Rev. Rul. 64-306

Advice has been requested as to the deductibility, for Federal income tax purposes, of the cigarette tax imposed by the Illinois `Cigarette Tax Act' (Ill. Rev. Stat. 1963, chapter 120, sections 453.1-453.30) as amended by the State of Illinois Legislature, 1963 House Bill 1228, approved July 16, 1963.

The pertinent provisions of 1963 House Bill 1228 are found in Sec. 2(a) which provides, in part, that:

The impact of the tax levied by this Act is hereby declared to be imposed upon the retailer and shall be prepaid or precollected by the distributor for the purpose of convenience and facility only, and the amount of the tax shall be added to the price of the cigarettes sold by such distributor. Collection of the tax shall be evidenced by a stamp or stamps affixed to each original package of cigarettes, as hereinafter provided.

The amount of the Cigarette Tax imposed by this Act shall be separately stated, apart from the price of the goods, by both distributors and retailers, in all advertisements, bills and sales invoices.

Section 164(c)(1) of the Internal Revenue Code of 1954 (as in effect prior to the enactment of section 207 of the Revenue Act of 1964, Public Law 88-272, C.B. 1964-1 (Part 2), 6), relating to the deduction of retail sales and gasoline taxes in computing taxable income, provides, in part, 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 upon, and paid by, such consumer.

Section 164(c)(2) of the Code (as in effect prior to the enactment of section 207 of the Revenue Act of 1964) provides, in substance, that the term `State or local sales tax' means a tax imposed by a State, a Territory, a possession of the United States, a political subdivision of any of the foregoing, or by the District of Columbia, which tax (A) is imposed on persons 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 he gross receipts for furnishing such services.

Section 1.164-5(a) of the Income Tax Regulations (applicable to section 164(c) of the Code prior to the enactment of section 207 of the Revenue Act of 1964) provides, generally, that where the law imposing the State or local sales tax for which the taxpayer seeks a deduction contains a requirement that the tax be separately shown in the advertisements or separately stated on all bills and invoices, it is presumed that the amount of the State or local sales tax was separately stated at the time paid by the consumer.

Since the cigarette tax imposed by the State of Illinois Cigarette Tax Act as amended by 1963 H.B. 1228, State of Illinois Legislature, approved July 16, 1963, falls within the provisions of section 164(c) of the Code (as in effect prior to the enactment of section 207 of the Revenue Act of 1964) it is deductible, for Federal income tax purposes, only for taxable years beginning prior to January 1, 1964, by the consumer paying or accruing the sales tax on or after July 16, 1963. In the case of an individual who elects to use the standard deduction or the optional tax table, no deduction is allowable unless the tax is attributable to a trade or business carried on by him. If the tax is attributable to a trade or business carried on by the individual, the amount of the tax is deductible from gross income in computing adjusted gross income under section 62 of the Code.