Wide World Photos, Inc. v. Commissioner of Revenue (April 11, 2001)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



WIDE WORLD PHOTOS, INC.  v.  	    COMMISSIONER OF REVENUE

Docket No. F250875			    Promulgated: 
						    April 11, 2001

	This is an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee to abate sales and use taxes assessed against the appellant under G.L. c. 64H, § 2.  
Commissioner Scharaffa heard the appeal and was joined in the decision for the appellee by Chairman Burns and Commissioners Gorton, Egan and Rose.
	These findings of fact and report are made at the requests of the appellant and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	James C. Heigham, Esq. for the appellant.
	
Lisa S. Mediano, Esq. and Timothy Stille, Esq. for the appellee.




FINDINGS OF FACT AND REPORT
	Wide World Photos, Inc. ("Wide World" or the "appellant") is a New York corporation and a wholly owned for-profit subsidiary of Associated Press ("AP"), a not-for-profit news service membership corporation with its headquarters in New York.  AP has Massachusetts offices in Boston and Springfield, but Wide World does not have any employees in Massachusetts on its payroll.  
	AP has developed and retained ownership of an extensive collection of stock photographic images, which are stored at its New York corporate headquarters ("AP Photo Library").  These images exist in various physical forms, such as plates, photographs and negatives.  Every photograph that is owned by AP and printed in tangible form contains copyright language designating the photograph as either an "AP Photo" or an "AP/Wide World Photo."  The AP Photo Library contains the master forms of its photographs, and copies can be produced from one master for distribution.  The images in the AP Photo Library are available to AP members as a service included in the membership agreement.  Wide World has an exclusive arrangement with AP to market the images in the AP Photo Library to non-members who may include, among others, academic institutions, book publishers, businesses and newspapers.   
	Wide World is registered as a sales and use tax vendor in every state that requires remittance and collection of a sales or use tax.  It collects and remits sales or use tax in each state for certain of its transactions.  Wide World does not contest that it is a "vendor engaged in business in the commonwealth" for purposes of G.L. c. 64I, § 4, and is therefore obligated to collect and remit use tax on sales to Massachusetts customers.  Wide World voluntarily registered as a Massachusetts vendor beginning on April 20, 1988 and collected and remitted sales or use tax to the Commissioner of Revenue ("Commissioner") when it sold a photograph to an individual Massachusetts customer.  Wide World does not dispute that a taxable sale occurred when it provided a photograph to a Massachusetts customer for consideration with the expectation that the customer would not return the photograph.  Wide World collected and remitted a sales or use tax for this type of transaction for taxable periods from April 1, 1994 through December 31, 1996 (the "tax periods at issue").


	However, Wide World did not collect and remit sales or use tax to the Commissioner during the tax periods at issue for certain other transactions involving Massachusetts customers.  In these transactions, the customers placed orders for the temporary use of photographs and were charged varying amounts partly determined by an industry price list utilized by Wide World sales representatives.  Pursuant to an order placed with a Wide World representative, Wide World would deliver photographs to these Massachusetts customers and communicate the requirement that the photographs were to be returned to Wide World after the customers' use.  A number of the invoices for the disputed transactions indicated that the photographs had been transferred "for personal use only not for reproduction" or "for one time editorial use" or "for use solely as office decor."  The photographs were stored and used in Massachusetts for various lengths of time during the customers' possession, usually two weeks to a month, and Wide World regularly granted to these customers extensions of time to retain possession of the photographs until the completion of the customers' particular projects.  Believing that such transactions did not constitute taxable sales, Wide World did not collect or remit a sales or use tax on these disputed transactions. 
	The invoices provided by AP and Wide World, for both the undisputed and disputed transactions, contained boilerplate language on the reverse side stating in part, "[t]his picture, and all of the rights therein, is the property of Wide World Photos.  It may be used only for purposes of one time reproduction in the U.S.A. when authorized by the owner.  Any use of the picture, whether such use is currently known or developed subsequent to the date of this agreement, is prohibited unless expressly authorized by the owner."
	In March of 1997, the Commissioner notified Wide World that its sales and use tax returns had been selected for verification and audit.  In March and in October of 1997, Wide World executed two separate consents extending the time to assess sales and use taxes for the tax periods at issue.  Pursuant to the audit, the Commissioner issued a Notice of Intention to Assess ("NIA") dated February 1, 1998, which proposed to assess Wide World additional "sales/use" taxes for the tax periods at issue.  On March 10, 1998, by Notice of Assessment ("NOA"), the Commissioner assessed Wide World $24,167.37 in "sales/use" taxes, plus $6,749.18 in interest for the tax periods at issue. 
 On April 7, 1998, Wide World filed an Application for Abatement requesting an abatement of these amounts.  The Commissioner did not act on the Application for Abatement, and on November 2, 1998, Wide World filed a petition with the Board.  On this basis, the Board found it had jurisdiction to hear this appeal.
For the reasons stated in the Opinion which follows, the Board found that Wide World was subject to Massachusetts use taxes on the disputed transactions with Massachusetts customers.  Accordingly, the Board issued a decision for the appellee in this appeal.

