Rev. Rul. 58-365

Advice has been requested (1) concerning the applicability of the manufacturers excise tax to sales of unclipped and uncapped ball point pens and (2) whether the subsequent attaching of a clip and/or a cap is considered to be an act of further manufacture.

M corporation manufactures and sells to N company ball point pens each of which is complete except for a pocket clip and a cap. N attaches a clip and a cap to each pen and resells the completed pens to distributors.

Section 4201 of the Internal Revenue Code of 1954 imposes a tax upon the sale by the manufacturer, producer, or importer of mechancial pencils, fountain pens, and ball point pens.

Section 4220(1)(A) of the Code provides that no manufacturers excise tax shall be imposed with respect to the sale by the manufacturer of any article (other than an automobile part or accessory taxable under section 4061(b), a refrigerator component taxable under section 4141, a radio or television component taxable under section 4141, or a camera lens taxable under section 4171) for use by the vendee as material in the manufacture or production of, or as a component part of, an article which is subject to the manufacturers excise tax.

Under the provisions of section 6416(b)(3)(A) of the Code, if a manufacturer purchases ball point pens, on which the manufacturers excise tax has been paid, and uses them in the manufacture or production of, or as a component part of another article on which the manufacturers excise tax has been paid or which has been sold free of tax by virtue of section 4220 or 4224, relating to tax-free sales, the tax paid by the original manufacturer may be credited or refunded to the purchasing manufacturer.

It is held that the manufacturers excise tax imposed by section 4201 of the Code attaches to the sale of ball point pens by the manufacturer, producer, or importer thereof even though they are not equipped with pocket clips and/or caps. It is further held that the attaching of a cap and/or a pocket clip constitutes an act of further manufacture; therefore, the person who performs such an operation is liable for the tax when he sells or uses the finished article.

Since N company which attaches the pocket clips and/or caps to the ball point pens, is liable for tax on its sales as a manufacturer, it follows that, under the provisions of section 4220 of the Code and the applicable regulations, N may purchase unclipped and/or uncapped ball point pens from M free of tax. Or, in accordance with section 6416(b)(3)(A) of the Code, N may purchase the unclipped and/or uncapped ball point pens on a tax-paid basis and then take a credit against its tax liability, or claim a refund, in an amount equal to the tax paid by M on M's sale of the unclipped and/or uncapped ball point pens to N .