Rev. Rul. 70-214

Advice has been requested whether articles subject to manufacturers excise taxes imposed by Chapter 32 of the Internal Revenue Code of 1954 can be sold tax-free under the provisions of section 4221(a)(4) to the organization described below.

The organization is a local nonprofit corporation organized to carry out community action programs under Title II of the "Economic Opportunity Act of 1964," 42 U.S.C. 2781-2837. Its basic purpose is to implement Title IV of that Act (42 U.S.C. 2901-2907) by assisting in the establishing, preserving and strengthening of small business concerns, and improving the managerial skills employed in such enterprises. Ninety percent of the organization's funds are received from the Federal government through the "Economic Opportunity Loan Program." The remaining ten percent is generated locally in the form of contributions or payments for services rendered. The organization is administered by a 20-man board, appointed by the participating community's mayor. Some city officials are appointed to the board, although there is no requirement that city officials serve on the board. Members of the board serve two-year terms, elect officers, and have full power to implement policies, make and amend by-laws and rules, and regulate the business of the corporation.

Section 4221(a)(4) of the Code provides that under regulations prescribed by the Secretary or his delegate, no tax shall be imposed under Chapter 32 on the sale by the manufacturer of an article to a State or local government for the exclusive use of a State or local government.

In determining whether sales to an organization are sales for the exclusive use of a State or local government, it must be established that the organization is either (a) controlled, directly or indirectly, by an agency of a State or local government, or (b) is performing a traditional governmental function on a nonprofit basis.

The organization in question is not controlled directly or indirectly by an agency of a State or local government, since it is operated by a board that is independent of city officials, and is not dependent on the city for financial support. Furthermore, the organization is not performing a traditional governmental function, since establishing, preserving, and strengthening small business concerns and improving managerial skills employed in such enterprises are not activities ordinarily associated with State or local governments.

Therefore, it is held that sales to the above-described organizations cannot be made tax-free under the provisions of section 4221(a)(4) of the Code, since such sales are not for the exclusive use of a State or local government, within the meaning of that section.

The rationale of this Revenue Ruling is equally applicable to the exemptions from retailers excise taxes provided by section 4055 of the Code, and the exemption from facilities and services taxes provided by section 4292. Accordingly, it is further held that the exemptions from excise taxes provided by sections 4055 and 4292 of the Code are not applicable in the case of the described organization.