Rev. Rul. 58-304

Advice has been requested as to the deductibility, for Federal income tax purposes, of the excise tax on liquor sales imposed by the State of Michigan under section 39 of Act No. 312 of the Public Acts of 1957, effective July 1, 1957.

The State of Michigan conducts a substantial business through stores operated directly by the State Liquor Control Commission. The Commission establishes the retail price at which liquor is to be sold both by its own stores and by licensed State-designated dealers. Licensees purchasing liquor are allowed a discount from the established retail price.

Section 39 of Act No. 312, supra , (section 15.1919(89), Chapter 146, Title 15 of Michigan Statutes Annotated, 1953 Revision, Volume 11, 1957 Cumulative Supplements) provides, in pertinent part, as follows:

Section 39. (1) For the purpose of supplementing the school aid fund established by section 23 of article 10 of the state constitution, there shall be levied and collected, and there is hereby imposed, the following excise taxes which shall be in addition to any and all taxes now imposed by law:

(a) * * *

(b) An excise tax equivalent to 4%of the retail selling price of spirits, as defined in section 2 of Act No. 8 of the Public Acts of the Extra Session of 1933, as amended, being section 436.2 of the Compiled Laws of 1948, other than those containing an alcoholic content of less than 22%. The tax shall be collected by the state liquor control commission at the time of sale by the commission. In the case of sales to licensees, the tax shall be computed on the retail selling price established by the commission without allowance of discount.

(2) Upon collection the department of revenue and the state liquor commission shall deposit the entire proceeds in the state treasury to the credit of the state school aid fund established by section 23 of article 10 of the state constitution.

Section 164(a) of the Internal Revenue Code of 1954 provides 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 164(c)(1) of the Code relates to the deduction of retail sales taxes and gasoline taxes in computing taxable income. Such section provides that in the case of any state or local sales tax, if the amount of the tax is separately stated, then, to the extent that the amount so stated is paid by the consumer (otherwise than in connection with the consumer's trade or business) to his seller, such amount shall be allowed as a deduction to the consumer as if it constituted a tax imposed on, and paid by, such consumer.

Section 164(c)(2) of the Code provides that, as used therein, the term `State or local sales tax' means a tax imposed by a State, a Territory, a possession of the United States, or a political subdivision of any of the foregoing, or by the District of Columbia, which tax (A) is imposed on persons engaged in selling tangible personal property at retail (or on persons selling gasoline or other motor vehicle fuels at wholesale or retail) and is a stated sum per unit of property sold or is measured either by the gross sales price or by the gross receipts from the sale; or (B) is imposed on persons engaged in furnishing services at retail and is measured by the gross receipts for furnishing such services.

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.

Accordingly, it is held that the tax imposed by the State of Michigan on the sale of liquor by the State Liquor Control Commission pursuant to section 39 of Act No. 312 of the Public Acts of 1957, supra , is deductible under section 164(a) of the Code by the purchaser who purchases such liquor from State Liquor Control Commission stores only. The amount of such tax is deductible in computing taxable income, except that in the case of an individual who elects to use the optional standard deduction or computes his tax from the tax table, the tax is not deductible unless attributable to a 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. The tax is not a retail sales tax and therefore is not deductible under section 164(c) of the Code.

Insofar as consumers or purchasers who buy liquor from licensed State-designated dealers are concerned, the tax which is reflected in the retail selling price paid to such licensees represents an additional cost of the liquor and is not deductible as a tax in computing taxable income. It should be noted that the licensed State-designated dealers who pay the tax to the State Liquor Control Commission when they purchase the liquor are entitled to a deduction for that tax.