Rev. Rul. 55-698

Advice has been requested whether the increase in the retail sales price on tobacco products as a result of the enactment of Chapter 2, Article V, Section 2, Subdivision 1, of the Minnesota Extra Session Laws of 1955, effective July 1, 1955, will affect the `ordinary retail price' of large cigars for purposes of classifying such cigars to determine the applicable Federal excise tax rate.

The Minnesota statute imposes a tax at the rate of 15 percent of the wholesale sales price on all tobacco products, exclusive of cigarettes, manufactured or brought into Minnesota for sale therein.

Section 5701 of the Internal Revenue Code of 1954 imposes seven different rates of Federal taxes on large cigars (cigars weighing more than three pounds per thousand), based on their retail price, and provides that in determining the retail price of such cigars for tax purposes, regard shall be had to the ordinary retail price of a single cigar in its principal market. Revenue Ruling 55-20, C.B. 1955-1, 516, sets forth the basis of standard for determining the principal market for large cigars for Federal tax purposes.

The `ordinary retail price of a single cigar in its principal market' may fluctuate due to increases or decreases in local taxes which are imposed on the manufacture or wholesale distribution of large cigars. Such changes may result in a change in the classification of the cigars for Federal tax purposes if the change in price causes the cigars to fall into another tax bracket.

It is held that such a change in the price of cigars would not affect the Federal tax paid by manufacturers or importers on large cigars removed from the factory or released from customs prior to the effective date of the state, city, or municipal tax imposed on such cigars. However, for the purpose of determining the amount of Federal tax to be paid on large cigars, a state, city, or municipal tax levied on distributions and based on the wholesale or manufacturer's sales price of such articles, similar to that imposed by the State of Minnesota, must be included in ascertaining in the `ordinary retail price' of large cigars if their principal market is in a state or locality imposing such a tax. This situation would not prevail where the state, city, or municipal tax was levied on the retail sales price of the cigars