OPINION
	This is an appeal from the refusal of the Commissioner to abate sales and use taxes assessed against Wide World during the tax periods at issue on the disputed transactions.  Pursuant to G.L. c. 64H, § 2, Massachusetts imposes a sales tax of five percent upon sales at retail within the Commonwealth of tangible personal property by a vendor that is not otherwise exempt.  Massachusetts also imposes a corresponding use tax, pursuant to G.L. c. 64I, § 2, upon the storage, use or consumption in the Commonwealth  of  tangible  personal  property   which  was 

purchased for storage, use or consumption in the Commonwealth.  "The use tax established in G.L. c. 64I, along with the sales tax in G.L. c. 64H, are complementary components of a unitary taxing program designed to reach all transactions (unless specifically exempted) in which tangible personal property is sold inside or outside the Commonwealth for storage, use or other consumption within the Commonwealth."  Towle v. Commissioner of Revenue, 397 Mass. 599, 604 (1986), citations omitted.  "As the two taxes are intended to be complimentary and the statutory basis for imposing each tax is virtually identical," the distinction between the two taxes is often immaterial when either reach a given transaction.  See Commissioner of Revenue v. Jafra Cosmetics, Inc., 433 Mass. 255, 259 (2001).  In this appeal, the Commissioner focused on the applicability of the use tax.  Accordingly, the Board in its decision focused on the use tax as well.  
For a transaction to be subject to the use tax, it must satisfy  the  three-prong requirement of  G.L. c. 64I, 
§ 2.  "[T]he use tax falls on property that (1) is stored, used or otherwise consumed in the Commonwealth; (2) is purchased from any vendor; and (3) was purchased for storage, use, or consumption within the Commonwealth."  Morton Buildings, Inc. v. Commissioner of Revenue, 43 Mass. App. Ct. 441, 444 (1997).  According to its statutory definition, "use" of property includes "the exercise of any right or power over tangible personal property incident to the ownership of that property."  G.L. c. 64I, § 1.  A person who does not hold title "may nonetheless exercise numerous powers associated with property ownership, such as possession and the right to employ property in the conduct of a business." New York Times Co. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 177, 191 (1997), aff'd 427 Mass. 399 (1998).  Therefore, a transaction may be subject to use tax, even though the transfer was for a limited duration rather than for permanent ownership.  See New York Times, supra (Finding that a lessee of aircraft was subject to use tax because, although the use was temporary, the lessee nonetheless had possession over the aircraft and could exercise the requisite degree of control over the property).  
Wide World agreed that leases of property are within the rubric of the use tax statute.  However, it argued that the disputed transactions created licenses for one-time use, which placed them outside of the statute, thereby negating the appellant's obligation to collect and remit use tax.  The appellant contended that licenses are not included within the use tax statute, because the definition of a "purchaser" required for the imposition of the tax requires that the person received property "sold at retail" and that the definition of "sale" in G.L. c. 64H, § 1 includes transfers of title by "barter, exchange, lease, rental" but not "license," either explicitly or implicitly.  
