In the Matter of the Claim for Refund Under the Sales and Use Tax Law of:
PAUL MAVRIDES
Claimant
DECISION AND RECOMMENDATION
The Appeals conference in the above-referenced matter was held by Staff
Counsel Carl J. Bessent on January 20, 1995, in Sacramento, California.
Appearing for Claimant:
Mr. Paul Mavrides
Mr. Sanford Presant
Attorney at Law
Appearing for the Sales and Use Tax Department:
Ms. Elsa Vega
Senior Tax Auditor
Mr. Phillip Bishop
Supervising Tax Auditor
Type of Business:
Independent contractor who performs work as an artist and writer.
Subject of Claim
Claimant seeks a refund of tax for the period January 1, 1990 through
December 31, 1990.
Item
Total amount claimed.
Claim
$1,467.70
A 10 percent penalty paid for failure to pay timely under Revenue and Taxation Code Section 6591 is included in the claim for refund.
Claimant's Contentions
1. Claimant delivered to California publishers its comic book manuscripts consisting of sequential pictorial-text story telling, which constituted the delivery of an original author's manuscript under Sales and Use Tax Regulation 1543 (b) (1) (a).
2. The imposition of sales tax on the delivery of comic manuscripts to claimant's California publishers constitutes an impermissible violation of claimant's right of free speech under the First Amendment to the United States Constitution, and claimant's right to equal protection under the law.
3. A claim for refund should be granted on the portion of the assessment representing sales tax on claimant's royalties on sales of comic books outside of California.
4. For those manuscripts delivered to California publishers, the publishers should be viewed as claimant's agents or partner in effecting sales as retailers in interstate commerce.
Summary
Claimant is an author and creator of comic books. A notice of determination dated September 12, 1991, was billed based on the Sales and Use Tax Department's Return Review Section disallowing royalties claimed by claimant on his 1990 return.
Sometimes claimant provides the publisher with a full page black and white outline that contains the page layout frame-by-frame, illustration outlines, and placement of the text that accompanies the illustrations. This item is photographed to develop an acetate overlay of desired size for printing the final page. In other instances, claimant provides a frame-by-frame color presentation (claimant does the coloring by hand) that the publisher uses to produce the color separations by photographing the work with different camera filters. In some instances claimant would send the "original manuscript" to the publisher for processing. In other situations claimant would send a reproduction page which may be the same size, smaller or larger than the final copy. Claimant stated that he could have transferred his work electronically, however, none of his work was transferred electronically during 1990. Claimant contends that his delivery to California publishers of comic book manuscripts, consisting of sequential pictorial/text story telling constitutes the delivery of "original author's manuscript" which is not subject to sales tax under Regulation 1543 (b) (1) (A). Claimant states that the regulation expressly provides that the "transfer of any paper, tape, diskette, or other tangible personal property transferred as a means of expressing an idea is not taxable." Attached as Exhibit "1" is a copy of a sample of claimant's 1990 works. Claimant states that, by looking at his work, one can see that the integrated presentation of text, pictures, and color [our copy is only in black and white] to create mood in sequential story telling format is clearly a manuscript that is an integrated means of expressing an idea. Claimant contends that the story is the key. Claimant states that a person "reads" a comic book, not just "looks" at a comic book.
Claimant states that under Regulation 1543 (b) (1) (A) the form, content, and manner of presentation of an author's manuscript expressing an idea is not relevant to whether the manuscript transfer is taxable. Also, claimant contends that the issue of whether the manuscript requires typesetting before publication or is camera ready with mirror duplication required for publication is irrelevant. Claimant points out that his manuscripts easily could have been transferred digitally to the publisher, via computer disc, instead of hard paper, had the regulation even suggested that the form of transmission was relevant. It is claimant's position that comic books are entitled to be treated as literature, despite their nontraditional content and social commentary.
