Rev. Rul. 60-239

Advice has been requested as to the deductibility, for Federal income tax purposes, of the cigarette tax imposed by the State of California under the Cigarette Tax Law enacted in 1959.

Part 13 of Division 2 of the California Revenue and Taxation Code, Enacted Statutes 1959, Chapter 1040, effective July 1, 1959, known as the California Cigarette Tax Law, imposes on all cigarettes upon distribution a tax at the rate of one and one-half mills ($0.0015) on each cigarette. The distributor, as defined in the statute, is required to pay the tax upon his distribution of cigarettes. However, where the user or the consumer is the first person in possession in the State of untaxed cigarettes transported to the State, he must pay the tax. The tax is prepaid by the distributor by the use of stamps or meter impressions which must be affixed to each package of cigarettes before it is distributed. The stamps are purchased from the State Board of Equalization and meter-machine settings are prepaid when the meter on the machine is sealed by the Board. Any cigarettes with respect to which the tax has been paid are not subject to the tax upon subsequent distribution. The distributors are required to obtain licenses, furnish bond, keep records, make reports, and pay the tax as provided in the law.

Section 164(a) of the Internal Revenue Code of 1954 provides as follows:

(a) GENERAL RULE.-Except as otherwise provided in this section, there shall be allowed as a deduction taxes paid or accrued within the taxable year.

Section 1.164-1 of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed.

The tax, in the instant case, is imposed upon the distributor who first receives the cigarettes within the State. In those cases in which the retailer or consumer is the first person in possession in the State of untaxed cigarettes transported to the State, he must pay the tax. But inasmuch as the tax does not normally fall upon the retailer, it is not a retail sales tax.

Accordingly, it is held that the tax imposed by the California Cigarette Tax Law of 1959 is deductible under section 164(a) of the Code by the distributor who affixes the stamps, or imprints such stamps by means of a meter stamping device, or otherwise makes payment to the State Board of Equalization. Since the tax is not a retail sales tax, it is not deductible by the purchasers of the cigarettes under the provisions of section 164(c) of the Code. However, where the tax has been imposed directly on the user or consumer by reason of his being the first person in possession in the State of untaxed cigarettes, the tax paid directly to the State by such user or consumer is deductible by him under the provisions of section 164(a) of the Code.