Rev. Rul. 61-27

Advice has been requested concerning the applicability of the manufacturers excise tax to phonograph records which are sold by the manufacturer as parts of language instruction courses, which also include certain text materials.

In the instant case, a company produces and sells a self-teaching course of instruction in a foreign language. The course consists of a text, a verb finder, and several phonograph records, all of which are manufactured by the company. In learning the foreign language, the text and verb finder have a function independent of the records; that is, they may be used without regard to the records.

Section 4141 of the Internal Revenue Code of 1954 imposes a tax upon the sale by the manufacturer, producer, or importer of certain enumerated articles (including in each case parts or accessories for such articles sold on or in connection with the sale thereof). The enumeration includes `phonograph records.'

In the instant case, since the text and the verb finder, in themselves, have a function independent of their use in connection with the records with which they are sold, the text and verb finder are not considered to be accessories for the taxable phonograph records. Rather, under the circumstances of this case, they are considered to be nontaxable articles.

It is a well-established principle that where a taxable article and a nontaxable article are sold by the manufacturer as a unit, the manufacturers excise tax applies to that portion of the manufacturer's sale price of the unit which is properly allocable to the taxable article. See, for example, S.T. 943, C.B. 1952-1, 221; Rev. Rul. 58-376, C.B. 1958-2, 810; Rev. Rul. 59-16, C.B. 1959-1, 340; Rev. Rul. 59-224, C.B. 1959-1, 344; and Rev. Rul. 60-259, C.B. 1960-2, 318.

Accordingly, it is held that where the language course, consisting of phonograph records, text, and verb finder, is sold by the manufacturer as a unit, the transaction constitutes a combination sale of taxable phonograph records and nontaxable articles. Therefore, the tax applies to that portion of the price for which the combination is sold which is properly allocable to the taxable phonograph records.

As in other cases involving the applicability of the manufacturers excise taxes, the price for which the combination is sold must be determined in accordance with the provisions of section 4216(a) of the Code regarding the inclusion of certain charges and the exclusion of certain other charges.

If the phonograph records, text, and verb finder described above have separate established sale prices, the tax base is determined by applying to the price for which the language course is sold the ratio which the separate sale price of the records bears to the sum of the separate sale prices of the taxable records and the nontaxable text and verb finder.

However, if the records, text, and verb finder are not sold separately and do not have established sales prices, the taxable portion of the price for which the language course is sold may be determined from a comparison of the actual costs of the taxable records and the nontaxable text and verb finder. For example, if the cost of the records represents 60 percent of the total costs of the records, text, and verb finder, the tax applies to 60 percent of the actual price for which the language course is sold, as determined in accordance with the provisions of section 4216 of the Code.

Compare Revenue Ruling 59-181, C.B. 1959-1, 329, which holds that (a) certain booklets and selecticators which are sold with phonograph records by the manufacturer thereof are considered to be accessories for such records under the provisions of section 4141 of the Code, and (b) phonograph record albums are considered to be containers for phonograph records under the provisions of section 4216(a) of the Code.