Internal Revenue Service
Rev. Rul. 65-154
1965-1 C.B. 488
The Internal Revenue Service describes a method for determining the highest price for which a manufacturer sells an article to wholesale distributors, for purposes of computing a constructive manufacturers excise tax sale price under section 4216(b)(2) of the Internal Revenue Code of 1954.
Rev. Rul. 65-154 /1/
Advice has been requested relative to the determination of a constructive sale price under the provisions of section 4216(b)(2) of the Internal Revenue Code of 1954.
Section 4216(b)(2) of the Code provides for a constructive tax base for manufacturers' sales at retail and to retailers, of articles subject to a tax imposed under chapter 32 of the Code, where such sales are made under prescribed conditions. Where a manufacturer's sales qualify for the use of the constructive tax base, said base `shall (if based on the price for which the article is sold) be computed on whichever of the following prices is the lower: (i) the price for which such article is sold, or (ii) the highest price for which such articles are sold by such manufacturer, producer, or importer to wholesale distributors (other than special dealers).'
Section 4216(a) of the Code defines the term `price' as used in chapter 32 of the Code, and states in part:
* * * A transportation, delivery, insurance, installation, or other charge * * * shall be excluded from the price only if the amount thereof is established to the satisfaction of the Secretary or his delegate in accordance with the regulations.
Section 6416(b)(1) of the Code reads, in part, as follows:
(1) Price Readjustments .-If the price of any article in respect of which a tax, based on such price, is imposed by Chapter 31 or 32, is readjusted by reason of the return or repossession of the article or a covering or a container, or by a bona fide discount, rebate, or allowance, including (in the case of a tax imposed by Chapter 32) a readjustment for local advertising (but only to the extent provided in section 4216(f)(2) and (2) and (3)), the part of the tax proportionate to the part of the price repaid or credited to the purchaser shall be deemed to be an overpayment.
Section 148.1-5(d)(1) of the Temporary Rules Relating to Constructive Sale Price for Manufacturers Excise Tax Purposes defines the term `wholesale distributors' as persons who customarily resell to others who in turn resell.
The specific question presented is whether a described method for determining the highest price for which a manufacturer sells a taxable article to wholesale distributors is acceptable to the Service for purposes of computing a constructive sale price under section 4216(b)(2) of the Code, for articles sold at retail, and to retailers.
The manufacturer in question will use as a basis for computing the highest price for which he sells a given article to wholesale distributors, his highest published tax-included price to wholesale distributors in effect at the time of the taxable sale for which a constructive tax base is sought. Such highest published tax-included price will be the price for the article when sold under the same conditions as those attending the taxable sale for which a tax base is being constructed. For example, if a taxable sale to a retailer is made for a delivered price including a charge for special packing, insurance, installation, etc., the highest published distributor price will be the delivered price reflecting the amounts charged a distributor for these same items.
After determining the highest published tax-included wholesale distributor price for the article when sold under the same conditions as the actual taxable sale at retail (or to a retailer), the manufacturer will then multiply that figure by the number of such articles sold at retail and to retailers by the manufacturer during the taxable quarter. Having thus obtained his total sales of the article at retail and to retailers for the taxable period in terms of his highest tax-included published price to wholesale distributors, the manufacturer proposes to adjust the total figure so as to reflect (a) the average section 4216(a) delivery expense incurred in connection with his taxable sales of the same article at his highest published price to wholesale distributors, and (b) the average section 6416(b)(1) price readjustments and allowances granted on his taxable sales of the same article at his highest published price to wholesale distributors. To provide for these adjustments the manufacturer will employ a percentage factor. To obtain this factor he will divide his total taxable sales of the article made at his highest published price to wholesale distributors for the four calendar quarters immediately preceding the quarter for which the tax is being determined, into the same figure less section 4216(a) delivery and other excludable expenses incurred, and the section 6416(b)(1) price readjustments and allowances granted, in connection with the same type of taxable sale during the same four quarters. The manufacturer may not include among the price readjustment and allowance items any credits allowed in connection with returned articles, or for tax-free sales.
The adjustment factor thus obtained will be applied to the total gross constructive sales figure for the taxable quarter, and the resultant amount will be considered the manufacturer's tax-included constructive sales price for sales of the specific article at retail and to retailers, as determined under the provisions of section 4216(b)(2), for the taxable quarter. The tax being imposed on the articles at a 10 percent rate, the tax due on the sales in question will be computed at 10/110 ths of the total tax-included constructive tax base. No further adjustment of the tax base will be made except for returned articles, or for tax credits granted in connection with tax-free sales.
Following is an example of the proposed computation. During the taxable quarter ended March 31, 1965, the manufacturer involved sold 500 x articles at retail at $70 each, and 500 of the same articles to retailers at $60 each. During said quarter the manufacturer's highest published price of x articles to wholesale distributors was $50 each, tax included. During the year ended December 31, 1964, the manufacturer sold 18,000 x articles to wholesale distributors also at $50 each, tax included, his highest published price to wholesale distributors during the year. All sales were made f.o.b. destination. Delivery expense incurred in connection with sales of x articles sold during 1964 at the highest price to wholesale distributors amounted to $9,600, and price readjustments granted with respect to the same sales amounted to $33,060. X articles are subject to manufacturers excise tax at a 10 percent rate.
a. Total gross constructive sales price for x articles
The method outlined above for determining the highest price for which an article is sold to wholesale distributors is acceptable to the Internal Revenue Service for purposes of computing a constructive tax base under section 4216(b)(2) of the Code, provided the method is applied on a consistent basis. Procedures which vary from the method outlined above should be submitted to the Service for a ruling.
Whether, in computing the ad valorem manufacturers excise tax due for purposes of assessment and collection, the total price charged for a taxable article shall be deemed to include an amount equal to the tax regardless of whether the retailer has included the tax in his selling price. See Rev. Rul. 65-41, page 454.
/1/ Also released as Technical Information Release 729, dated May 21, 1965.