Claimant states that although transfers of illustrations are subject to sales tax under Regulation 1543 (b) (1) (B), illustrations are not subject to sales tax if they illustrate text written by the illustrator and merely are incidental to the editorial matter. Claimant contends that an exemption for illustrations would implicitly recognize that an author's manuscript exemption is appropriate only where the author's expressions of the idea or story is the principal purpose of the work - not the sale of commercial art. Young children's story books and comic books are similar in that the text and illustrations are integral to the story telling and the illustrations and color constitute textural presentation to the same degree as the written word. Claimant pointed out that the comic book "Maus" by Art Spiegelman won the Pulitzer Prize, the ultimate literary accolade.
According to claimant, California would be the only state imposing a sales tax on a comic book manuscript delivered to a publisher. Claimant asserts that California resident comic book creators will either be forced to seek non-California publishers for their works or force California publishers to either leave the state or curtail comic book publication.
The Sales and Use Tax Department (Department) contends that claimant is liable for payment of sales tax on his sales to California publishers of art work for use in the publisher's comic books. Even though the publishers may own the copyrights to the work, claimant is liable for payment of sales tax on his sales to the California publisher. Even where claimant retains all copyrights to, and ownership of, his original work, claimant's transactions with the California publishers are leases of tangible personal property and remain subject to tax.
Next, claimant contends that the imposition of sales tax on the delivery of comic manuscripts to California publishers constitutes an impermissible violation of claimant's right of free speech under the First Amendment to the Constitution and his right to equal protection under the law. Claimant asserts that a violation occurs because such additional level of taxation unfairly differentiates claimant's comic manuscripts from other authors' manuscripts on the basis of content, presentation, and manner of expression. The imposition of an additional tax on claimant's manuscripts will prevent claimant from exercising his right to free speech by publishing his works because the tax will eliminate too much of the limited economic incentives to publishers for doing business in California. Claimant states that it is constitutionally appropriate either to tax all authors or none of them, but not to create a classification under which traditional authors are exempt from tax but the expression of "underground" authors are taxed.
The ACLU submitted a brief in support of claimant's position. The ACLU cited numerous authorities. However, none of the authorities involved the interpretation of either Regulation 1543 (b) (1) (A) or (B). The ACLU contends that Regulation 1543 (b) (1 (B) is impermissibly distinguished from Regulation 1543 (b) (1) (A).
The Department states that, while claimant's right to litigate preserves the constitutional issues, the Board has no jurisdiction to act on issues regarding whether a tax is constitutional or not.
Claimant states that under Regulation 1620 (a) (3) (B) the portion of the assessment representing tax on claimant's royalties from sales of comic books outside California is incorrect. Claimant asserts that the royalties that he received in 1990, on out-of-state sales, represent payment for the continuing sale of work as a retailer in interstate commerce and such royalties are exempt from California tax. Claimant contends that, even if sales tax is held to be payable on the delivery to California publishers of comic manuscripts, the portion attributable to royalties on out-of-state sales is exempt because claimant's California publishers are not the purchasers' representatives. Claimant's delivery of comic manuscripts to publishers does not fall within the exception to the interstate commerce exemption of Regulation 1620 (a) (3) (B). Instead, claimant alleges that the publishers should be viewed as his agents or partners in effecting sales as retailers in interstate commerce.
The Department states that claimant was unable to provide documentation supporting the sale of the camera ready artwork to an out-of-state or foreign publisher pursuant to the provisions of Regulation 1620 (a) (3) (B) or (C). Therefore, claimant was unable to establish the royalties were related to an exempt sale of camera ready art work in interstate or foreign commerce. Furthermore, the Department states that unless the sales were exempt from sales tax as sales in interstate commerce in accordance with Regulation 1620 (a) (3) (B) or (C), the gross receipts are subject to tax. At the conference, I requested claimant to provide proof that the comic strips were sent to an out-of-state publisher. To date, no such documentation has been provided.
At the conference, I stated that a request for relief from penalty statement would have to be provided under penalty of perjury for the relief of penalty to be considered in the event that I recommended that the Department's position be upheld. No such request for relief of penalty statement has been provided.
Analysis and Conclusions
Before discussing the application of Regulation 1543, we must discuss the true object sought by the publishers.
