Rev. Rul. 61-40

Advice has been requested regarding the deductibility, for Federal income tax purposes, of certain taxes imposed on the sale of cigarettes and alcoholic beverages under Titles 84 and 48 of the Arkansas Statutes 1947 Annotated, as amended.

Title 84, chapter 23, of the Arkansas Statutes 1947 Annotated, Volume 7, provides, in part, as follows:

84-2301. CIGARETTES-SELLING AND DEALING IN LICENSED.-The business of handling, receiving, possession, storing, distributing, taking orders for, soliciting for orders of, selling, offering for sale, and dealing in through sale, barter, or exchange, cigarettes * * * is hereby declared to be a privilege under the Constitution and laws of the State of Arkansas, and the purpose of this act * * * is to impose certain licenses, fees, and taxes on this business.

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84-2304. * * *.-There is hereby levied the following excise or privilege tax, to-wit: on all cigarettes a tax of three dollars 3.00 per thousand cigarettes is hereby imposed. * * *

Title 84 makes provision for the sale of cigarettes by a distributor licensed by the State of Arkansas only to duly qualified retailers, and before selling or delivering cigarettes, he is required to affix stamps of the proper denominations to show that the tax has been paid. The distributor is required to supply to the retailer with each sale of cigarettes an invoice showing the quantity, kind and price of cigarettes and the State revenue stamp required to show that the tax has been paid and the date of sale or delivery.

Title 48, chapter 4, of the Arkansas Statutes 1947 Annotated, Volume 4, provides, in part, as follows:

48-402. RATE OF TAX.-There is hereby levied and there shall be collected as provided by law and regulation the following taxes:

(a) a tax at the rate of two dollars fifty cents [$2.50] on each gallon of spirituous liquor sold or offered for sale in the State of Arkansas;

(b) a tax at the rate of seventy-five cents [75¢ ] on each gallon of vinous liquor * * * sold or offered for sale in the State of Arkansas;

(c) a tax at the rate of twenty cents [20¢ ] on each gallon of malt liquor sold or offered for sale in the State of Arkansas; and

(d) a tax at the rate of five dollars [$5.00] per barrel * * * on all beer sold or offered for sale in the State of Arkansas.

Title 48 requires the wholesaler or other person authorized to sell spiritous, vinous, or malt liquors to retailers to purchase and pay for strip stamps from the Commissioner or Revenues and affix the required stamps to the containers in which the liquors are sold before ordering or shipping such liquors.

Title 48, chapter 4, of the Arkansas Statutes 1947 Annotated, Volume 4, 1959 Cummulative Pocket Supplement, provides in part, as follows:

48-411. * * *.-There is hereby levied a special Alcoholic Beverage Excise Tax of three per cent 3% upon all retail receipts or proceeds derived from the sale of liquor, cordials, liqueurs, specialities, sparkling and still wines. * * *.

Title 48 requires every retailer in the State to collect such tax from the consumer in addition to the established retail price of liquor, cordials, liqueurs, specialties, sparkling and still wines and to file a return and remittance with the Commissioner of Revenues on or before the 20th day of each calendar month for the preceding month.

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. This subsection 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 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 1.64-1 of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed.

The excise or privilege tax imposed by the State of Arkansas on cigarettes and the excise tax on alcoholic liquors is imposed on the wholesaler or other person making payment of those taxes to the State. Therefore, the taxes are not retail sales taxes. However, the three percent special alcoholic beverage tax is a retail sales tax since it is imposed on persons selling tangible personal property at retail.

Accordingly, it is held that the taxes imposed by the State of Arkansas on cigarettes under Title 84, chapter 23, section 2304, of the Arkansas Statutes 1947 Annotated, and on alcoholic liquors under Title 48, chapter 4, section 402 of the above Statutes, are deductible under section 164(a) of the Code by the distributor, wholesaler, or other person making payment of such taxes to the State and are not deductible by the purchasers or consumers under section 164(c) of the Code. Insofar as the ultimate consumer or purchaser is concerned, this tax, in each case, represents an additional cost of the article and is not deductible as a tax in computing his taxable income.

However, the three percent special alcoholic beverage tax imposed under Title 48, chapter 4, section 411, Arkansas Statutes 1947 Annotated, 1959 Cumulative Supplement, is a retail sales tax and is deductible by the consumer under section 164(c) of the Code, when not paid in connection with his trade or business.