Rev. Rul. 62-51

Advice has been requested concerning the applicability of the manufacturers excise tax on lubricating oils under the circumstances described below.

A company produces `new' lubricating oil, hereinafter referred to as product ` A ,' which is subject to the manufacturers excise tax imposed by section 4091 of the Internal Revenue Code of 1954. Some of that lubricating oil is used by the company, along with `reclaimed' lubricating oil and (in some instances) small quantities of other substances, in the production of two other products, hereinafter referred to as product ` B ' and product ` C .' For reasons which are set forth below, no manufacturers excise tax applies to the company's sales of either product ` B ' or product ` C .'

By a process of compounding certain quantities of product ` A ' with reclaimed lubricating oil, the company produces product ` B .' Although product ` B ' has lubricating properties, it is a `grease' under the provisions of section 48.4091-2(a) of the Manufacturers and Retailers Excise Tax Regulations. Accordingly, product ` B ' is not subject to the manufacturers excise tax on lubricating oils.

Also, the company blends or mixes certain quantities of product ` A ' with reclaimed lubricating oil, the resulting product being referred to here as product ` C .' Although product ` C ' is a lubricating oil under the definition set forth in section 48.4091-2(a) of the regulations, the company is not a `manufacturer' of that product under the provisions of section 48.4091-2(b)(2)(iii) of the regulations. Accordingly, no manufacturers excise tax applies to the company's sales of product ` C .'

Two specific questions have been presented. The first is whether the company incurs liability for the manufacturers excise tax with respect to its use of product ` A ' in the production of product ` B ' or product ` C .' The second question, which becomes pertinent only if there is an affirmative answer to the first question, is whether the company is entitled to a credit or refund of the tax paid on the use of product ` A ' if the resulting product ` B ' or product ` C ' is sold (1) to another company (which is a manufacturer or producer of lubricating oil) for resale, (2) to a State or local government for its exclusive use, or (3) to another customer (i) for export or (ii) for nonlubricating use.

Section 4091 of the Code imposes a tax on lubricating oils sold in the United States by the manufacturer or producer thereof.

Under the provisions of section 4218(a) of the Code, insofar as applicable to the situation presented here, if any person manufactures or produces an article and uses it (otherwise than as material in the manufacture or production of, or as a component part of, another taxable article to be manufactured or produced by him), then he shall be liable for the manufacturers excise tax in the same manner as if such article were sold by him.

Therefore, if a manufacturer or producer of lubricating oil `uses' that lubricating oil, within the meaning of section 4218(a) of the Code, that manufacturer or producer becomes liable for the manufacturers excise tax imposed by section 4091 of the Code in the same manner as if the lubricating oil were sold by him.

Section 48.4091-2(a) of the regulations provides that the term `lubricating oils' includes all oils, regardless of origin, which (1) are suitable for use as a lubricant or (2) are sold for use as a lubricant. However, the term does not include synthetic materials which possess lubricating properties, nor does it ordinarily include products of the type commonly known as grease. Oleaginous substances which are classed as grease and which contain oil are not subject to the tax when of a worked consistency of less than 390 penetration units, or an unworked consistency of less than 360 penetration units, by the method of test of the American Society for Testing Materials D-217-52-T.

Section 48.4091-2(b) of the regulations provides, in part, as follows:

(1) For purposes of the tax imposed under section 4091, the term `manufacturer' includes:

(i) Any person who produces lubricating oil by any process of manufacturing, refining, or compounding, or any manipulation involving substantially more than mere mixing of taxable oils, and

(ii) Any person who produces lubricating oil by mixing taxable oils with other substances.

(2) For purposes of the tax imposed under section 4091, the term `manufacturer' does not include:

(i) Any person who merely blends or mixes two or more taxable oils.

(ii) Any person who merely cleans, renovates, or refines used or waste lubricating oil, or

(iii) Any person who merely blends or mixes one or more taxable oils with used or waste lubricating oil which has been cleaned, renovated, or refined.

Section 48.4091-4(a)(1) of the regulations provides that the tax imposed by section 4091 of the Code does not attach to the sale by the manufacturer of lubricating oil direct to a purchaser for non-lubricating use by him, if such oil is actually so used by such purchaser.

The company's use of product ` A ' in producing either product ` B ' or product ` C ' constitutes a `use' of taxable lubricating oil within the meaning of section 4218(a) of the Code, since product ` A ' is being used otherwise than in the manufacture of products which are themselves subject to the manufacturers excise tax. Therefore, the applicability of the tax to the `use' of product ` A ' in producing either product ` B ' or product ` C ' depends upon whether the tax would apply if product ` A ' were sold for the same purpose.

The sale of lubricating oils for use as constitutent materials in the manufacture of products which are not lubricating oils and which do not perform the function of a lubricating oil are considered to be sales for nonlubricating use within the meaning of section 48.4091-4(a) of the regulations. Although grease is a lubricant, it is not treated as a lubricating oil for tax purposes. The production of grease from any oils or other substances is a manufacturing process rather than mere blending. The `use' of product ` A ' in compounding the nontaxable product ` B ' is considered to be a nonlubricating use. Accordingly, the manufacturers excise tax does not apply to the company's `use' of product ` A ' in compounding product ` B .'

On the other hand, although product ` C ' is not taxable when sold by the company, it is a lubricating oil which performs a lubricating function. The use of product ` A ' in the blending or mixing of product ` C ' constitutes a lubricating use of product ` A ,' even though such use of the oil is not considered to be a process of `manufacture' within the meaning and intent of section 48.4091-(2)(b)(2)(iii) of the regulations. Therefore, it is held that the manufacturers excise tax applies to the company's `use' of product ` A ' in the blending or mixing of product ` C .'

Since the answer to the first question presented in the instant case is affirmative to the extent that product ` A ' is used in blending product ` C ,' the second question presented is pertinent. The answer to the second question depends upon the provisions of section 4093 and section 6416(b)(2) of the Code.

Section 4093 of the Code provides that, under regulations prescribed by the Secretary of the Treasury or his delegate, the tax on lubricating oils shall not apply to lubricating oils sold to a manufacturer or producer of lubricating oils for resale by him. However, under the provisions of section 4092(a) of the Code, a vendee who has purchased lubricating oils free of tax under section 4093 shall be considered the manufacturer or producer of such lubricating oils.

Under the provisions of section 6416(b)(2) of the Code, insofar as applicable to the instant case, the manufacturers excise tax paid in respect of any lubricating oil is deemed to be an overpayment if the lubricating oil was, by any person, exported, sold to a State or local government for the exclusive use of a State or local government, or used or sold for nonlubricating purposes.

Under the circumstances involved in this case, a taxable lubricating oil, product ` A ', is used by the company in such a manner that it loses its identity as a separate product for tax purposes. The provisions of section 4093 and section 6416(b)(2) of the Code would apply in this case only if the Taxable lubricating oil had been used or sold for the purposes specified in those sections. The fact that the nontaxable product ` C ' may have been sold for one of those purposes provides no basis for a credit or refund of the tax paid on the `use' of product ` A ' in blending product ` C .' See Revenue Ruling 59-63, C.B. 1959-1, 356, for a similar conclusion which relates to sales of nontaxable articles, in the manufacture of which taxable electric light bulbs were used, to a political subdivision of a State.