Rev. Rul. 59-87

Advice has been requested whether the retailers excise tax applies to a so-called `service charge' made by a retailer where a customer purchases less than a prescribed number of taxable articles.

A retail dealer sells articles primarily through a mail order system. The retail dealer advertises his articles at selling prices which are established for stated minimum quantities of articles, with a provision for an additional charge where smaller quantities are ordered. The so-called `service charge' covers the labor and other costs of repacking as well as the cost of and drqyage of the articles to the post office. Orders received from customers are to be accompanied by payment in full for the order, including the `service charge' and the Federal excise tax if applicable.

Section 4051 of the Internal Revenue Code of 1954 provides that, in determining the price for which an article is sold, there shall be included any charge for coverings and containers of whatever nature and any charge incident to placing the article in condition packed ready for shipment. That section further provides that a transportation, delivery, insurance, installation, or other charge (not required by the foregoing sentence to be included) shall be excluded from the price only if the amount thereof is established to the satisfaction of the Secretary of the Treasury or his delegate, in accordance with the regulations.

Section 320.8 of Regulations 51, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, states that charges for transportation, delivery, insurance, installation, and other charges actually incurred in connection with the delivery of an article to a purchaser pursuant to a bona fide sale, are to be excluded in computing the tax.

Accordingly, it is held that the so-called `service charge,' which is added to the established sale price where the customer orders taxable articles in smaller quantities than a stated minimum, is to be included in the sale price of the articles for purposes of computing the retailers excise tax, unless it can be shown that the additional charge, or some portion thereof, is excludable under the provisions of section 4051 of the Code. In the instant case, the portion of the `service charge' which is directly attributable to drayage, or transportation, may be excluded from the price on which the retailers excise tax is computed, provided that portion of the charge is satisfactorily established by adequate records.