BIGSBY v. JOHNSON (1940)

This appeal presents for our consideration the application of the retail sales tax to several phases of the printing business. In the complaint filed pursuant to section 31 of the Retail Sales Tax Act (Stats. 1933, p. 2599) and section 29 of the Use Tax Act (Stats. 1935, p. 1297) to recover taxes paid under protest, the plaintiff sets forth 21 causes of action. The defendant conceded that the plaintiff should prevail on causes of action numbered 4, 6 16, 19 and 21 inasmuch as the rulings of the state board of equalization, the tax administering agency, did not require the payment of a tax with respect to the transactions described therein. The plaintiff had judgment on the causes of action numbered 4, 6, 16, 17 and 19, but was denied judgment on the others. Plaintiff appeals on all causes of action on which the decision was adverse to him and defendant appeals on cause of action number 17. Apparently the trial court inadvertently failed to enter judgment for plaintiff on the cause of action number 21, the only one relating to the use tax, but defendant concedes herein, as he did in the lower court, that plaintiff should recover thereon and the judgment therein shall accordingly be reversed. Inasmuch as in many instances two or more of the remaining sixteen causes of action are governed by a single principle, we shall not attempt to discuss them separately, but shall rather point out the applicable principles and indicate the cause or causes of action governed by each principle.

The plaintiff operates a printing establishment, the operations of which include, so far as material to this action, the setting or composing of type, the making of papier-mache mats, the moulding of stereotype plates and the actual printing or presswork. His business transactions include, in addition to the ordinary printing order in which the printer furnishes the paper and ink and delivers the finished printed matter to his customer, the preparation of the necessary composition, mats and stereotype plates for use in connection with presswork on paper stock furnished by his customers and the furnishing to his customers of composition and mats. It is with the application of the retail sales tax to these transactions that this appeal is primarily concerned.

Furnishing of printed matter, mats and composition as a sale of tongible personal property. The plaintiff contends that printing operations involve the performance of labor and services rather than the sale of tangible personal property and in support of that contention points to the fact that the value of the labor and services furnished by a printer in connection with a printing order may far exceed the value of the paper stock and ink which he furnishes. He states, for example, that the value of the materials furnished represents less than eight per cent of the total charge made in one of the transactions involved herein. In addition to this asserted factual basis for his position, plaintiff cites H. G. Adair Printing Co. v. Ames, 364 Ill. 342, 4 N.E.2d 481, and Washington Printing & Binding Co. v. State, 192 Wash. 448, 73 P.2d 1326, which undoubtedly support his contention. We believe, nevertheless, that the plaintiff's position is unsound.

Section 2(b) of the Retail Sales Tax Act, as amended by St.1935, p. 1256, defines the term ‘sale’ as ‘* * * any transfer of title or possession, or both * * * in any manner or by any means whatsoever, of tangible personal property, for a consideration * * *.’ The only requirements for a sale of tangible personal property within the meaning of the act are, accordingly, (1) that there be a transfer of title or possession to tangible personal property and (2) that the transfer be made for a consideration. That printed matter is tangible personal property and that title and possession to such property is transferred by the printer to his customer for a consideration is clear. The amount charged for the printed matter, like the amount charged for all other articles of tangible personal property reflects manufacturing or production costs attributable to labor or other services.

Our rejection of the plaintiff's contention is supported by People ex rel. Walker Engraving Corporation v. Graves, 243 App.Div. 652, 276 N.Y.S. 674, affirmed, 268 N.Y. 648, 198 N.E. 539; People ex rel. Foremost Studio, Inc. v. Graves, 246 App.Div. 130, 284 N.Y.S. 906, and Cusick v. Commonwealth, 260 Ky. 204, 84 S.W.2d 14. In the Walker case, supra, the court upheld the application of the New York sales tax with respect to the sale of photoengravings and in doing so observed that [243 App.Div. 652, 276 N.Y.S. 675] ‘The value of the metal is not more than 2 per cent. of what the customer pays'. In the Foremost Studio case, supra, the tax was upheld as applied to charges for the furnishing of designs which were then to be impressed on cloth by the customer, and in the Cusick case, last above cited, the Kentucky sales tax was upheld as applied to the charges of a photographic studio for photographs. The contention of the taxpayers in the latter case that their work consisted entirely of labor and that their business was one of personal service was answered by the court as follows: ‘In addition to the facts pleaded, we have the following argument: The cost of a picture portrait or drawing is not the paste board or canvas on which it is painted or drawn, but is the art, skill and talent of the artist. It is a creation of art made under contract for a particular party. It is not kept for sale, cannot be sold, and never becomes merchandise within the meaning of the act. Though the argument is strongly pressed, we are inclined to the view that photographs fall within the provisions of the law. * * * Coming to the argument that a photographer is engaged in selling service, and that service is not taxable, it must not be overlooked that the chief value of many articles consists in the cost of the service and skill by which they are produced, rather than the cost of materials out of which they are made. Moreover, the situation is not the same as if the patron took an article to another to be repaired and paid only for the service rendered. One who desires a photograph of himself or his family does not contract simply for service. He desires the finished article, and that is what he buys and what the photographer sells.’

