Appeal Court OKs Refund for Musicians : Taxes: The state panel upheld the return of nearly $1 million to Joni Mitchell and two others. The decision on sales levies is no precedent, but lawyers will use it anyway.

In a major tax victory for recording artists, the California Court of Appeal has upheld a lower court decision directing the State Board of Equalization to return nearly $1 million in sales taxes and penalties wrongfully imposed on singer Joni Mitchell and the pop group America.

A three-judge panel of the Court of Appeal, in an unpublished 10-page decision, held that the state’s sales tax could not be imposed on the transfer of an artist’s master recording tapes to a record company, because it was the artist’s “performances that were the true objects of the contracts” between the two parties rather than the master recording tapes.

Master recording tapes are made by mixing down a multiple-track magnetic tape recording of the words and music of recording artists into a two-track, quarter-inch magnetic tape from which long-playing albums, compact disks and cassette tapes are manufactured by record companies.

Don Hennessy, senior staff attorney for the Board of Equalization, said the state has not decided whether to contest the Appeal Court decision. He also discounted the impact of the Mitchell case, saying it cannot be cited as a precedent for other tax cases under court rules because it yielded an unpublished decision.

Hennessy couldn’t say how much the state has collected in such taxes overall. But at least three similar cases are pending in lower court, and Mitchell’s lawyer, Ronald B. Turovsky, said the new ruling could pave the way for other musicians to use similar legal arguments to recoup hefty sales taxes and penalties that the state had applied to such recordings during the 1970s.

“This is a significant case . . . because it is very difficult to overturn the state in its taxing authority,” Turovsky said .

The tax on artists’ master recording tapes, which was rescinded by legislation more than a decade ago, was applied from 1970 until Jan. 1, 1976, under the theory that artists “sell” their tapes to record companies in exchange for royalties and therefore should be taxed on the transaction.

It could not be determined Thursday whether any other states now tax master recordings. In California, however, where much of the recording industry is concentrated, the application of the tax had so alarmed artists that they successfully lobbied state lawmakers to pass a bill in 1975 explicitly excluding master tapes from the state’s list of taxable items.

The change in the law came too late for the plaintiffs--Mitchell and instrumentalists Lee Bunnell and Gerald Beckley of the rock band America--as well as artists such as Neil Young who still have tax cases pending in Superior Court.

Although the Appeal Court remanded the Mitchell case back to trial court for the calculation of interest owed by the state to the plaintiffs, the court ordered each side to bear its own legal costs in the long-running dispute.

NEXT STEP: The Board of Equalization has until June 21 to appeal the Mitchell case to the California Supreme Court. But with a backlog of death penalty cases already on its docket, the board acknowledges that it is doubtful that the higher court would grant an appeal. If no appeal is pursued, the case would return to the trial court, where a judge would determine the taxes and interest owed to the plaintiffs.