Sales and Use Tax Regulation 1501 discusses the distinction between services and sales. The regulation provides that the sale of tangible personal property incidental to the performance of a service is not taxable. In relevant part the regulation provides:
"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 object of the contract; that is, is the real object sought by the buyer the service per se or the property produced by the service. ... [A]n 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." (Emphasis added.)
I agree with claimant that the value of a comic strip and comic book lie in their ability to express an idea. The issue, however, is whether the real object sought by the publisher is the service of creating the comic per se or the expression of the idea in its physical form. It is clear that the publisher desires the expression of the idea in its physical form. I conclude that the comics provided are camera ready art.
The situation in this matter is distinguishable from the example in the regulation of a manuscript transferred to a publisher by the author. The publisher does not need the manuscript itself, and is interested only in the words and ideas contained therein. The manuscript is merely a convenient method of conveying words and ideas. The regulation makes it clear that tax applies in cases where the buyer desires the manuscript as an item of tangible personal property.
Since the true object sought by the publisher is the property produced by the service of creating the comics, rather than the service per se, the transfer of possession of the comics to the publisher in California for a consideration is subject to tax.
Retail sales of illustrations in California are subject to tax. Even when the artist retains title to the original illustration, tax applies to the lease of the illustration. (See Sales and Use Tax Annotation 100.0135.) The applicable tax on a lease is a use tax upon the use in California of the property by the lessee.
Regulation 1543, "publishers", was enacted July 31, 1990. Under Revenue and Taxation Code Section 7051, all regulations are applicable to past transactions, unless the Board elects to adopt the regulation "without retroactive effect". No such election was made with respect to Regulation 1543. Therefore, it is applicable to all transactions in this matter.
The transfer by an author to a publisher of an original manuscript is not subject to tax if the transfer is for the purpose of publication. This rule applies whether the manuscript is on paper or in machine readable form. The transfer of any paper, tape, diskette, or other tangible personal property that is transferred, as a means of expressing an idea, is not taxable. However, tax applies to the sale of mere copies of an author's work. (See Regulation 1543 (b) (1) (A) .)
Charges for the transfer of illustrations are taxable whether or not they are copyrighted. An exception to this rule is transfers of illustrations that illustrate text written by the illustrator and that is merely incidental to the editorial matter. (See Regulation 1543 (b) (1) (B).
Regulation 1543 (b) (3) (A) states that tax applies to the gross receipts from the retail sale of camera ready art or camera ready copy. Revenue and Taxation Code section 6012 does not allow a deduction from gross receipts for royalties received on the sale of camera ready artwork.
Here, what claimant produced is not a manuscript of words and numbers, but is a manuscript of both text and illustrations. Claimant chose to do business in this manner by providing the original artworks, or reproductions of the originals, instead of sending the illustrations electronically. The illustrations are not incidental to the manuscript; thus, the comics are subject to tax.
Claimant raised constitutional issues regarding the First Amendment right of free speech and the right to equal protection. Article III, Section 3.5 of the California Constitution provides that no agency of the State may refuse to enforce a statute on the basis of a conclusion of the agency that the law is unconstitutional unless a decision to that effect has been rendered by a Court. While claimant's right to litigate is reserved by raising the constitutional issue, the Board has no jurisdiction to act on this issue. Thus, I am not in a position to declare Regulation 1543 (b) (1) (B) unconstitutional even if I believed it to be invalid.
In regards to the loss of California revenue to other states, the possible impact of this decision on other businesses cannot affect my recommendation in this case. Claimant may be correct that there would be a revenue loss to other states, but I have no authority to change the law.
Claimant has not provided documentation to support the sale of camera ready artwork was to an out-of-state or foreign publisher pursuant to the provisions of Regulation 1620 (a) (3) (B) or (C). Therefore, claimant was unable to establish that the royalties were related to an exempt sale of camera ready art work in interstate or foreign commerce.
Recommendation
Deny the claim.
Carl Bessert, Staff Counsel
Date
May 18 1995
Attachment:: Exhibit 1
Original file name: The Con's LIES vs. our LIES
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