Rev. Rul. 60-165

Advice has been requested as to the deductibility, for Federal income tax purposes, of the tax on cigarettes, cigars, and other tobacco products imposed by the State of Alabama by H56, Act 101, passed by the Legislature of Alabama, Second Special Session, 1959, effective October 1, 1959. Advice also has been requested as to the deductibility of the tax on cigarettes, cigars, and other tobacco products imposed by section 718, subdivision 1 of Article 9 of Title 51, Code of Alabama, 1940, as amended by H786, effective November 19, 1959.

Prior to the enactment of H56, which levies an additional tax on tobacco and tobacco products effective October 1, 1959, the State's tobacco tax was imposed by section 718 of Title 51, Code of Alabama. This tax was imposed directly upon every person, firm, corporation, club, or association, within the State of Alabama, who sold to anyone the tobacco products specified therein. H786 amended section 718 to increase the rate of tax imposed thereby on certain tobacco products and to provide that the tax levied by section 718 is in fact a levy on the ultimate consumer or user of the tobacco or tobacco products. Thus, H56 levies a new tax on tobacco and tobacco products and H786 amends section 718 which imposed the tobacco tax in effect prior to the enactment of H56.

The pertinent provisions of H56, effective October 1, 1959, which levies additional privilege and license taxes on the sale, storage, or delivery of tobacco products within the State, are as follows:

Section 1(a). In addition to all other taxes of every kind now imposed by law, every person, firm, corporation, club, or association within the State of Alabama who sells, or stores, or receives for the purpose of distribution to any person, firm, corporation, club, or association within the State of Alabama any cigarettes, cigars, cheroots, stogies and smoking tobacco shall collect and pay over to the State of Alabama a license or privilege or excise tax at the rates hereinafter set forth upon the selling, use, consumption, distribution, storing or withdrawal from storage in this state of cigarettes, cigars, cheroots, stogies, and smoking tobacco for any use, provided, that where the tax as hereinafter set forth shall have been paid to the state by any such person, firm, corporation, club, or association, such payments shall be sufficient, the intent being that the tax shall be paid to the state but once. * * *.

Section 1(b). Every such person, firm, corporation, club, or association shall add the amount of the tax levied and assessed herein to the sales price of the cigarettes, cigars, cheroots, stogies and smoking tobacco, it being the purpose and intent of this provision that the tax levied is in fact a levy on the consumer or user with such person, firm, corporation, club, or association acting merely as an agent of the state for the collection and payment of the tax to the state * * *.

Section 718 of Title 51, Code of Alabama, 1940, as amended, by section 1 of H786 effective November 19, 1959, provides, in part, as follows:

Section 718. In addition to all other taxes of every kind now imposed by law and which are not specifically repealed by this article 9, every person, firm, corporation, club or association, within the State of Alabama, who sells or stores or receives for the purpose of distribution to any person, firm, corporation, club or association within the State of Alabama, cigars, cheroots, stogies, cigarettes, smoking tobacco, chewing tobacco, snuff, or any substitute therefor, either or all, shall pay to the State of Alabama for state purposes only a license or privilege tax which shall be measured by and graduated in accordance with the volume of sales of such person, firm, corporation, club or association in Alabama. * * *. However, every wholesaler, distributor, jobber, or retail dealer shall add the amount of the tax levied herein to the price of the tobacco or tobacco products sold, it being the purpose and intent of this provision that the tax levied is in fact a levy on the ultimate consumer or user with the wholesaler, distributor, jobber, or retail dealer acting merely as an agent of the state for the collection and payment of the tax to the state. Therefore, notwithstanding any exemptiom from taxes which any such seller may now or hereafter enjoy under the constitution or laws of this or any other state, or of the United States, he shall collect the tax imposed hereunder from the purchaser or consumer, and the amount of the tax shall constitute a debt from the purchaser or consumer to the seller until paid. It shall be unlawful for any person, firm, corporation, or association, or co-partnership to fail or refuse to add to the sales price and collect from the purchaser the amount of the tax to be added to the sales price and collected from the purchaser hereunder.

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 1.164-1 of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed.

A consideration of the provisions of H56 and H786 discloses that it is the purpose and intent of the State Legislature that the taxes imposed on tobacco products in the State of Alabama are in fact a levy on the consumer, with the wholesaler, distributor, jobber or retail dealer acting merely as agent for the State for the collection of the taxes.

Accordingly, it is held that, for Federal income tax purposes, the tax imposed by the State of Alabama on the sale, storage, or distribution of tobacco products under the provisions of H56, Act 101, is, on and after October 1, 1959, deductible by the consumer under section 164(a) of the Code. The tax on tobacco products imposed by the State under section 718 of Title 51, Code of Alabama, 194-0, as amended, is also deductible by the consumer on and after November 19, 1959, the effective date of H786. However, in the case of an individual who elects the standard deduction or the optional tax table, no deduction is allowable unless the taxes are 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. If the taxes are attributable to such a trade or business carried on by an individual, the amounts thereof are deductible from gross income in computing adjusted gross income under the provisions of section 62 of the Code.

On and after the effective dates of H56 (October 1, 1959) and H786 (November 19, 1959), no deduction for the respective taxes is allowable to the licensee paying the taxes to the State of Alabama, and the portion of the price paid by the consumer to the licensee for tobacco and tobacco products which represents the Alabama State tax thereon is not includible in the gross income of such licensee.