Rev. Rul. 61-107

Advice has been requested with respect to the deductibility, for Federal income tax purposes, of the taxes imposed by the State of Virginia on the sale and use of certain tobacco products, the sale of certain alcoholic beverages and wine, and the sale of beer and 3.2 percent beverages, under Titles 58 and 4, Code of Virginia, 1950, as amended by Chapters 392, 393, and 403, Acts of the General Assembly, 1960, approved March 30, 1960.

Section 757.1 of Title 58, Code of Virginia, 1950, as amended by Chapter 392 of the Acts of the General Assembly, 1960, effective August 1, 1960, to June 30, 1962, provides, in part, that every person, firm, corporation, or association, within the State, who sells, stores, or receives for the purpose of distribution to any person, firm, corporation, or association within the State, little cigars, cheroots, stogies, cigars, or cigarettes, either or all, shall pay the State a tax at specified rates. The tax shall be paid through the use of stamps affixed to the box or other container from or in which the tobacco products are normally sold at retail.

Section 757.2 of Title 58 provides, in part, that every wholesale or retail dealer in the State shall immediately after receipt of any unstamped tobacco products affix the requisite denominations and amount of stamps thereto.

Section 757.19 of Title 58 provides, in effect, that every person storing, using or otherwise consuming the specified tobacco products shall be liable for the tax if the stamps provided for under section 757.1 have not already been attached to the products or the tax has not been paid by the seller of such products.

Section 15.1 of Title 4, Code of Virginia, 1950, as amended by Chapter 393, Acts of the General Assembly, 1960, effective August 1, 1960, to June 30, 1962, levies a tax upon all alcoholic beverages sold either by or through the Virginia Alcoholic Beverage Control Board and upon all wine sold to persons licensed to sell such wine at retail. The tax levied upon alcoholic beverages is added by the Board in establishing the price of the item sold and is collected by the Board from the purchaser at or prior to each sale. In the case of wine, the Board is required to collect the tax from each sale by a wholesale wine distributor to a retail licensee from the distributor. With respect to wines sold by the Board to a retail licensee, the tax is a specified percentage of the price charged by the Board and is not separately stated but is a component part of the price charged.

Section 40(a1) of Title 4, Code of Virginia, 1950, as amended by Chapter 403 of the Acts of the General Assembly levies a tax at a specified rate upon all beer manufactured in the State. The tax is payable by the person who manufactures the beer.

Section 40(b1) of Title 4, levies a tax upon all beer bottled and sold in the State. The tax is payable by the respective bottlers and wholesalers of the beer, if the tax has not been previously paid by the manufacturer under section 40(a1). A person who otherwise sells beer on which the tax has not been paid is required to pay the tax.

Section 108(a1) of Title 4, as amended by Chapter 403 levies a tax upon all beverages containing one-half of one per centum or more of alcohol by volume and not more than three and two-tenths per centum of alcohol by weight. The tax is payable by the manufacturer of the beverage.

Section 108(b1) of Title 4 levies a tax upon all specified beverages bottled and sold in the State. The tax is payable by the bottlers or wholesalers of the beverages, if the tax has not been previously paid by the manufacturer under section 108(a1). If not previously paid, the tax must be paid by the person who first makes the sale.

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.

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

Section 164(c)(2) 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 sale; 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.

The taxes levied under section 757.1 and 757.19 of Title 58, on certain tobacco products are not imposed on persons engaged in selling tangible personal property at retail. They are not, therefore, retail sales taxes within the meaning of section 164(c) of the Code. The taxes levied under section 15.1 of Title 4 on all alcoholic beverages sold either by or through the Virginia Alcoholic Beverage Control Board and upon all other wine sold to persons licensed to sell wine at retail do not constitute retail sales taxes within the meaning of section 164(c) of the Code. The taxes levied under sections 40(a1), 40(b1), 108(a1), and 108(b1) of Title 4 are excise taxes imposed on the manufacturer, bottler, wholesaler, or seller of beer and beverages and, therefore, are not retail sales taxes.

Accordingly, it is held that:

(1) The taxes (sales and use) imposed under section 757.1 of Title 58, are deductible under section 164(a) of the Code by the wholesaler or retailer who affixes the stamps to the container in which the tobacco product is normally sold at retail and are not deductible by the purchaser of the product under section 164(c) of the Code. However, where the taxes have been imposed, under section 757.19, directly on the person storing, using or otherwise consuming the products, by reason of the seller's not having paid them, such taxes paid directly to the State by such person are deductible by him under section 164(a) of the Code.

(2) The taxes levied on all alcoholic beverages and wine under section 15.1 of Title 4 are not deductible by the consumer under section 164(c) of the Code. However, the tax on wine is deductible under section 164(a) of the Code by the wholesale wine distributor who pays the tax on wine sold to a retail licensee.

(3) The taxes imposed under sections 40(a1), 40(b1), 108(a1), and 108(b1) of Title 4 are deductible under section 164(a) of the Coce by the manufacturer, bottler, wholesaler, or seller of beer and 3.2 percent beverages who pays the tax and are not deductible by the purchaser under the provisions of section 164(c) of the Code.