Rev. Rul. 54-329

Advice is requested whether persons engaged in rebuilding, reconditioning, or repairing automobile parts and accessories are considered to be the manufacturers or producers of such articles within the meaning of section 3403(c) of the Internal Revenue Code and subject to the tax imposed by that section.

Section 3403(c) of the Code imposes a tax of 8 percent of the price for which parts or accessories (other than tires, inner tubes, and radio or television receiving sets) for any of the articles enumerated in subsection (a) or (b) of section 3403 are sold by the manufacturer, producer, or importer. The terms `manufacturer' and `producer' are not defined in the Code. However, Regulations 46, containing the administrative regulations adopted in clarification of the Code, provide in section 316.4 that the term `manufacturer' includes a person who produces a taxable article from scrap, salvage, or junk material as well as from new or raw material, (1) by processing, manipulating, or changing the form of an article, or (2) by combining or assembling two or more articles.

For the purpose of the ruling made herein, a `manufacturer' is further defined as a person engaged in the production of rebuilt auto parts or accessories for sale or for use in further manufacture of other articles for sale. The term `parts,' as used herein, means automobile parts or accessories. The terms `reconditioning,' `rebuilding,' and `repairing,' as used herein, are not used synonymously. Each refers to a separate and distinct operation. While each operation may be performed by a different person, it is likewise true that one person may perform all three operations and the characterization of such person as a `reconditioner,' `rebuilder,' or `repairer' depends upon the character of the operation he is then engaged in performing. The conclusions of the Internal Revenue Service as to what is comprised within each operation and the taxable consequences thereof are as follows:

(1) Reconditioning .-The mere disassembling, cleaning, and reassembling (with any necessary replacements of worn parts with taxpaid parts) of used automobile fuel pumps, water pumps, carburetors, distributors, stock absorbers, windshield-wiper motors, brake shoes, clutch disks, voltage regulators, etc., are regarded as reconditioning operations distinct from the manufacture or production of rebuilt articles. The sale or use of such reconditioned parts is not taxable, regardless of who performs the reconditioning operations. However, any new taxable parts produced or purchased tax free for use in further manufacture, but used as replacements in reconditioning such units, are subject to the tax when used by the reconditioner.

(2) Rebuilding .-Reboring or other machining, rewinding, and comparable major operations performed on used parts being processed for sale or for use as components of other articles for sale are defined as rebuilding operations constituting manufacture for purposes of the tax. The person owning parts being rebuilt for such disposition is the rebuilder (manufacturer) and is liable for the tax on his sales of the rebuilt parts or on their use as components of other articles manufactured by him for sale. The tax applies whether the machining, etc., operations are performed by the rebuilder himself or by some other person in his behalf.

The manufacturers' excise tax applies to the rebuilder's sale of (a) rebuilt batteries, (b) rebabbitted or machined connecting rods, (c) resurfaced clutch plates, (d) rewound armatures, (e) reground or remetalized crankshafts, (f) engines in which blocks are machined (e.g., cylinders rebored, new sleeves inserted, with or without cylinders being rebored) or new blocks installed, and (g) similar parts on which machining, rewinding, or comparable operations are performed.

The tax due upon the sale of a rebuilt part is based upon the price for which such part is sold, excluding the value of a like part accepted in exchange. The tax due on the use of a rebuilt part as a component of another article manufactured by the rebuilder for sale is based upon the price for which such or similar rebuilt parts are sold in the ordinary course of trade, excluding the value of a like part accepted in exchange. Where a taxpaid part is used as a component in the manufacture of the rebuilt part, appropriate relief through refund or credit may be obtained pursuant to the provisions of section 3443(a)(1) of the Code.

The conclusion of the Service that rebuilding constitutes manufacturing and that the sale of rebuilt parts is subject to manufacturers' excise tax has been sustained by the courts. See Clawson and Bals, Inc. , v. United States , 182 Fed.(2d) 402, certiorari denied, 340 U.S. 883; Armature Exchange, Inc. , v. United States , 116 Fed.(2d) 969, certiorari denied, 313 U.S. 573.

(3) Repairing .-The restoration of an owner's part to usable condition (but not for purposes of sale or for use as a component of other articles for sale) constitutes a repair operation whether performed by the owner himself or by others acting in his behalf. A manufacturing has been defined as the production of rebuilt articles for sale, a rebuilding operation will under no circumstances be considered a repair, since the purpose of rebuilding as construed above is the restoration of the article for sale. The use by an owner of a repaired part does not give rise to a tax under section 3444 of the Code, since such use by a person who is not construed to be a manufacturer or producer is not considered the kind of use contemplated by that section. Conversely, however, the use by a rebuilder of a rebuilt part will be taxable under such section.

Where a part has been repaired, the repairer must retain in his possession such evidence or documents from which the nontaxable nature of the operation can be readily ascertained. However, if taxpaid parts are used or sold in the course of a repair operation, no adjustment of the tax thereon will be allowable. S.T. 927, C.B. 1942-2, 225, and S.T. 932, C.B. 1945, 431, superseded. S.T. 937, C.B. 1951-1, 151, holds that rebuilders of used automobile engines may, in lieu of using actual values of individual engine blocks accepted in part payment of rebuilt engines sold on an exchange basis, ascribe to blocks of all makes, types, and models so accepted a uniform value of 35 percent of the `exchange price' in the computation of the tax payable under section 3403(c) of the Internal Revenue Code.

Section 481(d) of the Revenue Act of 1951, effective November 1, 1951, added the following sentence to section 3403(c) of the Code:

In determining the sale price of a rebuilt automobile part or accessory there shall be excluded from the price * * * the value of a like part or accessory accepted in exchange.

In view of the fact that S.T. 937, supra , was superseded by the addition of the above-quoted sentence, it is hereby revoked.

/*/ this Revenue Ruling was amplified by Rev. Rul. 55-98, I.R.B. 1955-8, 29.