Rev. Rul. 58-45

Advice has been requested whether the tax on cigarettes imposed by the State of Nebraska under the amendments provided in Legislative Bill 130, passed at the 1957 Session of the Nebraska State Legislature and effective September 20, 1957, is deductible for Federal income tax purposes by the consumer.

Section 164(a) of the Internal Revenue Code of 1954 provides the general rule that in computing taxable income there shall be allowed as a deduction taxes paid or accrued within the taxable year, with certain exceptions not here material.

Section 1.164-1 of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed.

Revenue Ruling 55-266, C.B. 1955-1, 23, holds that the tax imposed by the State of Nebraska, section 77-2602 and section 77-2616 of Article 26 of Revised Statutes of Nebraska, 1943, Reissue of 1950, on cigarettes distributed and sold at wholesale and on the use of all cigarettes in the State, evidenced by stamps affixed to the containers or printed thereon by the use of a cigarette tax meter, is deductible for Federal income tax purposes under section 164 of the Code by the wholesale distributor or wholesale dealer or the user who pays for and affixes the stamp or meter impressions; and that the tax is not a retail sales tax imposed on persons selling tangible personal property at retail and is not deductible under section 164(c) of the Code by the consumer or purchaser of the cigarettes. Insofar as the ultimate consumer or purchaser is concerned, Revenue Ruling holds that the tax represents an additional cost of the article and is not deductible as a tax in computing his taxable income except where imposed directly upon him as a use tax.

An amendment, approved May 29, 1955, which added section 77-2602.01 to the Revised Statutes, Laws 1955, C. 305, section 1, provided that wholesale dealers or other persons having paid the Nebraska cigarette tax, or being liable for its payment, should collect the amount thereof from any person, firm, or corporation to whom cigarettes are sold in the State, along with the selling price thereof. Such amendment did not operate so as to change the classification of the Nebraska cigarette tax to that of a State or local sales tax within the meaning of section 164(c)(2) of the Code. It did not shift the incidence of the tax from the wholesale dealer (or other person paying the tax or liable therefor) to the consumer. In the absence of statutory language which specifically states that it is the intent of the State Legislature to impose the tax on the purchaser or consumer, no inference may be drawn that such intent existed.

Legislative Bill 130, entitled `an Act to amend section 77-2602, Reissue Revised Statutes of Nebraska, 1943, and section 77-2601.01, Revised Statutes Supplement, 1955, relating to revenue and taxation; to increase the tax on cigarettes to four cents; to restate that the tax collected shall be a tax collected from the user or consumer; and to repeal the original section,' contains the following provisions:

SECTION 1. That section 77-2602, Reissue Revised Statutes of Nebraska, 1943, be amended to read as follows:

`77-2602. Every person, engaged in distributing or selling cigarettes at wholesale in this state, shall pay to the Director of the Department of Agriculture and Inspection of this state a special privilege tax. This shall be in addition to all other taxes. It shall be paid prior to or at the time of the sale, gift, or delivery to the retail dealer in the several amounts as follows: On all cigarettes four cents per package containing not more than twenty cigarettes, and on packages containing more than twenty cigarettes a tax of four cents for the first twenty cigarettes and four cents for each twenty cigarettes or fractional part thereof in excess of twenty cigarettes. The proceeds of such tax shall be placed in the General Fund to be appropriated by the Legislature.

`SECTION 2. That section 77-2602.01, Revised Statutes Supplement, 1955, be amended to read as follows:

`77-2602.01. The impact of the tax levied by Chapter 77, article 26, Reissue Revised Statutes of Nebraska, 1943, and amendments thereto, is hereby declared to be on the vendee, user, consumer, or possessor of cigarettes in this state, and when such tax is paid by any other person, such payment shall be construed as an advance payment, and shall thereafter be added to the price of the cigarettes and recovered from the ultimate consumer or user. In making sales of cigarettes in this state, a wholesaler or jobber may separately state and show upon the invoice covering such sale the amount of the tax on cigarettes sold. The tax shall be evidenced by appropriate stamps attached to each package of cigarettes sold, and the tax shall be collected by the retailer from the user or consumer. The provisions of this section shall in no way effect the method of collection of such tax on cigarettes as now provided by existing law.

`SECTION 3. That original section 77-2602, Reissue Revised Statutes of Nebraska, 1943, and section 77-2602.01, Revised Statutes Supplement, 1955, are repealed.'

In view of the evident intent of the Nebraska Legislature to impose the cigarette tax upon the consumer in the State of Nebraska, it is held the tax imposed by the State of Nebraska, Section 77-2602 of Article 26 of Revised Statutes of Nebraska, wholesale and on the use of all on cigarettes distributed and sold at wholesale and on the use of al cigarettes in the State evidenced by stamps affixed to the containers or printed thereon by the use of the cigarette tax meter, is, on and after September 20, 1957, the effective date of Legislative Bill 130, 195-7 session of the Nebraska State Legislature, deductible under section 164(a) of the Code by the consumer in computing taxable income, except that, in the case of an individual who elects to use the optional standard deduction, the tax is not deductible unless attributable to the trade or business carried on by him which does not consist of the performance of services by the taxpayer as an employee. In the latter event, the tax is deductible from gross income in computing adjusted gross income.

Effective September 20, 1957, no deduction is allowable to the licensees (distributors or dealers) paying the tax to the State of Nebraska, and the portion of the price paid by the consumer to the licensees for cigarettes which represents the Nebraska State tax on cigarettes is not includible in the gross income of such licensees.

Revenue Ruling 55-266, C.B. 1955-1, 23 is not applicable to the tax on cigarettes sold in the State of Nebraska on or after September 20, 1957.