Rev. Rul. 59-203

The Internal Revenue Service has been asked to approve the use of a weighted average formula for computing excludable transportation and delivery charges in determining the basis for the manufacturers excise tax with respect to sales of matches in those instances where the tax computed at two cents per 1,000 is more than ten percent of the manufacturer's selling price.

Section 4211 of the Internal Revenue Code of 1954 imposes upon the sale by the manufacturer, producer, or importer of matches, a tax of two cents per 1,000 matches but not more than ten percent of the price for which so sold , except that in the case of fancy wooden matches and wooden matches having a stained, dyed, or colored stick or stem, packed in boxes or in bulk, the tax shall be five and one-half cents per 1,000 matches. Under the provisions of section 4216(a) of the Code, in determining the price for which an article is sold there shall be excluded charges for transportation and delivery costs actually incurred in connection with the delivery of an article to a purchaser pursuant to a bona fide sale. Thus, in determining whether the ten percent limitation will apply, the manufacturer may exclude the applicable transportation or delivery costs in determining the price for which the matches are sold.

A company manufactures several types of matches. The matches are sold on tax-included, delivered basis. In order to reduce the clerical expense involved in computing the excludable transportation and delivery expense in determining the adjusted price for which the matches are sold, the manufacturer proposes to use a weighted average cost of such expenses for each type of matches sold. This weighted average cost, which would be excluded from the tax-included, delivered selling price of matches in those instances where the tax computed at two cents per 1,000 is more than ten percent of the price for which sold, would be determined as follows:

 Total transportation and delivery costs for the

Therefore, if a case of type `A' matches were sold for $10.25 and contained 50,000 matches, the tax would be computed as follows:

      (1) Tentative tax at 2 cents per 1,000 matches

The Service will approve the use of a weighted average cost formula similar to the one described above for determining the excludable transportation and delivery charges on an individual basis for each match manufacturer, producer, or importer. This formula may be used in determining the basis for the manufacturers excise tax imposed by section 4211 of the Code, with respect to the sale of matches in those instances where the tax computed at two cents per 1,000 would exceed ten percent of the manufacturer's selling price. The weighted average cost of transportation and delivery should be computed by using the applicable sales, transportation, and delivery cost figures for the preceding calendar year. The resulting transportation and delivery cost per case for each kind of matches should be deducted from the tax-included, delivered selling price of each case sold during the current calendar year. A new formula should be developed for each subsequent year based upon the prior year's transportation and delivery costs. Each year's formula must be forwarded for approval to the office of the District Director of Internal Revenue for the district in which the manufacturer is located.

In determining the net excludable transportation and delivery costs for a given year, the following items should be eliminated:

1. All shipping expense up to the time of delivery of the merchandise to the carrier.

2. All freight charges on returned goods.

3. All freight charges on matches subject to tax at the rate of two cents per thousand.

4. All freight charges on nontaxable sales.

See G.C.M. 21114, C.B. 1939-1 (Part I), 351, which sets forth guides governing the inclusion or exclusion of cost of transportation and delivery charges in determining the prices for which certain articles are sold.