Rev. Rul. 82-40

ISSUE

1. For purposes of the manufacturers excise tax imposed by section 4161(a) of the Internal Revenue Code, who is the importer of taxable rods and reels in the situation described below?

2. What basis is used for computing excise tax on the importer's sale of rods and reels?

FACTS

X is a foreign corporation that manufactures various fishing equipment. P, also a foreign corporation, unrelated to X, is a trading company engaged in the export business. In addition to other products, P exports fishing rods and reels manufactured by X. P is the exclusive exporter of X's products.

In an attempt to improve the market for its products in the United States, X approached S, a domestic subsidiary of P engaged in international trade, to explore various marketing arrangements. An arrangement was made under which S acts as the importer of X's products in the United States and sells them to Y, a corporation created to act as the domestic wholesale distributor of X's fishing equipment. Under the agreement, Y is the exclusive distributor of X's fishing equipment in the United States. Y is owned 70% by X, 15% by P, and 15% by S.

When Y places an order with S, S has the right to accept or reject the order and to limit the quantity ordered. S maintains no inventory of fishing equipment and imports rods and reels only as they are needed by Y. The price of the goods to Y is determined at the time an order is accepted, and the risk of any fluctuation in price or importation cost is borne by S. In addition, S assumes any risk for defective merchandise delivered to Y and must seek restitution from its supplier, P.

Title to the fishing equipment passes to Y at the port of entry after it has cleared customs. Y is required by the agreement to pay S for the merchandise within 120 days of the issuance of the bill of lading. The entire cost of importation, including credit arrangements, is borne by S. S receives no direct or indirect financial assistance from X, P, or Y.

The agreement requires Y to promote X's merchandise in the United States. However, S also actively promotes its own goods, including goods imported for Y, at trade shows, especially new articles that S discusses with Y's actual and potential customers in order to create a market for those articles in this country.

LAW AND ANALYSIS

Section 4161(a) of the Code imposes a tax of 10 percent of the sales price on the sale by the manufacturer, producer, or importer of fishing rods, reels, creels, and artificial lures, baits, and flies.

Section 48.0-2(a)(4)(i) of the Manufacturers and Retailers Excise Tax Regulations defines an "importer" of taxable articles as any person who brings such an article into the United States from any source outside the United States.

Rev. Rul. 68-197, 1968-1 C.B. 455, states that an importer is the person who as principal and not as agent arranges for, or is the inducing and efficient cause of, goods being brought into the United States for purposes of use or sale by that person. The passing of title to the goods, either at the time of shipment or upon arrival in this country, is not a controlling factor.

In Import Wholesalers Corporation v. United States, 368 F.2d 577 (Ct. Cl. 1966), the plaintiff, an automobile dealer, was held to be the importer when another party placed the order with the foreign supplier and was named as importer in all of the documents, but plaintiff provided all of the financing to make importation possible and paid the other party a competitive market price plus $5 for each automobile. The court determined that the technicalities of importation were outweighed by the financing arrangements and that the small fee paid by the plaintiff was adequate payment for the risks and responsibilities assumed by the other party.

In Sony Corporation of America v. United States, 428 F.2d 1258 (Ct. Cl. 1970), the court determined that the sales agent, not the distributor (Sony), was the importer. In doing so, the court looked to the foreign manufacturer's reliance on the sales agent's knowledge of the market, the agent's promotional activities and efforts in introducing new products, the risk of loss borne by the agent, and the inclusion of the agent in the chain of title.

In Corex Corporation v. United States, 524 F.2d 1017 (9th Cir. 1975), cert denied, 425 U.S. 912 (1976), the court of appeals reversed the district court finding that Jon H., an association that performed importation functions for Corex Corp., rather than Corex Corp., was the importer of fishing reels and supplies. Applying the rules of Sony and Import Wholesalers to the facts of the case, the court concluded Jon H. was not the importer because Jon H. performed no substantial promotional activities, bore none of the usual risks, performed no function other than as a conduit, and earned little profit.

In the present situation, S is an established importer of many types of articles. S was instrumental in the creation of Y to act as a distributor of X's products. S provides all the credit and financing for the imported goods, and it finances Y's purchase for up to 120 days after issuance of the bill of lading. S incurs the risk of price changes after acceptance of Y's order. S also actively promotes the sale of both new and existing imported articles. These factors indicate that S is the inducing and efficient cause of the importation of the fishing equipment.

Generally, the basis for computing the manufacturers excise tax is the actual selling price of the article. If, however, an article is sold, otherwise than through an arm's length transaction at less than a fair market price, the tax must be based on a constructive sale price determined under section 4216(b) of the Code. Section 48.4216(b)-2(e) of the regulations states that a sale is considered to be otherwise than at arm's length if (1) one of the parties is controlled (in law or in fact) by the other, or there is common control, whether or not such control is actually exercised to influence the sale price, or (2) the sale is made under special arrangements between a manufacturer and a purchaser.

S and P are minority stockholders in Y. Their interests, however, are not large enough either singly or jointly to constitute control of Y. X, the majority stockholder in Y, is not related to, controlled by, or in control of either P or S. Nor are there any factors present that indicate the sales are made under a special arrangement. A special arrangement exists when there are factors other than control that indicate there is no adverse economic interest between the parties to a transaction. A lack of adverse economic interest does not necessarily exist because all parties to a transaction may benefit in some way, for example, having an assured market or source of supply or earning a profit.

HOLDING

1. S is the importer of rods and reels in this situation and is liable for tax on its sale of taxable rods and reels to Y.

2. The tax on S's sale to Y is to be based on the actual price for which the rods and reels are sold.