Rev. Rul. 75-558

Advice has been requested whether taxpayers may deduct a "renters' tax" imposed in Prince George's County, Maryland, either as a real property tax under the provisions of section 164(a)(1) of the Internal Revenue Code of 1954 or as a local general sales tax under section 164(a)(4).

Chapter 897 of the Laws of Maryland 1975, Section 75-4 of Article 17 Public Local Laws of Maryland, authorizes the governing body of Prince George's County to impose a local multi-family occupancy tax by legislative act on certain multi-family dwelling units. Pursuant to that authorization, Sections 75-4 through 75-8 were added to Subtitle 75, Taxes, Public Local Laws of Prince George's County, to impose, with certain exceptions, such a tax at a rate of two percent on the rent paid for the occupancy of any rental dwelling unit. The tenant is required to remit the tax to the landlord and the landlord, in turn, is required to remit the tax to the County Executive. Section 75-8 of Subtitle 75 provides that any landlord who shall willfully fail to remit the "renters' tax" collected or any tenant who shall willfully refuse to remit the tax shall be guilty of a misdemeanor punishable by up to one thousand dollars fine and/or six months in jail.

Prince George's County does not impose a local general sales tax on sales or services.

Section 164(a)(1) of the Code provides the general rule that state, local, and foreign real property taxes shall be allowed as a deduction for the taxable year within which paid or accrued.

Section 1.164-1(a) of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed.

Section 1.164-3(b) of the regulations provides that the term "real property taxes" means taxes imposed on interests in real property and levied for the general public welfare, but it does not include taxes assessed against local benefits. Section 1.164-4(a) provides, in part, that the real property taxes deductible are those levied for the general public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction.

Section 164(a)(4) of the Code allows as a deduction state and local general sales taxes paid or accrued within the taxable year.

Section 164(b)(2)(A) of the Code defines the term "general sales tax" as meaning a tax imposed at one rate in respect of the sale at retail of a broad range of classes of items. Section 164(b)(2)(C) provides that, except in the case of a lower rate of tax applicable in respect of an item described in section 164(b)(2)(B), no deduction shall be allowed under section 164 for any general sales tax imposed in respect of an item at a rate other than the general rate of tax. The items described in section 164(b)(2)(B) are food, clothing, medical supplies, and motor vehicles.

In Rev. Rul. 73-600, 1973-2 C.B. 47, the facts indicate that a "rates" tax was assessed by the local United Kingdom tax authorities against a United States citizen occupying leased living quarters in the United Kingdom. The "rates" tax liability was determined by applying the local tax rate to the rateable value of the property that was computed on the basis of a presumed reasonable annual rental value that a tenant would pay and a landlord would accept. The Revenue Ruling holds that the United Kingdom "rates" tax may not be deducted as a foreign real property tax under section 164(a)(1) of the Code since it is not a tax on or against real property or on interests in real property within the scope of section 164(a)(1), but is rather a tax on the occupation or use of real property for which there is only personal liability.

Rev. Rul. 73-600 received judicial approval in the case of Maynard and Norma Waxenberg, 62 T.C. 594 (1974), which considered whether the United Kingdom rates tax is a real property tax deductible under section 164(a)(1) of the Code. In concluding that the tax is not a deductible real property tax, the United States Tax Court drew a distinction between a tax imposed upon property (a property tax) and a tax imposed upon some, but not all, of the incidents of ownership of property (an excise tax). As the rates tax is imposed upon the occupancy of property, which is only one of the incidents of ownership of the property, and is measured by the rental value of the property, rather than by the underlying value of the property itself, the court found that the rates tax is not a deductible real property tax.

Since the Prince George's County "renters' tax" is a tax imposed on the rents paid for the occupancy of property for which there is only personal liability similar to the United Kingdom "rates" tax considered in Rev. Rul. 73-600 and Maynard and Norma Waxenberg, the "renters' tax" is not a state, local, or foreign real property tax described in section 164(a)(1) of the Code. Neither is the "renters' tax" a state or local general sales tax as described in section 164(a)(4) since such tax is not imposed by the state, nor is such tax imposed by Prince George's County on a broad range of classes of items.

Accordingly, the Prince George's County "renters' tax" is not deductible by taxpayers as a real property tax under the provisions of section 164(a)(1) of the Code or as a local general sales tax under section 164(a)(4).