Rev. Rul. 60-259

Advice has been requested concerning the applicability of the manufacturers excise tax on certain sporting goods where a manufacturer sells croquet sets under the circumstances described below.

M corporation sells croquet sets containing balls, mallets, arches. racks, and stakes. M manufactures the mallets and the stakes. The balls, arches, and racks are purchased from N company, which manufactures those articles.

Section 4161 of the Internal Revenue Code of 1954 imposes a tax upon the sale by the manufacturer, producer, or importer of certain enumerated articles of sporting goods, including in each case parts or accessories of such articles sold on or in connection therewith, or with the sale thereof. Included in the articles enumerated are `croquet balls' and `croquet mallets.'

The statute does not impose the manufacturers excise tax on the sale of the croquet sets, as such. The tax is imposed upon sales of croquet balls and croquet mallets, as individual articles. Furthermore, the tax is imposed upon the sale of these articles by the manufacturer, producer, or importer thereof and not upon resales of the articles by someone else.

Accordingly, in the instant case, it is held that the manufacturers excise tax on sporting goods applies to the sale of the croquet balls at the time they are sold to M corporation by N company. Therefore, N company is liable for the tax on its sale of the croquet balls.

The sale of the croquet set by M corporation is considered to be a combination sale of the various articles making up the set. M is liable for tax on the sale of the taxable articles of its manufacture included in the set, i.e. , the croquet mallets. M incurs no liability on its resale of the taxpaid articles purchased from N (croquet balls) when such articles are resold as part of the croquet set. The stakes, arches, and racks do not fall within the scope of section 4161 of the Code and, therefore, are not subject to the manufacturers excise tax on sporting goods.

M corporation's tax liability on the sale of the croquet set should be computed in accordance with the method described in Revenue Ruling 59-16, C.B. 1959-1, 340. For the purpose of this computation, the croquet balls purchased tax-paid from N company are to be treated as nontaxable articles. Therefore, if M's cost of the taxable mallets is one-third of its total cost of the complete combination (excluding any shipping carton), the tax applies to one-third of the price charged by M for the entire set (including the shipping carton). This method indirectly allocates in the same ratio a part of any shipping carton to the taxable mallets.