Rev. Rul. 60-356

Advice has been requested concerning the application of the manufacturers excise tax on mechanical pencils, fountain pens, and ball point pens to sales of magnetic mechanical pencils under the circumstances described below.

A company is engaged in manufacturing and selling mechanical pencils. Under special arrangements, the company produces magnetized mechanical pencils for certain customers. This is done by inserting magnetic rods into the barrel of mechanical pencils already completed by the company. The conversion of the pencils to magnetic pencils is accomplished by removing the plug from the top of the pencils, inserting the magnetic rods, and replacing the plug. As a result, the pencils are magnetized and will adhere to metal surfaces. These mechanical pencils are not made of, or ornamented, mounted, or fitted with precious metals or imitations thereof.

Section 4201 of the Internal Revenue Code of 1954 imposes a tax upon the sale by the manufacturer, producer, or importer of mechanical pencils, fountain pens, and ball point pens.

The manufacturers excise tax on mechanical pencils applies to the total price for which the mechanical pencils are sold by the manufacturer thereof. This is so, even though the manufacturer may have produced complete pencils and subsequently may have performed additional operations on such pencils prior to selling them.

Accordingly, it is held that the addition of a magnet to a mechanical pencil merely constitutes another step in the manufacture of the article which the manufacturer sells, that is, a magnetic mechanical pencil. Therefore, the manufacturers excise tax on mechanical pencils, fountain pens, and ball point pens, imposed by section 4201 of the Code, applies to the total price for which the magnetic mechanical pencils are sold by the manufacturer thereof, including the amount attributable to the magnetic rods. Since the pencils are not made of, or ornamented, mounted, or fitted with precious metals or imitations thereof, they are not subject to the retailers excise tax imposed by section 4001 of the Code.