Rev. Rul. 62-176

Advice has been requested concerning the applicability of the retailers excise tax on jewelry and related items to charges made by a repairer who furnishes materials and articles used in certain repair transactions.

Section 4001 of the Internal Revenue Code of 1954 imposes a tax on the sale at retail of several categories of articles, referred to generally as `jewelry and related items,' including to the extent involved here certain categories of articles as follows:

(1) All articles commonly or commercially known as jewelry, whether real or imitation.

(2) Certain enumerated stones, by whatever name called, whether real or synthetic.

(3) Articles made of, or ornamented, mounted or fitted with, precious metals or imitations thereof.

(4) Gold, gold-plated, silver, silver-plated or sterling hollow ware.

Section 48.4001-8(a) of the Manufacturers and Retailers Excise Tax Regulations provides that if an item is repaired and in connection therewith the person making the repair furnishes an article which would be subject to the tax imposed by section 4001 of the Code if sold separately at retail, the tax applies to the charge made for the article so furnished. In such case, the total charge made for the repair shall be deemed to be the price charged for the taxable article used in the repair, unless the portion of the total charge attributable to labor and to the use of any nontaxable materials is billed as a separate item. Examples of articles which are taxable when furnished in connection with the repair of other articles include (1) articles made of, or ornamented, mounted or fitted with, precious metals or imitations thereof, such as a ring mounting or setting, a bracelet link or safety chain, a complete shank of a ring (extending from one side of the head of the ring to the other side), a spring ring or swivel, catch, earring back or screw, and (2) a stone enumerated in section 4001.

Section 48.4001-8(b) of the regulations provides that if an article referred to in section 4001 is repaired and the repair operation consists of labor only, the repair operation is not subject to the tax. Also the tax does not apply to repair operations (1) where the repairer furnishes only materials such as unfabricated metal, wire, solder, etc., or (2) where the repairer furnishes only a portion of an article made of, or ornamented, mounted or fitted with, a precious metal or imitation thereof, such as a section of a shank of a ring.

The applicability of the tax to repair operations depends, therefore, upon whether in repairing an article belonging to a customer the repairer furnishes in article which, if sold separately, would be subject to the tax. Furnishing such a taxable article under those circumstances constitutes the sale of that article to the customer. If, in connection with the repair of a customer's article, the repairer furnishes one of the stones enumerated in section 4001 of the Code, the tax applies to the price charged for that stone.

In addition to the examples set forth in section 48.4001-8(a) of the regulations, certain `findings' are considered to be taxable articles if made of, or ornamented, mounted or fitted with, precious metals or imitations thereof. Included among such taxable `findings' are gold posts and nuts, backs for brooches, and plates for rings, or galleries (used beneath the stones in most men's rings and in some ladies' rings to prevent the stones from slipping through). However, the tax does not apply to charges for operations such as cleaning, polishing, soldering, resetting and tightening of stones, sizing of rings, etc., which do not involve the furnishing of a taxable article.

For the further guidance of repairers, there are set forth below the tax consequences of various types of retail transactions.

(1) Heads and crowns .-If a repairer replaces the full head or crown (or a four-prong or six-prong tiffany head or crown) of a customer's ring, the transaction is deemed to include the sale of the head or crown. If the head or crown is made of a precious metal or an imitation thereof, the tax imposed by section 4001 of the Code applies to the price charged for the head or crown. On the other hand, the mere `building up' of the prongs of a ring, when only solder, sizing wire, or similar materials are used, does not involve the sale of a taxable article.

(2) Overlays .-If a repairer makes an overlay for a customer's ring (such as one which has worn thin) by removing a ring from stock and fastening or soldering it around or over the customer's ring, the transaction is considered to include the sale of the ring taken from stock. Therefore, the tax imposed by section 4001 of the Code applies to the price charged for that ring. On the other hand, the mere plating of a customer's ring with a precious metal to make an overlay does not involve the sale of a taxable article.

(3) Recasting .-If a retailer produces an article of jewelry in accordance with a customer's specifications and accepts in trade an article belonging to the customer, the tax imposed by section 4001 of the Code applies to the entire price charged for the new article produced and sold to the customer without reduction for the amount credited for the customer's article which was traded in. On the other hand, if the retailer accepts an article from a customer, melts down and refines the metal in that article, and uses that metal exclusively in the production of a new article for that customer, no tax applies to the retailer's charge for his labor.

(4) Hollow ware .-If, in connection with the repair of an article of gold, gold-plated, silver, silver-plated or sterling hollow ware, the repairer furnishes a replacement cover, handle, leg, spout, or other complete article, the transaction is considered to include the sale of the taxable article furnished, and the tax imposed by section 4001 of the Code applies to the price charged for that article. On the other hand, the tax does not apply to a charge for replating or repairing hollow ware if the repairer furnishes gold or silver solder but does not furnish a taxable article.

In accordance with the provisions of section 48.4001-8(a) of the regulations, the total charge for the repair operation shall be deemed to be the price charged for the taxable article furnished, unless itemized to show separately the amount attributable to nontaxable materials and to labor used (1) in the repair of the customer's existing article and (2) for installation of additional articles, as distinguished from labor used to produce or assemble a taxable article prior to its installation. The retailer's records should be sufficient to establish that the allocation of the total charge between taxable and nontaxable items is reasonable and proper under the circumstances.