Rev. Rul. 71-485

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

An agricultural commodity commission was established by an order issued by an official of a State pursuant to legislation enacted by the State government. The purposes of the commission are to promote the general welfare of the State; enable the producers of wheat to establish sound marketing, grading, and standardization of wheat; plan and conduct programs for advertising and sales promotion; conduct research to achieve efficiency in production; maintain and improve uniform grades and standards; and prevent unfair trade practices. The commission is composed of members elected by the affected producers and members appointed by the elected members. The state official is an ex officio member.

Under the legislation, operating funds are derived solely from producer assessments payable to the commission. Assessments may be used only by the commission and may not be diverted to the use of the State. Upon termination of a marketing order any funds remaining after payment of all obligations incurred by the commission are returnable to the producers in proportion to assessments paid by them within the two-year period preceding the date of a termination order. Unpaid obligations or claims against the commission are enforceable only against assets of the commission in the same manner as if it were a corporation. Neither the State nor any agency or instrumentality thereof may be held liable for the debts or actions of the commission.

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. See Revenue Ruling 70-214, C.B. 1970-1, 230, which discusses the excise tax exemption with respect to a nonprofit corporation organized to carry out community action programs.

As evidenced by the facts set forth above, the commission is not controlled directly or indirectly by the State or an agency or instrumentality thereof but rather is operated in a manner similar to a nonprofit trade or business association. Furthermore, the overall activities of the commission are not traditional governmental functions ordinarily associated with States, their agencies or instrumentalities.

Therefore, it is held that sales of taxable articles by manufacturers to the commission may not 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 exemption 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 commission.