Internal Revenue Service
Rev. Rul. 59-216
1959-1 C.B. 643
Cash discounts allowed by retailers or manufacturers in connection with the sale of taxable articles include a proportionate reduction in the tax. Therefore, such discounts may not be considered as applying only to the tax-excluded sale price of articles, even though the computation of the amount of the discount is based upon such tax-excluded sale price.
Rev. Rul. 59-216
Advice has been requested whether a cash discount allowed by a retailer or a manufacturer to a purchaser of an article subject to the retailers or the manufacturers excise tax, imposed by Chapters 31 and 32 of the Internal Revenue Code of 1954, must be computed upon the retailer's or manufacturer's tax- included selling price or whether it may be computed upon the tax- excluded selling price of the article.
Section 6416(b)(1) of the 1954 Code provides that if the price of any article subject to the retailers or manufacturers excise taxes is readjusted by reason of a bona fide discount, rebate, or allownace, the part of the tax proportionate to the part of the price repaid or credited to the purchaser will be deemed an overpayment, to be credited or refunded to the taxpayer without interest.
Section 316.13 of Regulations 46 and section 320.9 of Regulations 51, which have been made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provide that readjustments in sale price (such as allowable discounts, rebates, bonuses, etc.) cannot be anticipated. The tax must be based upon the original price unless the readjustments have actually been made prior to the close of the reporting period. However, if the price upon which the tax was computed is subsequently adjusted, a proper credit may be taken against the tax on a subsequent return, or an appropriate claim for refund may be filed.
In arriving at an answer to the question presented, it must be understood that liability for the retailers excise tax is incurred by the retailer and not by his customers. Likewise, liability for the manufacturers excise tax is incurred by the manufacturer, producer, or importer, and not by the purchasers of the taxable articles. However, based upon provisions contained in sections 4051 and 4216 of the Code, where the retailers or manufacturers excise tax is not billed as a separate item, it is presumed that the amount of the tax is included in the price charged for the article, and such amount is excluded by an appropriate computation in determining the taxable sale price. Thus, retailers or manufacturers may bill their customers either (1) for a tax-excluded price plus an amount equal to the tax, or (2) for a total price, which is presumed to be a tax-included price regardless of whether it is so stated. The customers do not, in either instance, pay tax as such. Where the retailer or manufacturer collects an amount equal to the tax from his customer, either as a separate item or by inclusion in the price charged for the article, such amount becomes a part of the price payable by the customer for the article rather than a payment of tax as such.
The manner in which a retailer or a manufacturer computes a discount is a matter for settlement between him and his customer. There is nothing in the law or regulations which would compel a retailer or a manufacturer to compute a discount upon the tax- included selling price rather than the tax- excluded price. However, regardless of the manner in which such a discount is computed, a proportionate excise tax reduction is inherent in the price adjustment. In other words, whatever adjustment in price results from such discounts is considered to include a proportionate amount which represents the tax paid by the retailer or the manufacturer. Accordingly, the retailer or the manufacturer is entitled to claim a credit or refund for that amount.
For example, assume that a taxable article is sold by a retailer (or a manufacturer) for a list price of $660.00 plus ten percent tax (or a total of $726.00). By meeting prescribed conditions, the customer becomes entitled to a cash discount of five percent. If the retailer (or the manufacturer) uses the tax-excluded sale price ($660.00) as a base for computing the discount, the amount of the discount ($33.00) may not be considered as applying only to the tax-excluded sale price of $660.00, even though the computation was based upon such tax-excluded sale price. Instead, the amount allowed as the discount must be regarded as including a part of the tax to the extent specified in the law. Consequently, in this case, the discount represents an adjustment or reduction of $3.00 (% p1/11 th of $33.00) in the tax.
On the other hand, if the retailer (or the manufacturer) uses the tax-included sale price ($726.00) as a base for computing the discount, the discount ($36.30) represents an adjustment or reduction of $3.30 (one-eleventh of $36.30) in the tax.