Rev. Rul. 58-182

Advice has been requested whether the retailers excise tax on jewelry and related items applies to sales of jewelry under the circumstances described below. If the tax applies, advice has further been requested as to the proper basis for computing the tax.

A company sells costume jewelry on a party plan whereby a prospective customer agrees to act as a hostess and invite other prospective customers to a `party' at her home for a demonstration of the company's merchandise. When the sales demonstration takes place in the hostess's home, the hostess receives a credit of one dollar for each guest who purchases jewelry at the demonstration, a credit of one dollar for each future party booked by the salesperson from among the other guests, and a credit of two dollars provided that her party is held within two weeks from the time the contract was made by the salesperson.

The credit accumulated by he hostess may be applied toward the regular purchase price of the jewelry she selects, and she pays the balance of the full dollar value of the item. If the hostess does not select an article of jewelry and apply her credit to the purchase price, she receives nothing for her services. If she has credit in excess of the retail selling price of the article of jewelry selected, she loses such credit. The credits cannot be redeemed for cash but can only be applied toward the purchase price of articles of jewelry.

In addition, the hostess is permitted to buy as many as three additional articles of jewelry at a 50 percent discount. However, she must purchase the jewelry at the time of her party, and, if she does not do so, she is not permitted to purchase the jewelry at the discount price at a future date.

Section 4001 of the Internal Revenue Code of 1954 imposes a tax upon the sale at retail of jewelry and related items, and the tax attaches to the total price for which the articles are sold at retail. Section 320.1(f) of Regulations 51, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that the term `sale' means an agreement whereby the seller transfers the property (that is, the title or the substantial incidents of ownership) in goods to the buyer for a consideration called the price, which may consist of money, services, or other things.

Where, as in the instant case, the hostess renders services for which she is compensated by the issuance of credits, it is held that the transfer of the property by the company to the hostess for the consideration of cash and the credit slips constitutes a sale at retail. Accordingly, the retailers excise tax imposed by section 4001 of the Code attaches to the total price for which the article of jewelry is sold. For example, where a hostess selects an article of jewelry which sells at retail for $15, and applies thereto a credit of $13 and pays the balance of $2, the tax is computed on $15, the total selling price of the jewelry.

Where the hostess is merely permitted to purchase taxable articles of jewelry at a discount because of the special relationships created between the hostess and the retailer, it is held that the retailers excise tax attaches to the discounted price or to the amount actually required to be paid by the hostess for the jewelry.