We, likewise, are of the opinion that when one places an order for printed matter he desires not merely service but the delivery to him of the finished product and that within the meaning of the Retail Sales Tax Act the printer is engaged in selling the printed matter to him. This is equally true of the composition and mats. Each is tangible personal property and title or possession is transferred by the printer to his customer for a consideration, thus satisfying the provisions of the act. The fact that the composition and mats are acquired and employed merely in the production of the finished product furnishes no basis for exemption. They form no part of the final product and are not, accordingly, purchased for resale. Their position is similar to that of the photoengravings involved in the Walker case and the designs in the Foremost Studio case. We are of the opinion, therefore, that the furnishing by a printer for a consideration of a printed matter, mats, and composition, the materials used therein being supplied by the printer, constitutes a sale of tangible personal property within the meaning of the Retail Sales Tax Act.

Printing on paper stock furnished by customer as a fabrication and therefore a sale of tangible personal property within the meaning of the Retail Sales Tax Act. As already indicated plaintiff's printing operations are at times carried on with paper stock furnished to him by his customers. While in such a transaction technically there is no transfer of title to tangible personal property, except a small amount of ink, there is a transfer of ‘title’ and possession of the new or fabricated article, within the meaning of the act and the state therefore properly asserts a tax to be due with respect thereto in view of the following language which was added to section 2(b) of the act by amendment in 1935: “Sale' * * * includes the fabrication of tangible personal property for consumers who furnish either directly or indirectly the materials used in the fabrication work * * *.'

Plaintiff does not contend that the production of printed matter through the use of the customer's paper stock does not involve a fabrication within the meaning of this section. He contends rather that such transactions are immune from the tax because the subject of the act in this respect, i. e., a tax on a fabrication, is not expressed in the title of the act as required by section 24 of article IV of the California Constitution, the title merely relating, so far as material herein, to a tax for the privilege of selling tangible personal property. In amplifying his argument plaintiff points to the impropriety of imposing a tax on labor or services under a title relating solely to sales of tangible personal property.

If the labor or service with respect to which the state seeks to impose the tax were wholly disassociated from sales of tangible personal property, it would, in our opinion, be doubtful whether their inclusion within the definition of the term ‘sale’ without their mention in the title of the act constituted a compliance with the constitutional requirement. Such does not appear, however, to be the case. Instead of attempting by the 1935 amendment of section 2(b) to make any general extension of the tax to charges for labor or services, it appears that the legislature was merely seeking to render ineffectual attempts to avoid the tax through the breaking down and separation of the various processes involved in the manufacture and production of tangible personal property. As the tax might have been avoided through the arrangement of business operations in such a way as to avoid a technical sale of tangible personal property, it was entirely logical for the legislature to block attempts at avoidance by defining the term ‘sale’ in such a manner as to render ineffective any such arrangement as a method of tax avoidance. It appears, accordingly, that the 1935 amendment adding the fabrication provision to the definition of the term ‘sale’ was designed primarily to facilitate the effective administration of the sales tax rather than to extend the tax to a subject not expressed in the title of the act. As so considered the case falls within the rule announced in Selowsky v. Superior Court, 180 Cal. 404, 411, 181 P. 652, 656, that a ‘title fairly expressing the general subject covers all proper means and instrumentalities which will or may facilitate the accomplishment or enforcement of the purpose expressed * * *.’ Other cases setting forth the general rule that the title of an act need not contain an abstract or catalogue of the entire contents of the act and that the statement in the title of a general purpose or object covers all matters germane to that purpose or object are People v. Superior Court, 10 Cal.2d 288, 297, 73 P.2d 1221; In re Lake, 89 Cal.App. 390, 395, 265 P. 325; and People v. Jordan, 172 Cal. 391, 394, 156 P. 451.