However, this argument strains the logical implication of the use tax statute, which is to impose a use tax "upon the storage, use or other consumption in the commonwealth of tangible personal property purchased from any vendor for storage, use or consumption within the commonwealth."  G.L. c. 64I, § 2. The use tax definition of "purchase" is expansive, including "[a]ny transfer of title or possession, or both, exchange, barter, lease, rental, license to use, license to consume, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for any consideration."  G.L. c. 64I, § 1(2)(a).  Likewise, a "purchaser" is defined as "any person who shall have purchased tangible personal property sold at retail and includes a buyer, vendee, lessee, licensee or grantee."  G.L. c. 64I, § 1(3).  Accordingly, the Board found and held that it is immaterial for use tax purposes whether the disputed transactions created leases or licenses for a one-time use.  That the use tax applies to temporary uses is apparent from the specific inclusion of both leases and licenses in the definition of "purchase" incorporated in the statute.  See G.L. c. 64I, § 1(2)(a).  The critical inquiry is not the duration of the use, but rather, the existence of a transfer of physical possession for consideration.  See F.W. Faxon Co. v. Commissioner of Revenue, 3 Mass. App. Tax Bd. Rep. 89, 92 (1983)(Finding that no sale occurred where appellant "never obtains possession" of the items at issue).  
The disputed transactions in this appeal all involve the transfer of possession for consideration.  The customers received physical possession of the photographs for consideration.  Accordingly, the Board found and ruled that the disputed transfers constituted "purchases" within the meaning of the use tax statute. 
	The appellant further contended that the Commissioner made the distinction for sales and use tax purposes between leases and licenses in LR 84-56, which addressed the grant of a non-exclusive right to attach cables to utility poles.  In that letter ruling, the Commissioner found "[t]his grant is a license to use, not a lease of, the poles," and therefore, "the charges for permitting the attachment to the Utility's poles . . . are not subject to the sales tax."  However, LR 84-56 does not support Wide World's position.  The facts of that letter ruling differed significantly from the facts of the appeal at issue.  The Commissioner specifically noted that the license in LR 84-56 was non-exclusive and that the utility had granted several cable television companies the same right to attach cables to its poles simultaneously.  Moreover, the poles were real property and fixed in place.  As a result, the cable television companies never received possession of the utility's poles.  In fact, there was no transfer of title or possession of the tangible personal property at issue in LR 84-56.

