Rev. Rul. 58-323

Advice has been requested as to the treatment for Federal income tax purposes of the cigarette, consumers sales and the use taxes imposed by the State of West Virginia under Chapter 11, West Virginia Code of 1955, as amended.

The West Virginia statutes relating to the taxation of cigarettes in that State are contained in Chapter 11 of the West Virginia Code of 1955 and in the 1957 Cumulative Supplement thereto. Article 17 of Chapter 11, sections 999(50a) through 999(50v), relates to the excise tax on sale of cigarettes. Article 18 of Chapter 11, sections 999(50w) through 999(50cc), relates to the excise tax on the use, consumption or storage of cigarettes.

The excise tax imposed on the sale of cigarettes in the State, aggregating two and one-half cents on each ten cigarettes or fractional part thereof, is required to be paid by the purchase, by licensed wholesale and retail dealers, from the state tax commissioner, of stamps to be affixed to the packages of cigarettes. When authorized, the stamps may be affixed by means of a metering device, payment of tax due the State being made by the licensees using the metering devices. See section 999(50b1), 999(50b2), 999(50d), 999(50f) and 999(50i).

The excise tax imposed on the use, consumption or storage of cigarettes by consumers in the State, currently at the rate of two and one-half cents on each ten cigarettes or fractional part thereof, is required to be paid directly to the state tax commissioner by every person who has acquired cigarettes for use, storage, or consumption, except that no tax applies if the tax levied in Article 17 of Chapter 11, supra , has been paid. See sections 999(50x) and 999(50y).

The statutes relating to the consumers sales tax in West Virginia are contained in Article 15 of Chapter 11, Sections 999(1) through 999(30), supra . The law provides that for the privilege of selling tangible personal property and of dispensing certain selected services the vendor shall collect from the purchaser the tax as provided by the statutes and shall pay the amount of tax collected to the state tax commissioner. There is no tax on sales where the monetary consideration is five cents or less. The amount of the tax is computed at the following rates: (1) On each sale, where the monetary consideration is from six to fifty cents; both inclusive, one cent; (2) On each sale where the monetary consideration is from fifty-one cents to one dollar, both inclusive, two cents; (3) On each fifty cents of monetary consideration, or fraction thereof in excess of one dollar, one cent. See section 999(3). The purchaser shall pay to the vendor the amount of the tax which shall be added to and constitute a part of the sales price and shall be collectible as such by the vendor who shall account to the State for all tax paid by the purchaser. Except as otherwise authorized, the vendor shall keep the amount of tax paid separate from the proceeds of sale exclusive of the tax. A vendor shall not represent to the public, in any manner, directly or indirectly, that he will absorb all or any part of the tax, or that the tax is not to be considered an element in the price to the purchaser. See section 999(4). No profit shall accrue to any person as a result of the collection of the tax notwithstanding the total amount of such taxes collected may be in excess of the amount for which such person would be liable by the application of the levy of two percent to the gross proceeds of his sales and the total of all taxes collected by any such person shall be returned and remitted to the tax commissioner as provided. See section 999(5). It is the intent of the law that the tax levied thereunder shall be passed on to and be paid by the ultimate consumer. See section 999(10).

The statutes relating to the use tax in West Virginia are contained in Article 15A of Chapter 11, sections 999(30a) through 999(30aa), supra . The law imposes an excise tax on the use in the State of tangible property furnished or delivered within the State to consumers or users at the rate of two percent of the purchase price of such property. The tax is imposed upon every person using such property within the State until such tax has been paid directly to a retailer, or to the State tax commissioner as provided. See section 999(30b). The law exempts certain specified tangible personal property from the tax, including, the gross receipts or the gross proceeds from the sale of which are required to be included in the measure of the tax imposed by Article 15 of Chapter 11, supra . See section 999(30c). It is the purpose of the law to rest a fair share of the tax burden, commensurate with the benefits received, upon those exercising the privilege taxed thereby within the State. See section 999(30w).

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.

Subsection (c)(1) of section 164 of the Code relates to the deduction of retail sales taxes and gasoline taxes in computing taxable income. Such subsection 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.

Subsection (c)(2) of section 164 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 a stated sum per unit of property sold or is measured either by the gross sales price or by the gross receipts from the sales; 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.

Therefore it is held that the tax imposed by the State of West Virginia on the sale of cigarettes by Article 17 of Chapter 11, West Virginia Code of 1955, as amended, is deductible under section 164(a) of the Internal Revenue Code of 1954, by the licensed wholesale or retail dealer who purchases and affixes the stamps, or impresses such stamps by means of a metering device and makes payment of the tax due the State therefor. The tax is not a retail sales tax and therefore is 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 tax represents an additional cost of the article and is not deductible as a tax in computing his taxable income. However, in those instances where the tax imposed under Article 18 of Chapter 11, supra , in respect of the use, storage, or consumption of cigarettes, has been imposed directly on the consumer, it may be deducted by the consumer under section 164(a) of the Code.

From the provisions of the State law relating to the consumers sales tax, referred to above, it is clear that the legislative intent was to impose such tax upon the purchaser or consumer and to make the vendor the collector of the tax for and on behalf of the State. The use tax is also imposed on the consumer or user subject thereto.

Accordingly, it is held that both the West Virginia consumers sales tax and the use tax imposed under Article 15 and Article 15A, respectively, of Chapter 11 of the West Virginia Code of 1955, as amended, are deductible by the purchaser or consumer under section 164(a) of the Code, except that in the case of an individual who elects to use the optional standard deduction or computes his tax liability from the tax table, no deduction is allowable under section 164(a) of the Code unless the sales or use taxes are attributable to a trade or business carried on by him. Where the sales or use taxes are attributable to a trade or business carried on by an individual, the amounts of such taxes are deductible as taxes from gross income in computing adjusted gross income. In the case of taxpayers (other than individuals) engaged in trade or business, the sales or use taxes are deductible as taxes in computing taxable income. The amounts of such sales and use taxes collected by a vendor should not be included in the vendor's gross income, and no deduction is allowable to the vendor with respect to the amounts of such taxes remitted by him to the State tax commissioner of the State of West Virginia. Compare I.T. 2953, C.B. XV-1, 92 (1936).