Rev. Rul. 60-91

Advice has been requested concerning the applicability of the manufacturers excise tax on tires and tubes, as well as the allowability of a credit or refund of that tax, in the transactions described below.

A tire manufacturing company operates a number of retail stores which are engaged in the distribution of his products. These stores frequently make so-called `change-over' sales. In a change-over sale the company-owned store sells a set of new tires of the company's own make and accepts in exchange from the customer aa set of tires mounted on his automobile. The change-over sale is usually made immediately after delivery to the customer of his new automobile. The store may accept in exchange tires of the company's own make or tires manufactured by another company. In some cases the tires purchased by the customer may be of a higher or lower quality, or have different features from the tires originally mounted on the customer's automobile.

The procedure that the stores follow in these change-over sales is to bill its new tires for a price which includes the manufacturers excise tax and to allow the customer a credit for an amount equal to the taxincluded sale price of the tires accepted in exchange. The stores then place the latter tires in inventory and resell them at a tax-included price.

Under the provisions of section 4071(a) of the Internal Revenue Code of 1954, a tax is imposed on sales of tires, if wholly or in part of rubber, by the manufacturer, importer, or producer at the rate of eight cents a pound on tires of the type used on highway vehicles and five cents a pound on other tires. Since, in these cases, sales of the tires by the company-owned retail stores constitute sales by the manufacturer, such sales are the taxable event giving rise to liability for the tax.

Where articles sold are returned to the manufacturer by his vendee and the original sale is entirely rescinded by refunding the entire amount paid, including tax, to the vendee, no tax is payable on the transaction and, if paid, the tax may be credited or refunded. Where taxable articles sold are returned to the manufacturer by his vendee and only a part of the original sale price is refunded or credited to his vendee, the manufacturer is entitled to a tax credit computed on the portion of the sale price he refunds or credits to his vendee.

It is understood by the Internal Revenue Service that the method described above for handling change-over sales has been followed for many years by a number of tire manufacturers. The use of this method has resulted in no tax loss to the Government since tax has been paid by the manufacturer at the time of his resales of the tires accepted in exchange.

While from the strictly technical sense no recission occurs in these transactions, since different parties are involved, nevertheless, the Service feels that in transactions involving the return of the manufacturer's own tires there is substantial compliance with the provisions of the statute and regulations relative to the return or repossession of an article by the manufacturer.

Accordingly, it is held that the manufacturer is entitled to a credit or refund under section 6416(b)(1) of the Code of the tax paid on the original sale of the tires. When the tires of the manufacturer's own make accepted in the exchange are resold, a tax is due on such resales. This method may be used by manufacturers only in handling returns of their own make tires in change-over transactions and the subsequent sale of such tires.

With respect to tires made by another manufacturer accepted in change-over transactions, since these tires were not originally sold by the manufacturer making the exchange, the provisions of the law relative to the return or repossession of an article by the manufacturer obviously do not apply. Thus, as to the competitor's tires accepted in exchange no credit or refund is allowable. By the same token, no tax is due on the subsequent resale of such tires since such resales are not sales by the manufacturer. It must be observed that even in these transactions involving the acceptance of the competitor's competitive make tires, the sale in the exchange by the company-owned stores of the tires of the company's own manufacture are subject to tax without regard to the disallowance of a credit or refund on the competitor's tires.

In view of the long period of time during which the Internal Revenue Service has accepted in audits the method employed generally by members of the tire industry in handling these change-over transactions, and since it appears that no loss in revenue to the Government has resulted, under the authority contained in section 7805(b) of the Code, the portion of this Revenue Ruling relating to the competitor's tires will not be applied to change-over transactions occurring prior to April 1, 1960.