Rev. Rul. 58-463

Advice has been requested whether the tax imposed by the City of Baltimore, Maryland, on cigarettes, cigars, smoking tobacco and chewing tobacco, under section 69 of article 37 of the Baltimore City Code (1950 Edition), as amended by Ordinance 900, effective January 1, 1954, is deductible for Federal income tax purposes as a retail sales tax.

Under the provisions of section 69 of article 37, as amended, supra , a tax is imposed by the City of Baltimore on all cigarettes, cigars, smoking tobacco and chewing tobacco possessed or held in that city by any person for sale on or after January 1, 1954. Under section 72(a) of article 37, supra , the tax is collected and paid by the purchase of stamps from the Baltimore city treasurer. The tax may also be paid by or through the use of metering machines, decalcomanias, or other devices in accordance with prescribed regulations. Each person, before selling or offering to sell any cigarettes in Baltimore, is required to purchase stamps from the city treasurer and affix the stamps to the smallest container of cigarettes to be sold to the consumer as evidencing payment of the tax imposed. Each dealer is required to affix to each container of cigarettes, cigars, smoking or chewing tobacco stamps purchased from the city treasurer evidencing payment of the tax imposed. The word `dealer' is defined in section 74 of article 37, supra , as any person engaged in the business of selling tobacco products. The word `person' is defined therein as including any individual, partnership, society, association, joint stock company, corporation, estate, receiver, trustee, assignee or any other person acting in a fiduciary or representative capacity, whether appointed by court or otherwise, and any combination of individuals. After the tax has once been paid and the stamps affixed by a vendor, no further tax is required to be paid or additional stamps affixed by a subsequent vendor.

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, a 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 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.

Accordingly, it is held that the tax imposed by the City of Baltimore, Maryland, on cigarettes, cigars, smoking tobacco and chewing tobacco under the provisions of section 69 of article 37 of the Baltimore City Code, as amended, is deductible under section 164(a) of the Code by the persons or dealers who purchase and affix the tax stamps, or who impress the stamps to the packages or containers by means of a metering device or the use of decalcomanias and pay the tax due the City of Baltimore therefor. The tax is not a retail sales tax and, therefore, is not deductible by the purchasers of the cigarettes and other tobacco items 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 in computing his taxable income.