Internal Revenue Service
Rev. Rul. 60-6
1960-1 C.B. 495
Under stated circumstances, certain warehousing, insurance, and finance charges made by a manufacturer of taxable articles to his customer are not a part of the manufacturer's sale price of such articles upon which the manufacturers excise tax is based under the provisions of section 4216(a) of the Internal Revenue Code of 1954. In this case, the articles have been manufactured pursuant to the customer's specifications and, before they are sent to a warehouse for the benefit and convenience of the customer, the customer is bound by contract to accept the articles, even though title to the articles remains with the manufacturer until they are actually shipped from the warehouse to the customer.
Rev. Rul. 60-6
Advice has been requested whether, in determining the sale price of an article upon which the manufacturers excise tax is based, certain warehousing, insurance, and finance charges may be excluded from such sale price.
A contract manufacturer produces radio and television receiving sets only on specific orders with a definite price and a definite delivery date. Its customers consists of mail order, chain, and department stores. When the sets are completed, they are labeled with the customer's trade name which also appears on the instructions, literature, and cartons in which the sets are packed. At times a customer may be unable to accept a part or all of the sets on the delivery date specified in the sales contract. In anticipation of such cases, the manufacturer and the purchaser have entered into a separate agreement under which the sets are placed in a bonded warehouse for a limited time until the customer can take delivery. Upon securing warehouse receipts for the stored sets, the manufacturer turns over such receipts to a bank from which it borrows an amount based upon the cost of producing the stored sets.
Under the terms of the warehousing agreement, the customer agrees to pay the warehousing, insurance, and finance charges. When the customer furnishes a notice that he desires to have the merchandise shipped, the manufacturer obtains a release from the bank for the desired number of sets and separately bills the customer for the contract price of the sets and the outstanding warehousing, insurance, and finance charges. Title to these sets remains with the manufacturer until they are actually shipped from the warehouse to the purchaser, but upon the delivery to the warehouse pursuant to the instructions of the purchaser, the beneficial ownership of the sets passes to the purchaser. The contract of sale is unconditional. The sets have become identified, selected, labelled and set aside separately in performance of the contract. Nothing remains to be done other than delivery and payment of the price. The sets have been appropriated to the use of the purchaser in accordance with the intention of the parties to the contract of sale.
In setting forth special provisions applicable to the manufacturers excise taxes, section 4216(a) of the Internal Revenue Code of 1954 provides that, in determining the price for which an article is sold, there shall be included any charge for coverings and containers of whatever nature, and any charge incident to placing the article in condition packed ready for shipment, but there shall be excluded the amount of the manufacturers excise tax imposed by this chapter, whether or not stated as a separate charge. A transportation, delivery, insurance, installation, or other charge (not required by the foregoing sentence to be included) shall be excluded from the price only if the amount thereof is established to the satisfaction of the Secretary of the Treasury or his delegate in accordance with the regulations.
Under the provisions of section 316.12 of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, charges for transportation, delivery, insurance, installation, and other charges actually incurred in connection with the delivery of an article to a purchaser pursuant to a bona fide sale, are to be excluded in computing the manufacturers excise tax. No other additional charge may be excluded in computing the tax unless it can be shown by adequate records to the satisfaction of the Commissioner of Internal Revenue that such charge property is not to be included as a manufacturing or selling expense, or is in no way incidental to placing the article in condition packed ready for shipment.
The purpose of section 4216(a) of the Code is to authorize the inclusion in the taxable sale price of certain charges to closely connected with the cost of manufacture or production of taxable articles as to constitute a part of the price for which they are sold, and to exclude from the sale price certain other charges which, though they increase the cost to the customer of securing the articles, form no integral part of their sale price. See G.C.M. 21114, C.B. 1939-1 (Part I), 351.
In the instant case, the radio and television receiving sets are manufactured pursuant to the customer's specification. Before the sets are sent to the warehouse, the customer is bound by contract to accept them. Each shipment is made in response to a specific order therefor by the customer regardless of whether the sets are shipped directly to the customer or are stored in transit. Such warehousing is not a part of the manufacturer's normal marketing method. Furthermore, since the particular requirements of the customer's business dictate the need for the use of warehouse facilities, the storage of the sets is for the benefit and convenience of the customer. Moreover, in the instant case the warehousing, insurance, and finance charges are not considered to be part of the manufacturer's cost of processing and selling the articles. Hence, it is considered that the shipment of the sets in response to the customer's order, pursuant to a bona fide sale, began when the sets left the manufacturer's factory.
Accordingly, it is held that the warehousing, insurance and finance charges involved, for which the manufacturer is reimbursed by the customer, are not a part of the sale price of the sets upon which the manufacturers excise tax is based.