Rev. Rul. 62-41

Advice has been requested concerning the applicability of the retailers excise tax on luggage, handbags, etc., to a transaction whereby a manufacturer produces luggage from material furnished by a customer under the circumstances described below. Specifically, advice has been requested whether the applicability of the tax in this situation is affected by the provisions of section 4012(a) of the Internal Revenue Code of 1954.

A customer engages a manufacturer to produce, from the customer's own material, luggage for the customer's own use. Pursuant to a contract, the customer furnishes the basic material used in the manufacture of the luggage and retains title thereto throughout the transaction. The manufacturer produces the luggage and bills the customer, on the basis of the contract, for the labor, incidental materials, and a profit.

Section 4031 of the Code imposes a tax upon the sale at retail of certain enumerated articles, generally referred to as luggage, handbags, etc.

Section 4012(a) of the Code provides that where a person, who is engaged in the business of dressing or dyeing fur skins or of manufacturing, selling, or repairing fur articles, produces an article of the kind described in section 4011 from fur on the hide or pelt furnished, directly or indirectly, by a customer and the article is for use of, and not for resale by, such customer, the transaction shall be deemed to be a sale at retail and the person producing the article shall be deemed to be the person selling such article at retail for the purposes of such section. The tax on such a transaction shall be computed and paid by such person upon the fair retail market value, as determined by the Secretary of the Treasury or his delegate, of the finished article.

The provisions of section 4012(a) of the Code are relevant only to the fur articles upon which a retailers excise tax is imposed by section 4011 of the Code. There is no similar provision in the law or regulations with respect to the tax on luggage, handbags, etc.

Accordingly, the transaction described above is a contract for labor and materials rather than a sale of the luggage produced. Therefore, it is held that any charge made by the manufacturer incident to producing luggage from material owned by the customer under the circumstances stated is not subject to the retailers excise tax imposed by section 4031 of the Code.

It should be noted that this conclusion would not apply to any situation in which all of the circumstances (including the manner in which the customer acquired the materials) indicate that the substance of the transaction is the sale at retail of the luggage produced.