Rev. Rul. 57-437

Revenue Ruling 56-515, C.B. 1956-2, 792, provides that where a retailer adds to the selling price of an article subject to the retailers excise tax a charge for the privilege of purchasing the article on credit or under an installment payment plan, such charge is considered to be a part of the selling price of the article on which tax is to be computed, notwithstanding the fact that such amount may be set forth as a separate item. However, that Revenue Ruling further provides that where the charge made by the retailer is computed at the legal rate of interest, based on the unpaid balance of the account and the length of time agreed upon for payment of that balance, and is refundable in proportion to any accelerated payment of the account made by the customer, it is considered a bona fide finance or carrying charge and may be excluded from the tax base, provided it is shown as a separate item on the invoice furnished the customer or may be readily determined from the records of the retailer.

The Internal Revenue Service has been asked whether Revenue Ruling 56-515 should be interpreted to mean that excludable `service' charges (sometimes called `finance' or `carrying' charges) are limited to those charges which are computed at the legal rate of interest.

From the information presently available, it would seem that the credit service charge arrangements being used by retailers may be grouped into three categories, as follows:

Example 1 . When an article is sold on credit or under an installment payment plan, the retailer adds to the established cash selling price a charge which is a flat percentage of the cash selling price without regard to the length of time over which payments are to be spread. There is no provision for proportionate adjustment of the added charge because of accelerated payments.

Example 2 . For each individual sale there is determined a `service' charge which is based upon the unpaid balance of selling price after deduction of the down payment and upon the length of time provided for payment of that balance. In the case of accelerated payment of the account, a proportionate adjustment is made in the service charge.

Example 3 . The retailer enters into a `revolving credit' agreement with individual customers. Under this plan, a credit limit is established for each credit customer, based upon the amount of the customer's predetermined monthly payments. Sales of articles, either taxable or nontaxable, may be charged to this account up to the established credit limit. As the customer makes payments, the account is reduced below his credit limit and the customer may then make additional purchases until the credit limit is again reached. A charge at a specified percentage of the unpaid balance of the account is added at the end of each month. Thus, the amount of the additional `service' charge is based upon the unpaid balance of the account and the period of time actually taken for payment of that balance.

The retailers excise taxes imposed by sections 4001, 4011, 4021, and 4031 of the Internal Revenue Code of 1954 are based upon the price for which an article is sold at retail, subject to certain inclusions and exclusions set forth in section 4051 of the Code. Whether a `service' charge is to be considered a part of the selling price upon which the tax is based is a question of fact to be determined from the circumstances of each case. If such a charge is based arbitrarily upon the degree of risk involved or is otherwise computed in such a manner that it represents merely an increase in the price for which a taxable article is sold, then of course the amount of that charge may not be excluded from the taxable selling price. On the other hand, if the charge is confined to and is truly representative of the added expense imposed upon the retailer by reason of the credit sale, it may be excluded from the taxable selling price. In addition to the legal interest on the deferred portion of the selling price, such an excludable charge may include the cost of bookkeeping necessary to keep the records of the credit sales as well as any other expenses directly attributable to the fact that payment is deferred. See the decision of the Court of Appeals for the Fourth Circuit in the case of Berman's Jewelry Store, Inc. v. United States , 198 Fed.(2d) 675. To be excluded, the amount of such a charge must be made known to the customer either by entry on the sales invoice or by appropriate indication on some other document pertaining to the transaction of which the customer has knowledge.

Therefore, it is held that in order for a `service' charge to be excludable from the taxable selling price of an article subject to the retailers excise tax, it is necessary that (1) the charge be based upon the unpaid balance of the selling price and the length of time agreed upon for payment of the balance due, (2) the customer must receive a credit or adjustment of the charge proportionate to any accelerated payment, (3) the amount of the charge must be shown as a separate item on the sales invoice or some other document pertaining to the transaction so that the customer is aware of his privilege of prepaying his account so that he may take advantage of paying a lesser charge, and (4) there must not be present any factors which would negate the bona fides of the transaction.

Accordingly, the charge described in example 1 above would not be excludable from the taxable selling price. Assuming that in examples 2 and 3 the customers are properly informed of the `service' charges and that there are no circumstances which would cast doubt on the bona fides of the transactions, the charges described would be excludable from the taxable selling price.

Revenue Ruling 56-515, supra , is superseded.