Simplicity Pattern Co. v. State Bd. of Equalization

• Decision Date: 18 August 1980
• Citation: 615 P.2d 555,167 Cal.Rptr. 366,27 Cal.3d 900
• Court: California Supreme Court
• Parties: , 615 P.2d 555 SIMPLICITY PATTERN COMPANY, INC., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. L.A. 31243.

Page 366

167 Cal.Rptr. 366

27 Cal.3d 900, 615 P.2d 555

SIMPLICITY PATTERN COMPANY, INC., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

L.A. 31243.

Supreme Court of California.

Aug. 18, 1980.

Sheppard, Mullin, Richter & Hampton and Robert Joe Hull, Los Angeles, for plaintiff and appellant.

Stephen N. Hollman, Kadison, Pfaelzer, Woodard, Quinn & Rossi, Richard S. Cohen, Donovan, Leisure, Newton & Irvine, John Cooley Baity, Irell & Manella, Edward G. Victor, Kenneth I. Sidle and C. Kevin McGeehan, Los Angeles, amici curiae on behalf of plaintiff and appellant.

George Deukmejian, Atty. Gen., Arthur C. de Goede, Asst. Atty. Gen., Philip C. Griffin, Lawrence K. Keethe and Richard E. Nielsen, Deputy Attys. Gen., for defendant and respondent.

NEWMAN, Justice.

Plaintiff Simplicity Pattern Company appeals from a judgment in favor of defendant Board of Equalization. The judgment denies a refund of sales tax on the transfer of film negatives and master recordings used to make audiovisual materials that help train nurses, paramedics, and other medical personnel. The transfer was part of a sale by plaintiff of the segment of its business devoted to producing and marketing such materials, consummated in 1971 through an exchange of the assets and name of its wholly owned subsidiary, Trainex Corporation, for common stock of (but less than a controlling interest in) Medcom, Inc., the transferee's parent. Trainex dissolved after the exchange, and plaintiff assumed its liabilities.

Plaintiff contends that the sale of negatives and recordings was not taxable because it (1) was not a sale of tangible personal property, (2) was a sale for resale, and (3) should escape tax by reason of its resemblance to a statutory merger. Trial was based on stipulated facts, with exhibits; there was no other evidence. Defendant assessed sales tax on these items carried as inventory accounts on the transferor's books:

"Films and Records

"Negative costs ($814,688),

less amortization ($418,780) $395,908

"In Process of Development $227,750"

The components of those items apparently include all costs of materials and services for "preparation of master film strip negative, master and tape and printing proofs" but not the additional cost of making copies for retail sale. ¹ The stipulation notes that under the agreement "Old Trainex (the transferor) assumed liability for any sales or other taxes payable by reason of the transfer of the assets of Old Trainex, and it was agreed that, for such purpose, the assets of Old Trainex would be valued as shown on the books of Old Trainex less book depreciation."

Plaintiff paid and then claimed a refund of $34,900.04 in taxes and interest, and on denial of its claim commenced this action (see Rev. & Tax. Code, § 6932 et seq.). (All section references are to the Revenue and Taxation Code unless otherwise indicated.)

The standard of review here is set forth in Culligan Water Conditioning v. State Bd. of Equalization (1976) 17 Cal.3d 86, 130 Cal.Rptr. 321, 550 P.2d 593, where this court stated: "The Board contends that the assessment, grounded on what it denominates an administrative classification, may be overturned only if such classification was arbitrary, capricious or without rational basis. However it is clear from the record that the basis of the assessment was not embodied in any formal regulation or even interpretative ruling covering the water conditioning industry as a whole . . . but rather that the basis of the assessment was nothing more than the Board auditor's interpretation of two existing regulations . . . . (O)ur present task is to determine whether the Board in making the assessment in controversy has properly interpreted the relevant sections of the Sales and Use Tax Law and the Board's own relevant regulations adopted pursuant to such law. We recently summarized our proper function thusly: 'The interpretation of a regulation, like the interpretation of a statute, is, of course, a question of law (citations), and while an administrative agency's interpretation of its own regulation obviously deserves great weight (citations), the ultimate resolution of such legal questions rests with the courts. (Citations.)' (Carmona v. Division of Industrial Safety, supra, 13 Cal.3d 303, 310, 118, Cal.Rptr. 473, 530 P.2d 161 . . . .) Therefore, giving the appropriate weight to the Board's interpretation, we must decide whether the receipts from plaintiff's customers . . . are taxable rentals for leases of tangible personal property within the meaning of the applicable provisions of the Sales and Use Tax Law and regulations promulgated thereunder." (17 Cal.3d at pp. 92-93, 130 Cal.Rptr. at pp. 324-325, 550 P.2d at pp. 596-597; fn. omitted. See too International Business Machines v. State Bd. of Equalization (1980) 26 Cal.3d 923, 931, fn. 7, 163 Cal.Rptr. 782, 609 P.2d 1.)

