Rev. Rul. 64-2

Advice has been requested as to the deductibility, for Federal income tax purposes, of a tax on cigarettes and tobacco as provided by section 59-18 of the Utah Code Annotated as amended by H.B. 136, an Act of the Utah Legislature effective July 1, 1963.

Section 1 of the Act, H.B. No. 136, provides, in part, that it shall be unlawful for any person to barter, sell or offer for sale in this State, cigarettes or cigarette papers, without first having obtained a license therefor. It shall be granted only to a person owning or operating the place from which such sales are to be made.

Section 3 of the Act provides, in effect, that there is imposed and there shall be collected by and paid to the State Tax Commission upon the sale, use, storage or consumption of certain tobacco products in the State of Utah, a tax at the rate therein set forth, such tax to be paid by the manufacturer, jobber, distributor, wholesaler, retailer, user or consumer.

Section 4 of the Act provides, in part, that the taxes imposed on cigarettes and cigarette papers shall be paid by affixing stamps in the manner and at the time therein set forth, provided, however, that all such commodities must be stamped before being sold within the State. The intent and purpose of the Act is to require all manufacturers, jobbers, distributors, wholesalers and retail dealers to security affix the stamps provided for therein.

The taxes imposed on all tobacco products, except cigarettes, shall be remitted to the State Tax Commission together with quarterly returns as prescribed by it. It is the purpose and intent of the Act to impose a tax at the time any manufacturer, jobber, wholesaler, retailer or any other person brings, or causes to be brought into this State from without the State, or makes, manufactures or fabricates within the State any tobacco product except cigarettes and cigarette papers in this State for sale in this State.

Section 6 of the Act provides, in part, that the State Tax Commission shall sell the stamps therein provided only to persons holding licenses issued as provided in this chapter.

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 applicable in this case.

Section 164(c)(1) of the Code, relating to the deduction of retail sales and gasoline taxes in computing taxable income, provides, in part, 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 constitutes a tax imposed upon, and paid by, such consumer.

Section 164(c)(2) of the Code provides, in substance, that the term `State or local sales tax' means a tax imposed by a State, a Territory, a possession of the United States, a political subdivision of any of the foregoing, or by the District of Columbia, which tax (A) is imposed on persons 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.

The tax levied under section 59-18 of the Utah Code Annotated as amended by H.B. No. 136, on cigarettes, cigarette papers and other tobacco products is not imposed on persons engaged in selling tangible personal property at retail. It is not, therefore, a retail sales tax within the meaning of section 164(c) of the 1954 Code.

Accordingly, it is held that (1) the tax imposed on cigarettes and cigarette papers under section 59-18 of the Utah Code Annotated as amended by H.B. No. 136 is deductible under section 164(a) of the Code by the manufacturer, jobber, distributor, wholesaler, or retailer, who purchases the stamps and affixes them to the individual packages of cigarettes or cigarette papers, and (2) the tax imposed on other tobacco products is deductible under section 164(a) of the Code by the manufacturer, jobber, wholesaler, retailer or other person remitting the tax to the State Tax Commission.

Insofar as the ultimate consumer or purchaser is concerned, the tax imposed on cigarettes, cigarette papers and other tobacco products represents an additional cost of the article and is not deductible as a tax in computing his taxable income except in the case where the consumer brings untaxed products into the State for consumption or use and pays the tax on the products to the State.