Rev. Rul. 57-426

The Internal Revenue Service has been asked whether the manufacturers excise tax on radio receiving sets applies to the manufacturer's sale of a radio-paging system.

The radio-paging system consists of (1) a radio transmitter which transmits a coded signal and is usually located in a central office, and (2) a number of pocket-size radio receivers which are carried by each of the persons who may be paged over the system. Each receiver is turned to the code frequency assigned to it for the purpose of signalling the person who is carrying it. When a signal is transmitted, the receiver that is tuned to the transmitted frequency sounds an audible tone. The person who is carrying the receiver will, when he hears the tone, telephone a designated number or the operator of the transmitter for instructions. It is not possible to transmit any voice, music, or other program material over the system.

Section 4141 of the Internal Revenue Code of 1954 imposes a tax upon the sale, by the manufacturer, producer, or importer, of radio receiving sets, automobile radio receiving sets, television receiving sets, automobile television receiving sets, phonographs, combinations of any of the foregoing, radio and television components, and phonograph records (including in each case parts or accessories therefor sold on or in connection with the sale thereof). Except in the case of radio and television components and phonograph records, the tax imposed by this section applies only to articles of the entertainment type. Section 4142 of the Code defines the term `radio and television components' to include chassis, cabinets, tubes, speakers, amplifiers, power supply units, antennae of the `built-in' type, and phonograph mechanisms, which are suitable for use on or in connection with, or as component parts of any of the articles enumerated in section 4141 of the Code, whether or not primarily adapted for such use.

Section 4218(b) of the Code provides, in part, that such tax shall not apply with respect to the use by the manufacturer, producer, or importer of radio or television components, if such components are used by him as material in the manufacture or production of, or as a component part of, any article. Pursuant to the provisions of section 4220 of the Code, radio and television components may be sold tax-free (A) for use by the vendee as material in the manufacture or production of, or as a component part of, any article, or (B) for resale by the vendee for such use by his vendee, if such article is in due course so resold. Section 6416(b)(3)(B) of the Code provides that if radio and television components were sold on a tax-paid basis to a manufacturer or producer and are used by him as material in the manufacture of, production of, or as a component part of, any article, such tax shall be deemed an overpayment by such manufacturer or producer.

It is held that sales of the radio-paging system described above are not subject to the manufacturers excise tax imposed by section 4141 of the Code. Furthermore, under provisions of sections 4218(b) and 4220(2) of the Code, radio and television components, as defined in section 4142 of the Code, which are used as components in the manufacture of any article, are not subject to the tax imposed by section 4141 of the Code. If the manufacturer of the above described system purchased radio or television components on a tax-paid basis for use in the manufacture of the system, he will be entitled to a credit or refund of such tax under the provisions of section 6416(b)(3)(B) of the Code.