Gross receipts from a sale of tangible personal property. (a) Segregation of charges for labor and for materials. Quite consistently with his position that charges for the furnishing of printed matter represent charges for labor or services the plaintiff has shown separately in the billings rendered to his customers his charges therefor and his charges for materials, and contends herein that the tax is not applicable to the charges for the labor and services. In addition, however, he claims that the tax is inapplicable to the amounts charged for the paper stock and ink, inasmuch as he is not engaged in the business of selling such property and only furnishes it as an incident to the performance of his services. Inasmuch as we have already determined that the plaintiff's operations involve the sale of tangible personal property rather than the performance of labor or services this contention of the plaintiff must be rejected.

The term ‘gross receipts' is defined in section 2(f) of the Retail Sales Tax Act as follows: “Gross receipts' means the total amount of the sale * * * price * * * of the retail sales of retailers, including any services that are a part of such sales, valued in money, whether received in money or otherwise, including all receipts, cash, credits and property of any kind or nature, and also any amount for which credit is allowed by the seller to the purchaser, without any deduction therefrom on account of the cost of the property sold, the cost of the materials used, labor or service cost, interest paid, losses or any other expense whatsoever * * *.’

As the furnishing of the printed matter constitutes a sale of tangible personal property, it necessarily follows that the tax applies to the total amount of the sales price, i. e., the total amount charged for the printed matter. The definition of the term ‘gross receipts' clearly forbids the elimination from the measure of the tax of any labor or service costs. It is difficult to conceive any principle more essential to the effective administration of a sales tax measured by gross receipts than one absolutely precluding the breaking down of the sales price of property into amounts attributable to labor and to materials, to the end that the tax might be avoided as to the charges for labor. The manner in which the term ‘gross receipts' has been defined in section 2(f) indicates that the legislature was fully aware of this problem and removed any possibility of a construction which might permit such a result.

It is impractical to designate particular causes of action as governed by any one of the three issues hereinabove discussed inasmuch as in the case of several causes of action, the decision is controlled by the determinations made of not one but of two of the issues. In accordance with the principles set forth above, the judgment for the defendant on causes of action numbered 1, 2, 3, 5, 7, 8, 9, 10, 12, 13, 14 and 20 must be affirmed.

(b) Deduction for bad debts. In cause of action number 15 the plaintiff alleged that he was unable to collect the amount charged to a customer for the furnishing of certain printed matter, and contended that the tax was not applicable to the transaction. The contention is readily answered, for not only does the act define ‘gross receipts' as the total amount of the sale price, but it includes within the meaning of the term ‘any amount for which credit is allowed by the seller to the purchaser’ and specifically forbids the deduction of ‘losses'. The fact that a seller is unable to collect the sale price does not, accordingly, relieve him from including the sale in the measure of his tax and the judgment of the trial court in denying plaintiff judgment on his cause of action number 15 must therefore be affirmed.

Sale of used printing equipment. One of the transactions described in plaintiff's complaint involves the sale of a used Monomelt pot and accessories previously used by the plaintiff in his printing operations. He argues that he is not a used or second hand machinery dealer, that the sale was purely incidental to his printing business, that the transaction was not entered into for profit and was not, accordingly, sale made in the course of his business.

The Retail Sales Tax Act contains no provisions furnishing any basis for distinguishing between sales of new and used property and the state has proceeded upon the theory that the tax should be applied in the same manner with respect to retailers of both types of property. The problem here presented, however, is not merely whether the tax is applicable to sales of used property, a matter not questioned by the plaintiff, but whether a retailer of a particular type of tangible personal property is obligated to pay the tax with respect to sales of equipment which he theretofore used in the course of his business operations.

Section 3 of the act, as amended by St. p. 1253, in levying the tax provides as follows: ‘For the privilege of selling tangible personal property at retail a tax is hereby imposed upon retailers at the rate of * * * three per cent of the gross receipts of any such retailer from the sale of all tangible personal property sold at retail in this State on and after July 1, 1935. * * *’

Our attention has not been directed to any other provision of the act which might have a bearing on the matter.

Section 3 certainly in no way specifically excludes the gross receipts from the sale of the used printing equipment from the measure of the tax and, on the other hand, provides for the application of the tax to the gross receipts of a retailer from ‘* * * the sale of all tangible personal property * * *.’ (Italics added.) It appears to us, accordingly, that to adopt the plaintiff's contention would require us not only to disregard the word, ‘all’, but to read into the section an exception or exemption of property of a kind not ordinarily sold by a retailer or of the equipment of a retailer. This we are not prepared to do. It is the judicial function to construe and apply legislation as enacted.

