Rev. Rul. 57-571

Advice has been requested concerning the treatment for retailers excise tax purposes of charges for the preparation of advertising designs for clock dials and imprinting such designs on the dials.

In the instant case, a manufacturer is engaged in two distinct but closely related businesses. It manufactures and sells clocks which are enclosed in aluminum casings and electrically actuated. Also, it renders and sells to its customers an advertising service in anticipation of a potential order for the clocks. This service consists of the preparation of hand-painted art work which is a prototype of the advertisement to appear on the clock, the preparation of silk screens used to duplicate the colors in the art work, and the actual imprinting of the advertisement on the clock dial. The art work and screens remain the property of the manufacturer. The imprinted dials are retained by the manufacturer unless a customer places an order for advertising clocks. When an order is received, the imprinted dials and other clock components are assembled and the clocks are shipped to the purchaser. In billing the customers for the clocks, the listed price includes compensation for the dials on which the advertising is imprinted but does not include amounts previously invoiced for the art work, silk screens, etc., The manufacturer sells both at retail and for resale purposes.

The tax imposed by section 4001 of the Internal Revenue Code of 1954 on jewelry and related items (which includes clocks) is based upon the price for which the articles are so sold at retail. The price for which an article is sold includes any charge for coverings and containers of whatever nature, and any charge incident to placing the article in condition packed ready for shipment. Section 4051 of the Code.

It is held that the price for which advertising clocks are sold does not include, for the purpose of the retailers excise tax, any amounts charged for the preparation and imprinting of advertising designs on the clock dials, if such charges are shown separately from the charge for the clocks on the seller's records or the customer's invoice. If such charges are not shown separately, they are includible in the tax base. Since, in the instant case, the manufacturer makes separate charges for the art work, silk screens, and imprinting the design on the dials, such charges are not subject to the retailers excise tax. However, the tax is due and payable on the amount for which the clocks, including the dials, are sold by the manufacturer at retail.

Where a manufacturer makes sales of clocks for resale, no tax is applicable to the clocks when sold by the manufacturer, provided it obtains from the purchaser retailers' exemption certificate or equivalent proof to support the tax-exempt character of the manufacturer's sale. In such a case, the person who sells the clock at retail must report and pay the tax to the Government. To determine the tax base with respect to a combination sale of a taxable clock and a nontaxable advertising service, as Revenue Ruling 57-570, page 711.