Rev. Rul. 60-224

Advice has been requested as to the deductibility, for Federal income tax purposes, of the taxes on cigarettes and tobacco products imposed by the State of Vermont, effective July 1, 1959.

Prior to July 1, 1959, a tax on cigarettes was imposed by section 1148 of the Vermont Statutes, Revision of 1947, as amended by section 3 of No. 30 of the Acts of 1949 and No. 163 of the Acts of 1957 (section 7721 of Title 32, Vermont Statutes Annotated). This tax was imposed upon licensed wholesale and retail dealers depending upon who affixed the required stamp. H384 amended section 1148, effective July 1, 1959, to increase the rate of tax imposed thereby on cigarettes and to provide that the tax on cigarettes is levied directly upon the consumer. H364 levies a new tax on tobacco products other than cigarettes, effective July 1, 1959, and also provides that this tax is levied directly upon the consumer.

Section 1 of H384, effective July 1, 1959, provides that section 1148 of the Vermont Statutes, is amended to read as follows:

1148. Rate of tax .-A tax is imposed on all cigarettes held in this state by any person for sale, such tax to be at the rate of three and a half mills for each cigarette and the payment thereof to be evidenced by the affixing of stamps to the packages containing the cigarettes, as hereinafter provided. Any cigarette on which the tax imposed by this chapter has been paid, such payment being evidenced by the affixing of such stamp, shall not be subject to a further tax under this chapter. Nothing contained in this chapter shall be construed to impose a tax on any transaction the taxation of which by this state is prohibited by the constitution of the United States. The amount of taxes advanced and paid by a licensed wholesale dealer or a licensed retail dealer as herein provided shall be added to and collected as part of the retail sale price of the cigarettes. All taxes upon cigarettes under this chapter are declared to be a direct tax upon the consumer at retail and shall conclusively be presumed to be precollected for the purpose of convenience and facility only.

Section 7 of H364, effective July 1, 1959, provides that subchapter 4, sections 7811 and 7812 (among other sections), is added to chapter 205 of Title 32, Vermont Statutes Annotated, to read as follows:

7811. Imposition of tobacco products tax .-There is hereby imposed and shall be paid a tax on all tobacco products possessed in the State of Vermont by any person for sale on and after July 1, 1959, which were imported into the state or manufactured in the state after said date, except that no tax shall be imposed on tobacco products sold under such circumstances that this state is without power to impose such tax, or sold to the United States, or sold to or by a voluntary unincorporated organization of the armed forces of the United States operating a place for the sale of goods pursuant to regulations promulgated by the appropriate executive agency of the United States. Such tax on tobacco products shall be at the rate of twenty per cent of the wholesale price and is intended to be imposed only once upon any tobacco product. Provided, however, that upon payment of the tax within ten days, the distributor or dealer may deduct from the tax two per cent of the tax due. It shall be presumed that all tobacco products within the state are subject to tax until the contrary is established and the burden of proof that any tobacco products are not taxable hereunder shall be upon the person in possession thereof. The net proceeds, as determined by the commissioner of taxes, of the tax on tobacco products imposed by this act shall be applied first to the general fund deficit as of June 30, 1959.

7812. Liability for and collection of tax .-The distributor shall be liable for the payment of the tax on tobacco products, which he imports or causes to be imported into the state, or which he manufactures in this state, and every distributor authorized by the commissioner to make returns and pay the tax on tobacco products sold, shipped or delivered by him to any person in the state, shall be liable for the collection and payment of the tax on all tobacco products sold, shipped or delivered. Every retail dealer shall be liable for the collection of the tax on all tobacco products in his possession at any time, upon which the tax has not been paid by a distributor and the failure of any dealer to produce and exhibit to the commissioner or his authorized representative, upon demand, an invoice by a distributor for any tobacco products in his possession, shall be presumptive evidence that the tax thereon has not been paid and that such dealer is liable for the collection of the tax thereon. The amount of taxes advanced and paid by a distributor or dealer as hereinabove provided shall be added and collected as part of the sales price of the tobacco products. The tax imposed herein shall be considered a direct tax paid by the consumer and shall be deductible for income tax purposes.

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 there material. 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.

The statutory language in section 1148, as amended by H384, regarding the imposition of taxes on the sales of cigarettes, specifically states that all cigarette taxes are direct taxes upon the consumer at retail and that the precollection of such taxes by licensed wholesale and retail dealers is for the purpose of convenience and facility only.

The statutory language in section 7812, as added by H364, regarding the imposition of tax on tobacco products, specifically provides that the amount of taxes advanced and paid by a distributor or dealer shall be added and collected as part of the sales price of the tobacco products, and that such taxes are direct taxes paid by the consumer and deductible by him for income tax purposes.

In view of the intent of the Vermont Legislature to impose the taxes upon the consumer, it is held that on and after July 1, 1959, the tax on cigarettes imposed by the State of Vermont under the provisions of section 1148 of the Vermont Statutes, as amended, and the tax on tobacco products imposed by section 7811, chapter 205 of Title 32, Vermont Statutes Annotated, are deductible by the consumer in computing taxable income. However, in the case of an individual who elects to use the standard deduction or the optional tax table, no deduction is allowable unless the taxes are 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. If the taxes are attributable to such a trade or business carried on by an individual, the amounts thereof are deductible from gross income in computing adjusted gross income under the provisions of section 62 of the Code.

Effective July 1, 1959, no deduction is allowable to the licensees paying the taxes to the State of Vermont and the portion of the price paid by the consumer to the licensees which represents the Vermont State taxes on cigarettes and tobacco products is not includible in the gross income of the licensees.