Rev. Rul. 62-193

Advice has been requested whether the manufacturers excise tax imposed under section 4191 of the Internal Revenue Code of 1954 applies to the separate sales of the bank automation equipment described below.

The equipment consists of several machines, each of which is a separate salable article. Although the machines may be modified for other business uses, they are primarily sold for use in banking institutions for the purpose of sorting checks.

Item (1): A magnetic character check sorting machine .-This machine is equipped with an electronic scanning mechanism which `reads' magnetic characters previously printed on checks. This mechanism enables the machine to sort checks drawn on banks other than the bank using the machine according to their transit numbers and to sort checks drawn on the particular bank using the machine according to their account numbers. It has sixteen pockets for regular items and two pockets for rejects. By passing a group of checks through the machine several times, all checks are placed in their respective pockets in proper numerical sequence according to the numbers imprinted on them.

Item (2): A magnetic character check sorting machine central control unit .-This machine contains an electronic memory unit which enables it to control the operation of several magnetic character check sorting machines when they are performing the function of transit number sorting. It is equipped with a dictionary look-up feature which stores the transit routing numbers of up to 4,000 destinations. In operation, as the magnetic coding of each check is `read,' the complete transit routing number is referred to the dictionary look-up feature which, in turn, `instructs' one of the magnetic character check sorting machines to place the check in the proper pocket.

Item (3): An inproof and outproof listing machine .-This machine is a separate attachment for the magnetic character check sorting machine described in item (1) above. It is used to provide subtotals, batch totals, and grand totals for the inproof and outproof process. The listing and adding operation is done simultaneously with the passing of the checks through the magnetic character check sorting machine during the regular sorting operation.

Item (4): A transit number routing symbol encoder .-This machine prints in magnetic ink the bank transit number on checks drawn on other banks which are in transit and which have not been preprinted with magnetic ink. It operates mechanically by an electric powered motor. In operation, each check is manually inserted into the machine and the proper transit number is indexed on the keyboard. After printing has been completed, the encoded checks are automatically stacked in a receiving bin in the order in which they were inserted into the machine.

Item (5): A customer account number encoder .-This machine prints a maximum ten-digit customer account number on those checks which are drawn on the particular bank using the machine and which have not been preprinted with magnetic ink. In operation, each check is manually inserted into the machine and the customer account number is indexed on the keyboard. After printing is completed, the checks are automatically stacked in a receiving bin in the same order in which they were inserted into the machine.

Item (6): An adding machine amount encoder .-This machine is an attachment for a regular adding machine. It operates mechanically, deriving its power from the motor of the adding machine to which it is attached. The machine is used to print in magnetic ink on each check inserted therein the amount of the check. In operation, each check is manually inserted into the machine and the amount of the check is indexed on the keyboard. The check amount is then encoded in magnetic ink on the check and also listed on the adding machine tape for the purpose of providing batch totals.

Item (7): A proof machine amount encoder .-This machine is an attachment for a standard proof machine. It is electrically operated and is completely controlled by the action of the proof machine to which it is attached. The machine is used for the purpose of encoding checks with magnetic characters so that they may be sorted at a later stage by a magnetic character check sorting machine. In operation, if the amount of a check which is going through the proof machine has not been previously encoded with magnetic ink, this machine will print the amount thereon with magnetic ink. However, if the check has already been printed with magnetic ink, the machine will permit it to go through the proof machine without any additional printing of magnetic ink thereon.

Section 4191 of the Code imposes a tax upon the sale by the manufacturer, producer, or importer of certain enumerated business machines (including in each case parts or accessories of such articles sold on or in connection therewith or with the sale thereof). Included in the enumeration of articles are adding machines, listing machines, sorting machines, and combinations of any of the foregoing.

It is held that the magnetic character check sorting machine identified above as item (1) is a sorting machine within the meaning of section 4191 of the Code, since its primary purpose is to sort checks into particular pockets according to their transit and account numbers. Therefore, sales of such a machine by the manufacturer thereof are subject to the manufacturers excise tax imposed by that section of the Code.

It is further held that the magnetic character check sorting machine central control unit identified as item (2) above does not come within the scope of any of the articles enumerated in section 4191 of the Code, since its primary function is to electronically control the operation of several magnetic character check sorting machines. Accordingly, the manufacturers excise tax imposed by that section does not apply to the separate sales of such a machine. However, where the magnetic character check sorting machine central control unit is sold on or in connection with, or with the sale of, a taxable magnetic character check sorting machine by the manufacturer of the sorting machine, the central control unit is considered, for for purposes of section 4191 of the Code, to be a part or accessory for such sorting machine and, therefore, is includible in the tax base of the sorting machine.

Since the inproof and outproof listing machine identified as item (3) above lists and adds the amounts of checks, it is held that it is a combination listing and adding machine within the meaning of section 4191 of the Code. Therefore, sales of such a machine by the manufacturer thereof are subject to the tax imposed by that section.

The various encoder machines identified as items (4), (5), (6), and (7) above do not come within the scope of any of the articles enumerated in section 4191 of the Code, since their primary function is only to imprint magnetic characters on checks for purposes of sorting them at a later stage of processing. Accordingly, separate sales of these machines by the manufacturer thereof are not subject to the tax imposed by section 4191 of the Code. However, where such machines are sold on or in connection with, or with the sale of, a taxable machine by the manufacturer of the taxable machine for use therewith, the nontaxable machines are considered to be parts or accessories for the taxable machine and are, therefore, includible in the tax base.