) 6 Cal.App.3d 149, 164-165, 85 Cal.Rptr. 890 (Montgomery Ward) [].) In other words, unstated contentions clearly implied from contentions expressly raised in a claim for refund are sufficiently stated for purposes of exhaustion. (See Wallace Berrie & Co. v. State Bd. of Equalization (1985) 40 Cal.3d 60, 66, fn. 2, 219 Cal.Rptr. 142, 707 P.2d 204 (Wallace Berrie) [].)
In this case, Preston more than sufficiently raised the copyright issue in her claim for refund. First, the contention in her claim that the transactions at issue involve only the transfer of the "right of reproduction" and not the "`sale' of original artwork" sufficiently conveys her reliance on federal copyright law. Because the right "to reproduce the copyrighted work" is one of the rights given to copyright owners by statute (17 U.S.C. § 106), Preston's refund claim, by definition, raises a contention predicated on federal copyright law.
Second, Preston's discussion of Regulation 1501 adequately raises the copyright issue. In her refund claim, she analogizes an...
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