Rev. Rul. 57-486

Advice has been requested as to the deductibility, for Federal income tax purposes, of the New Hampshire State tax on tobacco products in view of the amendment to the Revised Laws of the State of New Hampshire (1942) by chapter 256 of the Laws of 1955.

In accordance with chapter 79, section 5 of the Revised Laws, as amended by chapter 238, section 4 of New Hampshire Laws of 1947, tobacco products sold at retail in the State are subject to tax evidenced by stamps affixed to the package. Under the law each unclassified importer was required, within 24 hours after receipt of any unstamped products, to notify the tax commission on the amount and brands of tobacco products received and the name and address of the consignor and to pay the tax within ten days from mailing notice showing the tax due.

Chapter 256 of New Hampshire Laws of 1955, approved July 14, 1955, amended chapter 79, section 5, of the Revised Laws to provide that the tax on the tobacco products is imposed upon the retail consumer and further, in that respect, reads, in part, as follows:

Be it enacted by the Senate and House of Representatives in General Court convened:

*

2. PRESUMPTION. Further amend chapter 79 of the Revised Laws (chapter 78, RSA) by inserting after section 5 thereof the following new section: 5-a. NATURE OF TAX. All taxes upon tobacco products under this chapter are declared to be a direct tax upon the consumer at retail and shall conclusively be presumed to be pre-collected for the purpose of convenience and facility only.

3. TAKES EFFECT. This act shall take effect upon its passage.

I.T. 3358, C.B. 1940-1, 30, holds that for Federal income tax purposes the cost of the stamps, which are required by the laws of the State of New Hampshire (chapter 167, sections 1 to 19, inclusive, approved June 7, 1939, as amended by chapter 180, approved June 14, 1939) to be purchased and affixed to packages of tobacco products, is an allowable deduction as a tax in the return of the distributor or dealer purchasing and affixing the stamps. The cost of stamps, however, may not be deducted separately as a tax if it is included as a part of the business expense of the distributor or dealer, or is otherwise used to reduce his net income. To the purchaser or consumer of the tobacco products, the cost of the stamps is merely additional cost of the article purchased.

Section 164(a) of the Internal Revenue Code of 1954 provides that in computing taxable income, except as otherwise provided, there shall be allowed as a deduction taxes paid or accrued within the taxable year. Section 39.23(c)-1(a) of Regulations 118, made applicable to section 164(a) pursuant to Treasury Decision 6091, C.B. 1954-2, 47, provides that in general taxes are deductible only by the person upon whom they are imposed.

In view of the evident intent of the New Hampshire Legislature to impose the tobacco tax upon the consumer in the State of New Hampshire, it is held that the tax on tobacco products imposed by the State of New Hampshire, chapter 79 of Revised Laws, as amended, is on and after July 14, 1955, the effective date of the amendment by chapter 256 of New Hampshire Laws of 1955, deductible under section 164(a) of the Code by the consumer in computing taxable income, except that in the case of an individual who elects to use the optional standard deduction, the tax is not deductible unless attributable to a trade or business carried on by him which does not consist of the performance of services by the taxpayer as an employee. In the latter event, the tax is deductible from gross income in computing adjusted gross income.

Effective July 14, 1955, no deduction is allowable to the licensees (distributors or dealers) paying the tax to the State of New Hampshire, and the portion of the price paid by the consumer to the licensees for tobacco products which represents the New Hampshire State tax on tobacco products is not includible in the gross income of such licensees.

I.T. 3358, supra , is not applicable to the tax on tobacco products sold in New Hampshire on or after July 14, 1955.

Deductibility of Federal Insurance Contributions Act Tax imposed on employers. See Rev. Rul. 57-489, page 207.