Rev. Rul. 55-20

Advice has been requested as to the proper basis for determining the tax rate on cigars weighing more than 3 pounds per thousand.

In the case here involved, a cigar manufacturer, producing only one type or grade of cigars, confined his sales in the first year of manufacture primarily to sales of individual cigars to friends and neighbors at x cents each. However, sales by the manufacturer in subsequent years were made in box lots of 50 cigars at 50 x cents per box. The cigars in te box lots so purchased from the manufacturer were then sold singly to consumers at 2 x and 3 x cents per cigar.

Section 2000(c) of the Internal Revenue Code of 1939 provides that in determining the retail price of cigars for tax purposes regard shall be had to the ordinary retail price of a single cigar in its principal market. This method of determining the proper tax rate is applied in the case of cigars weighing more than 3 pounds per thousand. The law does not attempt to fix the price at which the cigars shall retail. It imposes a tax on such cigars sold or removed for consumption or sale by the manufacturer or importer thereof, based upon the price at which the cigars are manufactured to retail, with the term `retail' involving the `ordinary retail price of a single cigar in its principal market.'

Article 75 of Regulations 8, 26 C.F.R. Part, 140, provides that where there is more than one price for the same cigar in its principal market, the tax to be paid will be determined according to the price at which the majority are sold therein.

The price at which cigars are manufactured or imported to be sold at retail is a question of fact. The best evidence of that fact is the price at which the cigars are actually sold at retail in their principal market, that being the one the manufacturer or importer has chiefly in view. The principal market of a cigar is regarded as the locality where the bulk of such cigars are sold. If the cigars are sold singly at retail in that locality for more than one price, the tax to be paid shall be based on the retail price at which the majority of the cigars are there so sold. Where cigars are manufactured or imported to retail only in full packages or boxes, or in lots of two or three cigars for a certain price, and the cigars are never sold in their principal market in any other manner so that there is no established retail price for a single cigar in such market, the price of a single cigar is the price of the package or lot divided by the number of cigars contained therein.

In the instant case, the rate of tax for the first year in which sales were made should be determined upon the basis of the price at which the manufacturer made single sales of the cigars ( x cents). The basis for determining the proper tax rate for subsequent years should be the price at which the majority of the cigars were sold singly to the consumers (either 2 x cents or 3 x cents) and not the rate at which they were sold in box lots by the manufacturer, divided by 50