Rev. Rul. 58-564

Advice has been requested as to the deductibility by consumers of the privilege tax imposed by the Territory of Hawaii under section 117-14.6(b) of Chapter 117 of the Revised Laws of Hawaii, 1955, section 3, subsection (u) of Act 1 of the Special Session of 1957, effective July 1, 1957. Advice has also been requested whether the tax can be treated as a deductible business expense by the seller.

Section 3, subsection (u) of Act I of the Special Session of 1957, supra , amends Chapter 117 by inserting therein a new section, section 117-14.6, relating to a tax on certain retailing in the Territory of Hawaii.

Section 117-14.6(a) of Chapter 117 prescribes the types of retailing activities in the Territory of Hawaii subject to the tax and provides for certain exceptions not here material.

Section 117-14.6(b) provides that there is levied and shall be assessed and collected annually a privilege tax against persons engaging or continuing within the Territory in the retailing to which section 117-14.6 relates, on account of such retailing activities, as set forth in subsection (a) of section 117-14.6, equal to three and one-half percent of the gross proceeds of sale or gross income received or derived from such retailing. Persons on whom a tax is imposed by section 117-14.6 are called `retailers.'

Section 117-14.6(c) provides, in general, that retailers subject to the tax shall be licensed.

Section 117-14.6(d) provides that no retailer shall advertise or hold out to the public in any manner, directly or indirectly, that the tax imposed by section 117-14.6 is not considered as an element in the price to be charged to the consumer; and that any person violating the provisions thereof shall be fined not more than $50.00 for each offense.

Section 117-14.6(e) provides, in general, that a retailer-taxpayer shall not be taxed in excess of three and one-half percent in respect of any item of his gross income.

Subsection (a) of section 20 of Act I of the Special Session of 1957, supra , provides, among other things, that section 117-14.6 of Chapter 117 of the Revised Laws of Hawaii shall take effect July 1, 1957, and shall apply to taxes accruing on and after that date.

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 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 1.164-5 of the Income Tax Regulations, relating to the deductibility of State and local sales and gasoline taxes under section 164 of the Code, provides, in part, that the requirement that the amount of the tax must be separately stated will be deemed complied with where it clearly appears that, at the time of sale to the consumer, the tax was added to the sales price and collected or charged as a separate item; and that where the law imposing the sales or gasoline tax for which the taxpayer seeks a deduction contains a prohibition against the seller absorbing the tax, it is presumed that the amount of the sales or gasoline tax was separately stated at the time paid by the consumer.

Accordingly, it is held that the privilege tax imposed by the Territory of Hawaii under section 117-14.6(b) of the amendment to Chapter 117 of the Revised Laws of Hawaii, 1955, added by section 3, subsection (u) of Act 1 of the Special Session of 1957, effective July 1, 1957, constitutes a `State or local' sales tax within the meaning of section 164(c)(2) of the Code, and consumers paying such tax (otherwise than in connection with their trade or business) are entitled to a deduction therefor in computing their taxable income, provided the taxpayers concerned itemize their deductions and do not elect to use the standard deduction or compute their tax from the use of the optional tax table.

It is also held that such privilege tax is deductible by the retailer under section 164(a) of the Code. If the retailer is an individual, the deduction must be taken in arriving at adjusted gross income. See section 62(1) of the Code. In the case of all other retailers, the deduction is allowable in determining taxable income. The sales tax collected by a retailer from a purchaser must be included in the retailer's gross income for Federal income tax purposes.