Rev. Rul. 62-90

Advice has been requested concerning the application of the retailers excise tax to the exchange of taxable articles for coupons under the circumstances described below. If the tax applies, further advice has been requested concerning the proper basis for computing the tax.

A company is engaged in the business of selling, at wholesale and at retail, products which are not subject to the retailers excise taxes. When a retail customer purchases the company's products, the customer is given coupons that he may redeem by presenting them to the company in exchange for certain other merchandise, including articles which are subject to the retailers excise taxes imposed by sections 4001, 4011, 4021, and 4031 of the Internal Revenue Code of 1954.

The coupons may not be redeemed for cash or for the products normally sold by the company. Occasionally, when a customer wants a particular article but has not accumulated a sufficient number of coupons therefor, the company will exchange the article upon the presentation of a combination of coupons and cash. In such cases, the customer must present at least 75 percent of the total number of coupons allotted to the particular article. The customer substitutes cash in lieu of the remaining number of coupons allotted to the article, on the basis of one cent for each coupon.

Section 4001, 4011, 4021, and 4031 of the Code impose upon jewelry and related items, furs, toilet preparations, and luggage, handbags, etc., respectively, sold at retail, a tax equivalent to ten percent of the price for which so sold.

Section 320.5(d) of Refulations 51, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that the giving of a premium in consideration of the return of wrappers, labels, coupons, trading stamps, or other scrip, delivered or sold in connection with the sale of a commodity, constitutes a taxable transaction, and the person so giving the premium is considered to be one who sells at retail.

In the case of Southern Premium Stamp Co. v. United States , 289 Fed.(2d) 319 (1961), the United States Court of Appeals for the Fifth Circuit affirmed the decision of the District Court, 191 Fed.Supp. 158 (1961), which held that the transfer of articles (such as jewelry and luggage) by the stamp company to the ultimate consumer in exchange for trading stamps is a sale at retail which is subject to tax. The court further held that the fair market value of the taxable articles (at the time of transfer to the ultimate consumer in exchange for the trading stamps) is the `price for which so sold' for purposes of computing the retailers excise tax.

The applicability to the instant case of the position approved by the court in the Southern Premium Stamp Co. decision is not affected by the fact that the taxable articles are exchanged for `coupons' rather than for `trading stamps' or by the fact that the coupons are accepted in exchange by the company which issued them rather than by a `trading stamp' company.

Accordingly, it is held that the retailers excise tax applies to the exchange of taxable articles for coupons under the circumstances described in the instant case and that the company is liable for the retailers excise tax with respect to its transfer of taxable articles. It is further held that the basis upon which the tax is to be computed is the fair market value of the taxable articles at the time the articles are transferred to the customers.