Rev. Rul. 56-261

The Internal Revenue Service has received many requests from retailers of articles subject to Federal retailers excise tax that they be permitted to compute and prepay the tax at the time the taxable articles are purchased from their suppliers, rather than when they are sold. These requests are made for the most part by retail establishments where the sales of taxable articles comprise only a minor part of their business. Such retailers contend that such a procedure would simplify record keeping.

Retailers excise taxes are imposed by sections 4001, 4011, 4021, and 4031 of the Internal Revenue Code of 1954 upon the sale at retail of jewelry and related items, furs, toilet preparations, and luggage, handbags, etc., respectively.

The incidence of the above taxes is upon the sale of the articles at retail. However, the Service will interpose no objection to the computation and prepayment of the tax at the time the taxable articles are purchased by the retailer, provided (1) the tax so prepaid is computed on the established retail sale price of the articles; (2) the tax applicable to the retail sale price of any taxable articles on hand at the beginning of the period for which the prepayment plan is adopted is included in the Form 720, Quarterly Federal Excise Tax Return, filed for that period; (3) the retailer maintains (a) an accurate record of the inventory upon which tax is prepaid when the plan is adopted and (b) an accurate record of all taxable articles purchased by him showing the date of purchase and the purchase prices, as well as a record of the mark-up over purchase price used in arriving at the established retail price in each case; and (4) the prepayment method is used with respect to all articles subject to tax which he purchases for sale at retail.

Occasions may arise where, subsequent to the time of prepayment of tax under this plan, articles will be sold at prices higher than those used as a basis for computing the tax prepayment. In such cases, the additional tax resulting from the increase in retail sale prices must be included in the quarterly return for the period in which the articles are sold.

On the other hand, there may be occasions where there will be excess prepayments of tax for which a credit or refund will be allowable. Such excess prepayments might arise from the sale of articles at prices lower than the established retail prices upon which the prepayment was based, from a reduction in the applicable tax rate, or from the loss, destruction, or return to suppliers, of articles upon which tax has been prepaid. Interest will not be allowed upon such excess prepayments.

Each retailer who desires permission to prepay tax at the time of purchase of taxable articles, based upon the established retail sale price of the articles, should file a request in writing with his local District Director of Internal Revenue describing fully the nature of his business and the kinds of taxable articles handled. Prepayment of the tax by the retailer under this procedure should not be commenced until approval has been received from the District Director. Approval by District Directors of such requests will be conditioned upon the acceptance by the retailer of the requirements set forth herein and of the responsibility for maintaining such records and accounts as will enable internal revenue officers to determine whether the correct amount of tax has been paid to the Government.