The used equipment constituted an asset of the plaintiff's business and its sale was reflected in his property and income accounts. We are of the view, therefore, that the sale was made in the course of the plaintiff's business and that the tax applies to the gross receipts therefrom. The plaintiff's argument that such a holding would require the application of the tax with respect to an automobile ‘turned in’ to a dealer in connection with the purchase of a new car is unsound, inasmuch as the dealer acquires the used automobile for resale. His argument that the holding would permit the purchaser of an automobile to purchase it for resale in view of the fact that it would be ‘turned in’ on the purchase of a new car at a later date is likewise unsound, for the automobile is purchased for use and not merely for subsequent resale. The judgment for the plaintiff on cause of action number 17 must therefore be reversed.

Sale of printed papers to newspaper publishers. (a) When the publisher distributes the newspapers without charge. In some of the transactions described in the complaint the firm to which the plaintiff furnished printed matter was a newspaper publisher which either distributed the printed papers without charge, as in the case of advertising or so-called community newspapers, or which had a paid subscription list. No new problem is presented in the case of the furnishing of the printed papers to a publisher who distributed them without charge, for as we have already determined the furnishing of the papers constituted a sale of tangible personal property, and as the sale was not made for resale it was a retail sale within the meaning of section 2(c) of the Retail Sales Tax Act.

(b) When the publisher has a paid subscription list. In two cases, however, the newspaper publisher did not distribute the papers free of charge but rather had a paid subscription list and the papers were distributed by the publisher to his subscribers. The plaintiff advances the additional argument in the cases that the printed papers were acquired by the publisher for resale to his subscribers and that the tax would not, accordingly, apply to the printer's charges to the publisher therefor. The defendant contends, on the other hand, that the newspaper publisher is engaged in the performance of a service rather than in the sale of tangible personal property and that the sale of the papers to him is, therefore, a retail sale. It is said that the service, consisting of the gathering of new through correspondents throughout the world, the preparation of materials from those correspondents in a form suitable for publication and the dissemination of news to readers, is analogous to the service performed by a physician and is to be distinguished from the mechanical services of a printer which give rise to a sale of tangible personal property.

We are not inclined to dispute the contention that the character of the services performed by a newspaper publisher differs materially from those of the printer. Furthermore, we would not say that a physician is engaged in the sale of tangible personal property merely because he furnishes to his patient a prescription through the medium of certain written symbols on a piece of paper, which is undoubtedly tangible personal property. Nevertheless, we are of the opinion that the arguments advanced by defendant in support of his contention that the furnishing of printed matter constitutes a sale of tangible personal property within the meaning of the Retail Sales Tax Act and which induced us to uphold that contention, compel us to hold that the newspaper publisher in furnishing a newspaper to a paying subscriber is likewise engaged in the sale of tangible personal property. We can see no escape from the conclusion that the newspaper is tangible personal property and that the subscriber pays a consideration for the transfer to him of title to that tangible personal property.

It is undoubtedly true that the character of certain transactions is such that no sale within the meaning of the Retail Sales Tax Act occurs, even though title to tangible personal property passes from one person to another and the latter person makes a payment of a certain amount to the former. We have no hesitation in saying, for example, that a physician does not make a sale of tangible personal property when he furnishes a prescription to his patient. The activity of the physician is clearly the performance of a service even though certain tangible personal property may be furnished the patient in the performance of that service. The patient does not consult the physician to obtain a prescription and the physician's charge is not determined with reference to the furnishing of the prescription; in fact, it would probably be the same whether or not the prescription is furnished. It follows, then, the the physician's activity is the performance of a service and that he is paid for that service without regard to the furnishing of the prescription. In the case of the newspaper publisher, however, a charge is exacted for the furnishing of the newspaper and the subscriber pays a consideration for the delivery to him of the newspaper. The transfer of title aspect of the transaction outweighs, in our opinion, the service aspect which though admittedly of great importance, is not necessarily more important than that involved in the painting of and subsequent transfer of title to a portrait or the publication and subsequent transfer of title to books and magazines. That the transfer of title to portraits, books and magazines for a consideration gives rise to a sale of tangible personal property has not, so far as we can ascertian, been questioned. We believe, accordingly, that a newspaper publisher is engaged in the business of selling tangible personal property to his subscribers and that the sale to him of the printed papers to be distributed to the subscribers is a sale for resale, the gross receipts from which are not subject to the tax. Judgment for the defendant on the causes of action 11 and 18 must, therefore, be reversed.

To recapitulate: The judgment for defendant on causes of action numbered 1, 2, 3, 5, 7, 8, 9, 10, 12, 13, 14, 15 and 20 are, and each is affirmed. The judgment for the defendant on causes of action numbered 11, 18 and 21 are, and each is, reversed. The judgment for plaintiff on cause of action numbered 17 is reversed.

GIBSON, Justice.

We concur: WASTE, C. J.; CURTIS, J.; EDMONDS, J.; CARTER, J.; SHENK, J.