Rev. Rul. 74-253

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.

The organization is incorporated under State law as a non-stock corporation to engage in comprehensive health planning for a number of towns in a health service area. A large portion of the organization's operating funds are provided by grants from the Federal government pursuant to the Comprehensive Health Planning and Public Health Services Amendments of 1966, section 314(b), 42 U.S.C. section 246, which authorized Federal support for comprehensive health planning. The balance of funds is provided by contributions from the local communities. The organization's board of directors which does not exceed thirty members is elected annually by the advisory council. Members of the advisory council are elected from the general membership of the organization. The organization's by-laws require that the membership of the board of directors and the advisory council be such (1) that a majority be persons whose major occupation is neither the provision or administration of any type of health service nor teaching or research in health, and (2) as to insure representation of the interests of local governments, public and voluntary agencies, health organizations and institutions, and consumers of health services in the area.

The organization is engaged in three basic types of activity: areawide health planning; review of programs involving applications for Federal funds; and consulting with towns, local groups, and agencies regarding health planning. The consulting activities are conducted within limitations imposed by guidelines for areawide comprehensive health planning promulgated by the Department of Health, Education, and Welfare. While the organization does not have adequate resources to conduct studies and programs at the request of agencies or community groups, it does design, supervise, and assist with studies and programs appropriate to the areawide plan.

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

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 State and local authority, and it does not depend on a State or local government for financial support. In addition, the comprehensive health planning and consulting activities of the organization under the circumstances are not traditional governmental functions ordinarily associated with State or local governments.

Therefore, sales of taxable articles by manufacturers to the organization 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, the exemptions from excise taxes provided by sections 4055 and 4292 are not applicable in the case of the described organization.