Accordingly, the Commissioner properly found that the sales and use taxes did not apply to the utility in LR 84-56, based not upon the distinction which he drew between leases and licenses but rather on the fact that there was no transfer of physical possession for consideration and thus no purchase of tangible personal property.  "The appellant never has possession of the [property] and has no interest in them . . . . No 'sale' therefore takes place under G.L. c. 64H, §1 (12)(a)."  F.W. Faxon, 3 Mass. App. Tax Bd. Rep. at 92.  
By contrast, the customers in this appeal received physical possession of the photographs during the terms of their use.  Moreover, their possession, while limited in duration, was nonetheless exclusive.  Another Wide World customer did not simultaneously use the same photograph; rather, each customer received an exclusive right to use the photograph during the term of the contract.  Based on these pertinent factual distinctions, the Board accordingly found that LR 84-56 did not apply to the disputed transactions in this appeal.
	Furthermore, the Board was not persuaded by the appellant's argument that AP's copyright in the photographs created limited, non-exclusive uses that were beyond the reach of the use tax statute.  The Wide World/AP invoices contained boilerplate language which restricted the use of the photographs "only for purposes of one time reproduction in the U.S.A. when authorized by the owner," while other invoice terms often further restricted the transfer "for one time editorial use" or "for use solely as office decor."  However, the Board found that these restrictions did not negate the taxability of these transactions.  The key to taxability in this appeal was not the extent of the use but rather the transfer of physical possession of the photographs for consideration.  See F.W. Faxon, 3 Mass. App. Tax Bd. Rep. at 92.  The customers' possession of the photographs, although temporary, enabled them to accomplish their goals of making reproductions or displays.  Because these uses of the photographs were dependent upon possession of the actual photographs themselves, the transfers of the photographs by Wide World were transfers of tangible personal property within the meaning of the use tax statute.  See Florida Associations of Broadcasters v. Kirk, 264 So.2d 437, 439 (Fla. Dist. Ct. App. 1972)("In our view, the trial court correctly held that the use of the film cannot be distinguished from the actual physical film and that the renting of the film is a transfer of tangible personal property within the meaning of the statute."), cert. denied, 268 So.2d 534 (Fla. 1972). 
See also United Artists Corp. v. Taylor, 7 N.E.2d 254, 256 (N.Y. 1937)(In finding that a transfer of possession of a motion picture film with a license to use constituted a sale:  "The license to exhibit without the transfer of possession would be valueless.  Together they are one transaction and constitute a sale. . . . ").  
Moreover, there is an important distinction between an intellectual property right and the tangible property itself.  Copyrighted materials by definition must be "fixed in a tangible medium of expression."  17 U.S.C. § 301(a).  However, the federal Copyright Act specifies that copyrights are distinct rights separate from the tangible medium itself:  "Ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied. Transfer of ownership of any material object. . .  does not of itself convey any rights in the copyrighted work embodied in the object. . . ." 17 U.S.C. § 202. See also, South Central Bell Telephone Co. v. Barthelemy, 643   So.2d   1240,  1249  (La.),  rehr'g   denied  (1994), 



quoting C. Samuel, Louisiana's Offense Against Intellectual Property:  What Exactly Is the Offense and Is It Preempted by the United States Copyright Law?, 37 La.Bar J. 157, 158 (1989):
"[A] distinction is made between the intellectual property in a work and the tangible property that embodies the work. . . .  The exclusive rights that constitute the intellectual property known as copyright are different from rights to a particular copy of the copyrighted work.  When one buys a copy of a copyrighted novel in a bookstore or a recording of a copyrighted song in a record store, one acquires ownership of that particular copy of the novel or song but not the intellectual property in the novel or song.  In other words, by acquiring a copy of a copyrighted work, one does not acquire the copyright, the intellectual property." 

Although Wide World did not transfer AP's copyrights in the photographs to the customers, Wide World nonetheless did transfer possession of those photographs.  The photographs had value to the customers apart from their copyrights, because in receiving possession of the tangible medium itself, the customers could use a photograph to make their reproductions or displays.  Accordingly, the Board found and ruled that the restrictions on the use of the photographs did not affect the taxability of the disputed transfers.


Based on the foregoing, the Board found and ruled that the disputed transfers of photographs by Wide World to the Massachusetts customers were subject to the use tax.  Accordingly, the Board issued a decision for the appellee.

	         APPELLATE TAX BOARD
	
				
  By:____________________________
					       Abigail A. Burns, Chairman


A true copy:


Attest: _____________________
	    Clerk of the Board

 While liability for the use tax resides with the person who stores, uses or consumes the property, the vendor is charged with the responsibility for collecting and remitting the use tax if the purchase is made from a vendor engaged in business in the Commonwealth.  G.L. c. 64I, § 4.  Wide World voluntarily registered as a vendor in Massachusetts.  Therefore, its liability for collection of use taxes is not at issue if the disputed transactions are subject to use tax in Massachusetts.

   The appellant cited Logan Coal & Timber Co. v. Malvering, 122 F.2d 848 (3rd Cir. 1941), to highlight the distinction between "rent" and "royalties" for federal tax purposes.  However, the distinction there was relevant.  For purposes of calculating the surtax on undistributed income of a personal holding company, Section 351 of the Internal Revenue Code ("Code") specifically exempted rents from the surtax.  

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