Rev. Rul. 59-324

Advice has been requested regarding the deductibility, for Federal income tax purposes, of the taxes imposed by the State of Washington on the sale, etc., of cigarettes.

The taxes are imposed under Titles 82, 73, and 28 of the Revised Code of Washington, as amended, upon the sale, use, consumption, handling, or distribution of all cigarettes within the State. The pertinent provisions of the Washington Statutes are as follows:

Chapter 82.24

82.24.020 TAX IMPOSED-RATE. There is levied, and there shall be collected as hereinafter provided, a tax upon the sale, use, consumption, handling or distribution of all cigarettes, in an amount equal to one cent upon each ten cents or fraction thereof of the intended retail selling price of the smallest container or package in which the cigarettes are contained.

82.24.080 LEGISLATIVE INTENT. It is the intent and purpose of this chapter to levy a tax on all of the articles taxed herein, sold, used, consumed, handled, or distributed within this state and to collect the tax from the person who first sells, uses, consumes, handles or distributes them in the state. * * *.

Chapter 73.32

73.32.130 CIGARETTE TAX AUTHORIZED FOR BOND INTEREST AND RETIREMENT-SEGREGATION, TRANSFER OF FUNDS-DEALER'S COMPENSATION.

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In addition thereto, there is hereby levied and there shall be collected by the tax commission from the persons mentioned in and in the manner provided by chapter 82.24, as now or hereafter amended, an excise tax upon the sale, use, consumption, handling or distribution of cigarettes in an amount equal to one cent upon each ten cents or fraction of the intended retail selling price thereof, * * *.

Chapter 28.47

28.47.440 ADDITIONAL TAX ON CIGARETTES IMPOSED. In addition to the taxes levied by RCW 73.32.130 and 82.24.020, there is levied and shall be collected by the tax commission from the persons mentioned in and in the manner provided by chapter 82.24, as now or hereafter amended, an excise tax upon the sale, use, consumption, handling or distribution of cigarettes in an amount equal to one-half cent upon each ten cents or fraction of the retail selling price thereof, * * *.

The taxes are collected and paid by the purchase of stamps from the State tax commission and through the use of meter stamping machines for imprinting stamps under rules and regulations prescribed by the tax commission. Every wholesaler of cigarettes is required, immediately after receipt of taxable cigarettes, to cause the requisite stamps to be affixed. Every retailer and all persons operating under a retailer's registration certificate, immediately upon receipt of any unstamped articles, are required to have the proper stamps affixed.

Section 164(a) of the Internal Revenue Code of 1954 provides 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 164(c)(1) of the Code relates to the deduction of retail sales taxes and gasoline taxes in computing taxable income. Such section provides that, in the case of any State or local sales tax, if the amount of the tax is separately stated, then, to the extent that the amount so stated is paid by the consumer (otherwise than in connection with the consumer's trade or business) to his seller, such amount shall be allowed as a deduction to the consumer as if it constituted a tax imposed on, and paid by, such consumer.

Section 164(c)(2) of the Code provides that, as used therein, the term `State or local sales tax' means a tax imposed by a State, Territory, a possession of the United States, or a political subdivision of any of the foregoing or by the District of Columbia, which tax (A) is imposed on persons engaged in selling tangible personal property at retail (or on persons selling gasoline or other motor vehicle fuels at wholesale or retail) and is stated sum per unit of property sold or is measured either by the gross sales price or by the gross receipts from the sale; or (B) is imposed on persons engaged in furnishing services at retail and is measured by the gross receipts for furnishing such services.

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.

Accordingly, it is held that the taxes on the sale, etc., of cigarettes imposed by the State of Washington under the provisions of Titles 82, 73 and 28 of the Revised Code of Washington, as amended, are deductible under section 164(a) of the Code by the wholesaler or retailer who purchases and affixes the stamps or imprints such stamps by means of a meter stamping machine and makes payment of the taxes therefor. Such taxes are also deductible by a person operating under a retailer's registration certificate who purchases and affixes the stamps and pays the taxes. The taxes are not retail sales taxes and therefore are not deductible by the purchasers of the cigarettes under section 164(c) of the Code. Insofar as the ultimate consumer or purchaser is concerned, the taxes represent an additional cost of the article and are not deductible in computing his taxable income. However, where the taxes have been imposed directly on the consumer by reason of his becoming a person operating under a retailer's registration certificate, such taxes, to the extent they are paid by him directly to the State tax commission, may be deducted by such sonsumer under section 164(a) of the Code.