Rev. Rul. 58-291

Advice has been requested whether the tax imposed by the State of Michigan on the sale of cigarettes, pursuant to Act No. 265 of the Public Acts of 1947, as amended (section 7.411(1) et seq. Michigan Statutes Annotated, 1957 Cumulative Supplement) and Act No. 312 of Public Acts of 1957 (section 15.1919(89) Michigan Statutes Annotated, 1957 Cumulative Supplement) is deductible for Federal income tax purposes.

Under the provisions of Act No. 265 of the Public Acts of 1947, as amended, supra , no person shall sell, purchase, possess or acquire cigarettes or act as manufacturer, wholesaler, secondary wholesaler, vending machine operator, unclassified acquirer, transportation company or transporter, in the State unless licensed to do so by the Michigan department of revenue. Section 7.411(3), Michigan Statutes Annotated. Every licensee, other than an unclassified acquirer, is required to file a monthly return with the department, stating therein, among things, the number of cigarettes purchased and sold by such licensee in the State during the preceding calendar month. Such licensee shall, at the time of filing the return, pay to the department an excise tax equal to one and one-half mills for each cigarette so sold during the calendar month covered by the return, less one percent compensation from the total amount of tax due to cover the cost of expenses of the wholesaler incurred in the administration of the Act. Cigarettes with respect to which the tax has once been imposed and has not been refunded, if paid, are not subject upon a subsequent sale to the tax imposed by the Act. Each unclassified acquirer is required, upon importation or acquisition of cigarettes from any source whatsoever, to file a return with the department, stating therein, among other things, the number of cigarettes imported or acquired, and to pay to the department an excise tax equal to one and one-half mills for each cigarette so imported or acquired and held for sale or consumption; but cigarettes with respect to which the tax has once been imposed and has not been refunded, if paid, are not subject, when subsequently sold, to any further tax under the Act. Section 7.411(7), Michigan Statutes Annotated.

An `unclassified acquirer' means, for the purposes of Act No. 265, supra , any person except a transportation company or a purchaser at retail from a retailer licensed under Act No. 167 of the Public Acts of 1933, as amended, being sections 205.51 to 205.78, inclusive of the Compiled Laws of 1948, who imports or acquires cigarettes for use, sale or distribution from any source other than a manufacturer, a wholesaler, or a secondary wholesaler licensed under Act No. 265, supra . Section 7.411(1)(6), Michigan Statutes Annotated.

Section 39 of Act No. 312 of the Public Acts of 1957, supra , provides, in 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) An excise tax equal to one mill on each cigarette, said tax to be paid monthly to the state department of revenue in the same manner and at the same time and subject to the same rules and regulations as are provide in Act No. 265 of the Public Acts of 1947, as amended. Every manufacturer, wholesaler, secondary wholesaler, vending machine operator, unclassified acquirer, transportation company and retailer as defined in Act No. 265 of the Public Acts of 1947, as amended, who has on hand on July 1, 1957, any cigarettes upon which a tax of one and one-half mills has been previously paid under said Act No. 265 of the Public Acts of 1947, as amended, shall file a complete inventory thereof with the state department of revenue and, at the same time, pay an excise tax of one mill on each such cigarette, said inventory and payment to be filed and paid on or before July 20, 1957.

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.

Subsection (c)(1) of section 164 relates to the deduction of retail sales taxes and gasoline taxes in computing taxable income. Such subsection 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.

Subsection (c)(2) of section 164 provides that as used therein the term `State or local sales tax' means a tax imposed by a State, 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 cigarettes pursuant to the provisions of Act No. 265 of the Public Acts of 1947, as amended, supra , and the additional tax imposed pursuant to section 39 of Act No. 312 of the Public Acts of 1957 are deductible under section 164(a) of the Code by the licensee making payment of such tax to the State. The tax is not a retail sales tax and, therefore, is not deductible by the purchasers of the cigarettes under section 164(c) of the Code. Insofar as the ultimate consumer or purchaser is concerned the tax represents an additional cost of the article and is not deductible as a tax in computing his taxable income. However, where the taxes have been imposed directly on the consumer by reason of his becoming an `unclassified acquirer', as defined, such taxes, to the extent they are paid by him directly to the department of revenue, may be deducted by such consumer under section 164(a) of the Code.