Internal Revenue Service
Rev. Rul. 59-394 1959-2 C.B. 280
Where a tire manufacturer sells a customer a new replacement tire at a reduced price pursuant to a mileage guaranty, the manufacturers excise tax on the replacement tire is computed upon that proportion of the total weight of the second tire which the actual sale price bears to the regular sale price of the second tire. Moreover, if the defective tires are inspected by the manufacturer's tire engineers, it is not necessary that they be physically returned to the manufacturer. Furthermore, the returned defective tires are used tires, and resales by the manufacturer of such tires are not subject to the tax.
Rev. Rul. 59-394
Advice has been requested concerning the applicability of the manufacturers excise tax imposed on tires where adjustments are made on defective tires sold under a mileage guaranty.
A manufacturer of tires gives a road hazard guaranty with the sale of a certain line of its tires. Under the guaranty, if a tire becomes defective before being driven a certain number of miles, a replacement tire is sold to the customer at a reduced price. Some of the defective tires are adjusted by dealers and are not physically returned to the manufacturer. However, an inspection team of tire engineers employed by the manufacturer examines all tires on which a tax adjustment is requested. The defective tires are scrapped, repaired and resold, resold as casings for `retreads,' or, when their condition warrants, resold as used tires.
Section 4071 of the Internal Revenue Code of 1954 imposes a tax upon the sale by the manufacturer, producer, or importer of tires made wholly or in part of rubber.
S.T. 644, C.B. XII-I, 381 (1933), provides that, where a taxable article is sold under a warranty as to quality or service and the manufacturer replaces it with a new article of the same type, model, and quality for the payment of an additional amount which, however, is less than the regular price of the second article, if the tax is based upon weight or volume, it should be computed upon that proportion of the total weight or volume of the second article which the actual sale price bears to the regular sale price of the second article. For example, if the tire is guaranteed to run for 20,000 miles and after failing at 10,000 miles it is replaced by the manufacturer in consideration of the payment of one-half of the regular purchase price of the new tire, the tax on the replacement tire should be computed on the basis of one-half its weight.
Accordingly, in the instant case, it is held that where the manufacturer sells a customer a new replacement tire at a reduced price pursuant to the guaranty contract, the manufacturers excise tax on the replacement tire is computed upon