TANGIBLE PERSONAL PROPERTY?

California imposes a sales tax on "the privilege of selling tangible personal property at retail." (§ 6051.) " 'Tangible personal property' means personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses." (§ 6016.)

Plaintiff contends its film negatives and master recordings were not tangible because the purchaser's primary interest was not in the physical objects but rather in the right to exploit the intellectual products they embodied. Intellectual property has been called an "intangible incorporeal right" existing separately from the physical medium that embodies it. (Italiani v. Metro-Goldwyn-Mayer Corp. (1941) 45 Cal.App.2d 464, 466, 114 P.2d 370 (statute of limitations for injury to goods inapplicable to plagiarism suit).)

Might the negatives and recordings here be deemed only partially tangible for purposes of the tax? Generally, physical objects valued in part for their intellectual content may be taxed as tangible personal property on their total worth. (Michael Todd Co. v. County of Los Angeles (1962) 57 Cal.2d 684, 21 Cal.Rptr. 604, 371 P.2d 340 (assessment of movie film negatives as "tangible personal property" may include copyright value); Roehm v. County of Orange (1948) 32 Cal.2d 280, 285, 196 P.2d 550 (property tax); Western Title Guaranty Co. v. County of Stanislaus (1974) 41 Cal.App.3d 733, 116 Cal.Rptr. 351 (property tax); see too cases holding negatives and master tapes to be tangible property for investment tax credit: Texas Instruments Inc. v. United States (5th Cir. 1977) 551 F.2d 599, 608; Walt Disney Productions v. United States (9th Cir. 1976) 549 F.2d 576.)

Accordingly, if plaintiff's films and recordings were tangible property the tax on their transfer was measurable by what plaintiff received for them as a whole, without deduction for amounts paid for their intellectual or other intangible components. Sales tax is measured by a percentage of seller's gross receipts (§ 6051) except for deductions expressly authorized. (See §§ 6011 and 6012, defining "sales price" and "gross receipts".) Illustratively, section 6362.5 (enacted after the transaction now before us) limits tax on sales of master sound tapes or records to amounts the customer pays for "tangible elements" exclusive of "copyrightable, artistic or intangible elements." Other laws similarly exclude intangible elements of value from property tax assessment. § 986 (art work held by artist); § 988 (motion picture; nullifying effect of Michael Todd, supra, 57 Cal.2d 684, 21 Cal.Rptr. 604, 371 P.2d 340); §§ 995-995.2 (computer programs).) The creation of those specific exceptions seems to confirm the general rule of includability of all value components. (Culligan, supra, 17 Cal.3d at 97, 130 Cal.Rptr. 321, 550 P.2d 593; ² and see the Board's regulation 1501: "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." (CAL.ADMIN.CODE, TIT. 18, CH. 2, S 1501. )³ See too reg. 1502(f)(1) (tax on sale on tangible property incorporating computer program applies to entire amount charged, including license fees and royalties); Thys v. State (1948) 31 Wash.2d 739, 199 P.2d 68 (annual royalties payable to purchasers of hop-picking machines included in the taxable selling price).)

Was the present sale one of tangible property? Distinct issues are involved in the questioned status of (1) completed films and records, carried on the transferor's books as "(n)egative costs less amortization", and (2) films and records in "process of development".

Plaintiff contends that to transfer completed negatives and recordings is not to sell tangible property when the transfer's "true object" is their intellectual rather than their physical substance, citing Albers v. State Board of Equalization (1965) 237 Cal.App.2d 494, 47 Cal.Rptr. 69. Albers held the sale of a draftsman's drawing of construction plans taxable because the true object of the transaction was the drawing itself rather than architectural or engineering services that, if rendered by the transferor, might have made the drawing merely incidental. That true object concept appears in regulation 1501: "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."

Culligan, supra, 17 Cal.3d 86, 96, 130 Cal.Rptr. 321, 327, 550 P.2d 593, 599, construed that regulation to require imposition of sales tax on the lease of...