Rev. Rul. 54-448

Advice is requested concerning the method of computing the tax imposed by section 3406(a)(1) of the Internal Revenue Code of 1939 on sales of sporting goods by a manufacturer who sells certain articles at wholesale and retail and other articles at retail only.

In the instant case, the articles which are sold by the manufacturer only at retail consist of billiard cues, other than jointed cues, composition billiard balls, ivory billiard balls, cast phenolic billiard balls, billiard tables, ten pins and candle and duck pins. Jointed billiard cues are sold by the manufacturer both at wholesale and retail.

Under the provisions of section 3406(a)(1) of the Code, as amended by the Excise Tax Reduction Act of 1954, tax at the rate of 10 percent is imposed on sales by the manufacturer of articles of sporting goods on or after April 1, 1954.

Under the authority of section 3441(b)(1) of the Code, the tax on the sale of articles of sporting goods which are sold by a manufacturer only at retail, is to be computed on the price for which such articles are sold by manufacturers or producers in the ordinary course of trade as determined by the Commissioner. Such determination has been made with respect to each of the following articles and has been found to represent an amount equal to the indicated percentage of the established retail list price subject to the adjustments provided by section 3441(a) of the Code.

 Billiard cues, other than jointed cues          60% of established

With respect to the sale of jointed billiard cues at wholesale, the tax should be based on the wholesale price subject to the adjustments provided by section 3441(a) of the Code.

Under the authority of section 3441(b)(1) of the Code, the tax on retail sales of articles by a manufacturer who also sells like articles at wholesale, is to be based upon his highest established wholesale price to independent dealers, subject also to the adjustments provided by section 3441(a) of the Code.

Advice is also requested regarding the determination of tax credits allowable under section 3443(a)(2) of the Code with respect to cash discounts allowed by a manufacturer. In the instant case, cash discounts of 2 percent are allowed by a manufacturer on the sales of both taxable and nontaxable articles. The manufacturer finds it practically impossible to ascertain the exact amount of cash discounts allowed on the sale of taxable articles as distinguished from those allowed on the sale of nontaxable articles. The manufacturer proposes to determine the tax credits relating to discounts allowed on sales of taxable articles in the current month on the basis of the ratio that the sales of taxable articles in the preceding month bears to the total sales of articles in that month. The term `current month' refers to the month for which the manufacturer is reporting the total tax and taking credit with respect to cash discounts which have actually been allowed to customers at the time the net tax due for the month is computed.

Where it is impractical to determine the exact amount of cash discounts allowed on the sale of taxable articles during the current month, the manufacturer may determine the tax credits relating to discounts allowed on sales of taxable articles on the basis of the ratio that the preceding month's sales of taxable articles bears to the total sales of articles in such preceding month, provided that the same procedure is followed each month.

For example, where cash discounts of $100 are allowed during the current month with respect to sales of taxable and nontaxable articles and the sales of billiard tables during the preceding month were in an amount equal to 25 percent of the total sales of both taxable and nontaxable articles during such preceding month, the portion of the current month's discounts applicable to such taxable tables may be determined by applying this percentage to the total discounts allowed for the current month. The resulting amount of $25 represents the discounts allowed during the current month based on 2 percent of the established retail list price of the tables. Since the tax on the sale of such tables was not computed on the established retail list price but rather on 70 percent of such price, the amount of discounts of $25 applicable to the tables should be reduced to $17.50 by the application of such percentage. The application of the tax of 10 percent to the discounts of $17.50 on which tax was computed results in an allowable tax credit of $1.75.