Rev. Rul. 54-50

Advice is requested whether the tax on cigarettes imposed by the State of Oklahoma under the provisions of title 68, Oklahoma Statutes 1951, section 586a, as amended, effective June 10, 1953, is deductible for Federal income tax purposes by the consumer.

Section 23(c)(1) of the Internal Revenue Code provides that in computing net income there shall be allowed as deductions taxes paid or accrued within the taxable year, with certain exceptions not here material. Section 39.23(c)-1 of Regulations 118 provides that in general taxes are deductible only by the person upon whom they are imposed.

In I.T. 2919, C.B. XIV-2, 86 (1935), it is held that the Oklahoma cigarette (stamp) tax imposed by the laws of the State of Oklahoma is an allowable deduction as a tax in the return of the first seller within the State of cigarettes to which he has affixed the stamps, or the consumer of cigarettes to which he has affixed the stamps as required by the statutes.

The Revenue Service has also held that the Oklahoma cigarette (stamp) tax is not a retail sales tax within the meaning of section 23(c)(3) of the Code, and the amount of the tax is not deductible by the purchaser under that section of the Code. Such position has been sustained by the United States Court of Appeals, Tenth Circuit, in Commissioner v. Willard Thompson et ux. , 193 Fed (2d) 586, Ct. D. 1744, C.B. 1952-1, 26.

Section 586a, chapter 16, title 68, Oklahoma Statutes 1951, as amended by the act (H.B. 912) effective June 10, 1953, now reads, in part as follows:

The tax hereby levied shall be in lieu of all forms of tax on cigarettes, general or local, and shall be paid only once on any cigarettes sold, used, received, possessed or consumed in this State. Such tax shall be evidenced by stamps which shall be furnished by and purchased from the Tax Commissioner or by an impression of such tax by the use of a metering device when authorized by the Tax Commission as provided in this Act and said stamps or impression shall be securely affixed to one end of each package in which cigarettes are contained or from which consumed.

The impact of the tax levied by this Act is hereby declared to be on the vendee, user, consumer, or possessor of cigarettes in this State and when said tax is paid by any other person such payment shall be considered as an advance payment and shall thereafter be added to the price of the cigarettes and recovered from the ultimate consumer or user. In making a sale of cigarettes in this State a wholesaler or jobber may separately state and show upon the invoice covering such sale the amount of tax on cigarettes sold. The tax shall be evidence by appropriate stamps attached to each package of cigarettes sold. Every retailer who makes sales of cigarettes within this State to persons for use or consumption shall separately show the amount of tax as evidence by appropriate stamps to each package of cigarettes sold and the tax shall be collected by the retailer from the user or consumer. The provisions of this Section shall in no way affect the method of collection of such tax on cigarettes as now provided by existing law.

In view of the above-quoted amendment and apparent intent of the Legislature of the State of Oklahoma to impose the cigarette tax upon the vendee, user, consumer, or possessor of cigarettes in the State of Oklahoma, it is held that the cigarette tax imposed by the State of Oklahoma under the provisions of chapter 16, title 68, Oklahoma Statutes 1951, section 586a, as amended, effective June 10, 1953, is deductible on and after June 10, 1953, under section 23(c)(1) of the Code by the vendee, user, consumer, or possessor of the cigarettes who pays the tax to the retailer; however in the case of an individual who elects the optional standard deduction (see sec. 23(aa) of the Code), no deduction is allowable unless the cigarette tax is attributable to a trade or business carried on by him. If the tax is attributable to a trade or business carried on by the individual, the amount of the tax is deductible from gross income in computing adjusted income. See section 22(n)(1) of the Code.

On and after June 10, 1953, no deduction is allowable to the first person who sells the cigarettes on account of the purchase of the cigarette stamps from the State, and, accordingly, the portion of the price received for the cigarettes which represents the Oklahoma cigarette tax is not includible in gross income.