HEADLINE: Joni Mitchell and "America" musicians will receive refund of sales taxes assessed upon transfer of master tapes under recording contracts, rules California appellate court.

Singer Joni Mitchell and two members of the recording group "America," Gerald Beckley and Lee Bunnell, were entitled to a refund totalling about $1 million for sales taxes and penalties paid to the state, a California appellate court has ruled.

In upholding a lower court decision, the appellate court panel briefly described the recording agreements signed by Mitchell and and by Beckley and Bunnell. The artists were required to provide a specified number of master tapes to their respective record companies. Master tapes, stated the court, "are made by mixing down a multiple-track magnetic tape recording of the words and music of the artist into a two-track, one-quarter inch magnetic recording tape; the tape is used to make an acetate master, from which records are manufactured."

During the early 1970s, the State Board of Equalization began assessing sales tax against companies and artists based upon the transfer of master tapes. The Board viewed the artists as the owners of the master tapes because raw materials were charged to the artists' accounts, the masters were not in existence when the contracts were executed, and the contracts referred to completed products. Thus, for the Board, the agreements in issue were sales contracts, not agreements for personal services.

Judge Donald Gates, however, observed that the artists had agreed to provide their exclusive personal services directly to the record companies, and that the companies would own all master recordings and exclusive use of the artists' performances, names, and likenesses. The fact that the contracts may have characterized the artists as independent contractors and referred to the "delivery" of master tapes did not mean that the companies' acquisition of the master tapes constituted a sale for "a master tape can be used as a measure of quantity of work, as well as a necessary component in the creation of records."

The panel distinguished the cases cited by the Board, noting that Simplicity Pattern Co. v. State Bd. of Equalization, 27 Cal.3d 900 (1980; ELR 2:11:5) involved the transfer of master recordings as part of a simultaneous transfer of the assets of an ongoing business, and not incidental to the performance of any service. And in A&M Records v. State Bd. of Equalization, 204 Cal.App.3d 358 (1988; ELR 10:5:9), the record company contracted for the ownership rights to master tapes from companies owned by the recording artist. In Capitol Records, Inc. v. State Bd. of Equalization, 158 Cal.App.3d 582 (1984; ELR 6:9:11), record companies both purchased pre-existing master tapes and financed the production of master tapes by independent production companies, which contracted directly with the recording artists.

In the instant matter, the artists agreed to provide their services to record companies, and the trial court reasonably concluded that those performances were the "true objects" of the contracts, concluded the court.

The case was remanded to the trial court for a determination of the correct amount of pre-judgment interest, but the trial court did not err in failing to assess post-judgment interest on the entire amount of the judgment.

It should be noted that the court determined that its decision did not warrant publication since "the basic issue ... was effectively eliminated by the enactment of section 6362.5 of the Revenue and Taxation Code in 1975."

Mitchell v. State Board of Equalization, Case No.B036082 (Ca.Ct.App., May 11, 1990) [ELR 12:4:14]