Rev. Rul. 60-131

Advice has been requested concerning the treatment for Federal income tax purposes of the taxes on cigarettes and tobacco products imposed by the State of New York under the provisions of Section 471 of the Consolidated Laws of New York, as amended by Chapter 71, Article 20, of the Laws of New York, 1959, 182d Session.

Section 471 of the Consolidated Laws of New York, as amended, provides, in part, as follows:

1. There is hereby imposed and shall be paid a tax (a) on all cigarettes possessed in the state by any person for sale on and after April first, nineteen hundred fifty-nine and (b) on all tobacco products possessed in the state by any person for sale on and after July first, ninetten hundred fifty-nine which were imported into the state or manufactured in the state after said date, * * *.

Such tax on cigarettes shall be at the rate of two cents for each ten cigarettes or fraction thereof and is intended to be imposed upon only one sale of the same package of cigarettes. Such tax on tobacco products shall be at the rate of fifteen percent of the wholesale price, and is intended to be imposed only once upon any tobacco product. _ _ .

2. It is intended that the ultimate incidence of and liability for the tax shall be upon the consumer, and that any agent, distributor or dealer who shall pay the tax to the tax commission shall collect the tax from the purchaser or consumer. Except as hereinafter provided, the tax shall be advanced and paid by the agent or distributor. The agent shall be liable for the collection and payment of the tax on cigarettes imposed by this article and shall pay the tax to the tax commission _ _ .

3. The distributor shall be liable for the collection and payment of the tax on tobacco products which he imports or causes to be imported into the state, or which he manufactures in the state, and every distributor authorized by the tax commission to make returns and pay the tax on tobacco products sold, shipped or delivered by him to any person in the state shall be liable for the collection and payment of the tax on all tobacco products so sold, shipped or delivered.

4. Every dealer shall be liable for the collection of the tax on all tobacco products in his possession at any time, upon which tax has not been paid by a distributor * * *.

5. The amount of the taxes advanced and paid by the agent or distributor as hereinabove provided shall be added to and collected as part of the sales price of the cigarettes or tobacco products.

I.T. 3372, C.B. 1940-1, 33, holds, in part, that the tax imposed on cigarettes under the provisions of section 471 of the Laws of New York, 1939, effective July 1, 1939, is an allowable deduction as a tax in the Federal income tax return of the dealer purchasing and affixing the stamps.

Section 164(a) of the Internal Revenue Code of 1954 provides the general rule that in computing taxable income there shall be allowed as a deduction taxes paid or accrued within the taxable year, with certain exceptions not here material.

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

The statutory language in the amendment of 1959 to section 471 of the New York law, regarding the imposition of taxes on the sales of cigarettes and tobacco products, specifically states that it was the intent of the State Legislature that the ultimate incidence of and liability for the taxes are upon the consumer, and it implies that the collection of the tax by the dealer or distributor is for the purpose of convenience only.

In view of the intent of the New York State Legislature to impose the taxes upon the consumer, it is held that the tax on cigarettes on and after April 1, 1959, the effective date of the amendment, and the tax on tobacco products imported into the State or manufactured in the State on and after July 1, 1959, are deductible in computing taxable income by the purchaser or consumer who pays the tax to the retailer. In the case of an individual who elects to use the standard deduction or the optional tax table, no deduction is allowable unless the taxes are attributable to a trade or business carried on by him. If the taxes are attributable to a trade or business carried on by the individual, the amount of the taxes are deductible from gross income in computing adjusted gross income. See section 62 of the Code.

On or after April 1, 1959, no deduction is allowable to the distributor or dealer paying the cigarette tax to the State of New York and no portion of the price paid by the consumer to the distributor or dealer for cigarettes which represents the New York State tax is includible in the gross income of such distributor or dealer. The preceding statement is also true with respect to the tax on tobacco products effective on or after July 1, 1959.

I.T. 3372 is not applicable to the tax on cigarettes imposed by the State of New York on or after April 1, 1959.