THE CONTINUING home-taping controversy, described by one record company executive as the "cancer in our industry," took a sudden turn several weeks ago when a major New York retail chain followed the hesitant footsteps of a few independent stores around the country and began renting records as well as selling them. The King Karol chain now rents albums for $2 a day, with a full-charge deposit held until the record is returned. After 8 to 10 rentals, the record may be sold as a used record. Nowhere is anything said about home-taping; the records are for "audition," or as another rental outfit puts it, "for preview purposes." Yet another store advertises "Risk-Free Record Buying and Renting."

In England, where blank tapes outsell prerecorded tapes and where cassette players outsell record players, a major controversy surfaced in February when Island Records kicked off its One Plus One program by releasing Steve Winwood's best-selling "Arc of a Driver" on one side of a high-quality chromium dioxide tape -- with the other side left blank for home taping as a bonus for purchasers. Since then, the label has begun to transfer its entire catalog to One Plus One cassettes, which sell for $3 less than normal prerecorded cassettes; there's also a major cross-marketing campaign coordinated with the tape manufacturer, BASF. The line's sales have been "very, very good" according to an Island executive, but the label's American distributor, Warner Bros., has so far nixed the line here.

Stateside, the already beleaguered record industry, which estimates that it loses $1 billion a year in sales to home tapers, is less than pleased at the move into rentals by the 30-year-old King Karol chain. "We're appalled," says Joe Smith, president of Elektra-Asylum Records and one of the industry's most vociferous campaigners against home taping. "We've always based our costs, our entire structure, on people buying records. We have no structure for the rental of records. The King Karol move is certainly not a positive one."

Adds Lou Dennis, national sales manager for Warner Bros., "I don't understand how people can even think about renting. You're encouraging home taping. Why the hell else would you rent records?" Stanley Gortikov, president of the Recording Industry Association of American, a 53-company trade group whose members account for 90 percent of all record and prerecorded tape sales, see rentals as "an attack on the rights of property of the artists, record companies, creators, copyright owners and risk takers. Because the price of records is fairly low, I think the rental of records is done for one purpose only -- which is not listening, but to encourage home taping."

The home-taping issue came to a head in 1979, when the industry followed 1978's record-high sales of $4 billion with a sharp drop-off in profits: Home taping war paired with record piracy as the major problem.But consumers, who for the first time that same year purchased more portable than home-playback systems, were not always well-served by the record companies, which seemed more infatuated with the revenue possibilities of videotape, videodisc and cable. Prerecorded tapes suffered from high-speed duplication on low- to medium-quality tape housed in cheap units. With the increasingly high cost of prerecorded tapes and albums -- which record company executives insist will only go higher because of recently increased royalty fees and costs for raw materials as well as revenue losses from home taping and rentals -- consumers and retailers perceived a new mutuality of interests. The initial battle of the profit margin has been waged over blank-tape sales; rentals, an idea whose time is around the corner, may prove to be the backbreaker.

Ben Karol, the owner of the Manhattan chain who studied successful rental systems in Canada before starting his own, scoffs at the tempest his rental policy has created. "It's a lark at this point, an experiment," he insists. "The record industry isn't that great these days. You sit around and think of ways to stimulate it, try to come up with ideas based on what similar product is doing." Karol looked no further than his own video department, pointing out that "the whole video tape business is now going rental."

As a counter to the escalating price of records, Karol says that "now you can get somebody to audition a record for a couple of bucks. Maybe half of them will like it . . . and I'll make a sale. It's worth a shot." Karol says that so far most of his business has been classical and that record renters have not been buying blank tape at his store. "Maybe my prices are too high. Listen, we're trying to find out if there's some way to enhance and increase our business. We don't want to hurt anybody."

The idea of renting records is not entirely new, having been tried in various locales during the mid-'70s, when retail prices were significantly lower; some stores even did the actual taping for customers. And before that, many major stores had listening booths that provided a similar "preview" capability; the cost of commercial space eliminated that tradition.

A confluence of events in the late '70s and early '80s has turned tape technology into a major thorn for the industry that, ironically, developed it.Cassettes have become the cheapest optimum means of listening to music; portable cassette players in particular combine technological and social advantages -- the fact that you can take it with you weighs heavily in the minds of an increasingly mobile population.

Tapes, besides holding up better than vinyl, offer one distinct advantage that the record industry can't counter: They are reusable, adaptable to the transient nature of music. Records, unfortunately, tend to be unalterable artifacts -- you can't erase a record. "That's the beauty of videodiscs: it's playback only," says Warner Bros.' Dennis. "As long as all the tape machines in this country have a record button, how do you control that? You can't."

The major ongoing -- and so far unresolved -- issue of home taping (including video, of course) has to do with copyright infringement. Tapers don't pay royalties to songwriters or performers whose work they copy; the issue of home, noncommercial duplication has yet to be addressed by law in any clear-cut manner. "We live in a rental society," Dennis mourns, echoing Gortikov's assertion that "the principal of renting is not unlawful, per se." And since rentals are couched in terms of auditioning or previewing or testing, there's really nothing the record companies can do about it.

Many industry critics point to record companies' traditional unresponsiveness to emerging trends. Prerecorded tape has become an increasingly large portion of the market, yet a home taper working with average equipment can produce a better-quality, cheaper tape than is currently provided by the record companies (audiophile tapes excluded). The raw material has come from previously owned discs, borrowed albums and radio broadcasts (some stations, including DC101 and WAVA here make a big to-do about playing entire albums without commercial interruption, an obvious gesture to home tapers). At least previously, records were being bought; the idea of rentals has hit the industry like a slip in the face. To add insult to injury, sales of blank tape, spurred on by massive national advertising campaigns, continue to spiral to the point that Karol feels that "the blank-tape industry is getting to be a bigger industry than the record industry."

The only business (besides video) with a similar problem, according to Karol, is the book business. Publishers' single biggest customers, he points out, are libraries. "It could be that one day the biggest customers that the record companies have would be libraries. When book prices went up, the publishers came up with the paperback to carry the ball a little further. I see this [rentals] as a positive possibility in the industry."

Stanley Gortikov admits that the ultimate solution may be legislative. There has been talk about a levy or royalty on black tape and hardware, a system already in effect in other parts of the world. "If rentals and home taping accelerate," he says, "and if sales are substantially displaced, that will raise the bareak-even point of records even higher, and consumer prices will possibly go higher."

"How are you going to stop home taping?" asks Lou Dennis. "You'd have to be banging on doors and arresting people and you can't do that. It leaves us in a very precarious position." The expansion of rentals, they all agree, would be a totally self-destructive move on the retail level. Says Elektra-Asylum's Joe Smith, "If it were to become much larger, it could be terribly damaging."

Meanwhile, Island's subsidiaries, Antilles and Mango (which, unlike the parent label, are distributed not by Warner Bros. buy by independents) expect to bring out their first American One Plus One tape, a reggae compilation, later this summer. Rentals are not a significant part of the record business right now -- there are no stores in the Washington area currently renting -- but with the stores' need to increase their profitability in the face of increasingly smaller profit margins, the record manufacturers and the blank-tape manufacturers are keeping hawk eyes on developments.