Rev. Rul. 68-600

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, M.T. 43, C.B. 1952-1, 209. This ruling relates to the applicability of the wagering taxes to merchandising plans where merchants, in order to encourage patronage, give tickets or chances to customers in connection with the sale of merchandise, and the holders of certain tickets or chances are awarded prized in the form of merchandise.

Section 4401(a) of the Internal Revenue Code of 1954 imposes an excise tax on wagers. Section 4401(c) provides that each person who conducts any wagering pool or lottery shall be liable for and shall pay the tax on all wagers placed in such pool or lottery. Section 4411 imposes a special annual tax to be paid by each person who is liable for tax under section 4401 or who is engaged in receiving wagers for or on behalf of any person so liable.

For purposes of these taxes, section 4421(1) of the Code defines the term `wager' to include, among other things, any wager placed in a lottery conducted for profit.

Section 44.4421-1(b)(1) of the Wagering Tax Regulations defines the term `lottery' in general as including any scheme or method for the distribution of prizes among persons who have paid or promised a consideration for a chance to win such prizes, usually as determined by the numbers or symbols on tickets as drawn from a lottery wheel or other receptacle, or by the outcome of an event, provided such lottery is conducted for profit. Section 44.4421-1(c)(4) of the regulations provides that a wagering pool or lottery operated with the expectancy of a profit in the form of increased sales, increased attendance, or other indirect benefits is conducted for profit for purposes of the wagering tax.

The liability of a merchant for the wagering taxes would depend in each individual case upon the manner in which the merchandising plan is operated.

If it is reasonable to infer from the circumstances surrounding the operation of the plan that a customer does not pay more for merchandise in order to obtain such tickets or chances than he would otherwise pay for the merchandise alone, then no `wager' subject to the excise tax would appear to have been placed. Conversely, if a customer does pay more for merchandise in order to obtain a chance on a prize than he would otherwise pay for the merchandise alone, such excess amount would appear to constitute a consideration for the chance and a `wager' subject to the excise tax. Among the circumstances that should be considered are (1) the value of the chance in relation to the price paid for the merchandise, (2) the relative price of the merchandise as compared with the price charged by comparable merchants who do not award prizes in connection with sales of merchandise, (3) the present price of the merchandise as compared with the price charged by the same store before adoption of the plan, and (4) the emphasis that the merchant places on the chance in selling his merchandise. Consideration should also be given to such factors as whether chances are distributed with sales of all merchandise generally and whether they are offered only with sales of a particular kind of merchandise not ordinarily carried in the store.

M.T. 43 is hereby superseded since the position set forth therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.