Rev. Rul. 61-204

Advice has been requested concerning the applicability of the retailers excise tax on luggage, handbags, etc., to the retail sales of certain so-called `kits,' which are described below.

Section 4031 of the Internal Revenue Code of 1954 imposes a tax upon certain articles, by whatever name called, sold at retail. Included in the enumeration of taxable articles are billfolds, card and pass cases, key cases or containers, pocketbooks, purses and handbags, and wallets.

A company sells at retail numerous types of leathercraft `kits.' These `kits' contain in precut but unassembled condition all of the major components of one or another of the articles enumerated in section 4031 of the Code, together with instructions for easy assembly. In some cases the `kits' contain instructions for the optional tooling of decorative designs. In some of the `kits' the precut leather components are prepunched for easy lacing, while in others there are instructions for the punching of the holes, which is to be done by the person who assembles the article. Some `kits' contain lacing, cement, coatings, bleaches, etc., but others do not.

After completing the assembly of the leather articles, the assembler ordinarily applies a leather `finisher' which contains certain ingredients which soften and waterproof the leather and tend to prevent the soiling of the articles. This `finishing' process consists of applying the liquid `finisher' in much the same manner as is used in applying liquid shoe polish.

The retailers excise taxes, as well as the manufacturers excise taxes, are imposed upon a wide variety of articles , which are enumerated in the statute either specifically or by class. These articles are no less taxable merely because in some instances they may be sold as `kits' in unassembled or `knockdown' condition. For example, see Revenue Ruling 55-125, C.B. 1955-1, 518, which relates to articles of jewelry sold in unassembled condition; Revenue Ruling 58-38, C.B. 1958-1, 376, which includes perfume ingredient `kits'; Revenue Ruling 167, C.B. 1953-2, 428, and Revenue Ruling 56-307, C.B. 1956-2, 808, which relate to radio receiving sets; Revenue Ruling 54-320, C.B. 1954-2, 411, which relates to table tennis tables; Revenue Ruling 56-306, C.B. 1956-2, 793, which relates to dry charge batteries; Revenue Ruling 57-496, C.B. 1957-2, 726, which relates to power lawn mowers; and Revenue Ruling 58-376, C.B. 1958-2, 810, which relates to ball point pens. See also the decision of the United States Court of Claims in the case of George A. Hine v. United States , 113 F.Supp. 340 (1953), which relates to sales of fishing rod `kits.'

The same basic rationale which underlies the conclusions cited above applies to sales in unassembled condition of any of the articles subject to the retailers excise tax on luggage, handbags, etc. Therefore, the tax imposed by section 4031 of the Code applies to sales at retail of `kits' which contain the major components from which taxable articles may be assembled without the performance of substantial or significant operations other than assembly. On the other hand, the tax imposed by section 4031 of the Code does not apply to the sale of leather or other materials and supplies from which a taxable article may be produced only by the performance of substantial or significant cutting, shaping, or other operations in addition to assembly.

Whether a particular `kit' is taxable or nontaxable depends upon all of the facts relating to that `kit.' However, there are set forth below some of the criteria which must be taken into account.

Lacing, cement, and similar assembly materials are not considered to be major components; therefore, the absence of such materials does not, of itself, make a `kit' nontaxable. The `finishing' process described above is not considered to be a substantial or significant operation; therefore, a `kit' which otherwise would be considered taxable is not made nontaxable because such `finishing' is recommended or required. The punching of holes in the leather components for the purpose of lacing them together is not considered to be a substantial or significant operation; therefore, the fact that such holes must be punched by the person who assembles the components does not preclude the taxability of the `kit.' With respect to `kits' which contain the major components from which taxable articles may be assembled without the performance of substantial or significant operations other than assembly, the taxability of the articles is not affected by the fact that decorative tooling may be recommended to enhance the ornamental value of the assembled articles.

Accordingly, it is held that the retailers excise tax imposed by section 4031 of the Code applies to the sale at retail of the leather-craft `kits' described in the instant case.