Rev. Rul. 59-305

Advice has been requested concerning the applicability of the tax on the transportation of property to payments made within the United States for shipments from foreign countries to points within the continental United States, where such shipments are routed so as to enter, leave, and then re-enter the United States before reaching the consignee.

The following examples illustrate this situation:

Example (1). A shipment of freight originating in a city in Western Canada and destined for a New England town is routed so that it enters the United States in North Dakota, goes through North Dakota, Minnesota, Wisconsin, and Michigan and then crosses into Ontario, Canada, continues through Canada to the Vermont border, and then re-enters the United States and proceeds to its destination.

Example (2). An airplane flies freight from the Orient to the United States. The plane stops enroute in Hawaii and from there continues to the United States where it lands at a west coast city. The freight is either delivered to the consignee at the airport or transferred to a domestic carrier for delivery to the final destination in the United States.

Example (3). Shipments by water from Africa destined for Los Angeles are unloaded at New Orleans. They are subsequently loaded on another vessel and carried via the Panama Canal to Los Angeles. The shipment from New Orleans to Los Angeles takes place outside of United States waters. Transshipment at New Orleans is necessary because there is no direct boat service from Africa to Los Angeles.

Section 4271(a) of the Internal Revenue Code of 1954, prior to its repeal by Public Law 85-475, 72 Stat. 259, C.B. 1958-3, 73, imposed a tax upon the amount paid for the transportation of property by rail, motor vehicle, water, or air from one point in the United States to another. With respect to transactions prior to the repeal of the tax, section 4271(c) of the Code provides that in the case of property transported from a point without the United States to a point within the United States, the tax shall apply to the amount paid within the United States for that part of the transportation which takes place within the United States.

Section 143.13 of Regulations 113, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides, in part, that where the amount paid in the United States covers the entire movement of property from a point of origin in a foreign country to an inland point in the United States, the tax will apply to the pro rata part of such payment which is applicable to transportation within the United States. However, in the case of shipments of foreign origin arriving by water, no tax will attach to transportation or services performed prior to the unlading of property at the port of first arrival. Section 143.30 of the regulations provides, in part, that the term `United States' means the States, the Territories of Alaska and Hawaii, and the District of Columbia.

Accordingly, in example (1) above, it is held that the tax applies only to that part of the payment applicable to transportation within the United States, i.e., the transportation (1) from the border point in North Dakota, where the shipment first entered the United States, to the border point in Ontario, Canada, where it re-entered Canada, and (2) from the border point in Vermont, where the shipment reentered the United States, to its final destination in the United States. Revenue Ruling 56-57, C.B. 1956-1, 525, establishes the method to be used in determining the part of the transportation charges paid for transportation within the United States.

In example (2), it is held that the tax applies to the amount paid for transportation (a) within Hawaii (since Hawaii is considered to be a part of the United States for purposes of the tax on the transportation of property) between the points where the route enters and leaves the three-mile limit off the coast of Hawaii, and (b) within the continental United States from the point where the route enters the three-mile limit off the coast of the continental United States to the point of final destination. The tax may be computed on that proportion of the total amount paid which the mileage of the taxable portion of the transportation bears to the mileage of the entire transportation movement.

In the case of shipments of foreign origin arriving by water, the tax does not apply to any part of the amount paid for transportation or services performed prior to the unlading of property at the port of first arrival. In the case of the water shipment from Africa to Los Angeles described in example (3), if the transportation from New Orleans to Los Angeles had been performed within the United States, New Orleans would be the port of first arrival at which the property is unloaded, within the meaning of the regulations, and the tax would properly apply to the amount paid for transportation between the two United States ports. However, since it was necessary to transship the property at New Orleans and carry it by water via the Panama Canal to Los Angeles, which under the specific circumstances is regarded as the port of first arrival within the meaning of the regulations, the transportation from New Orleans to Los Angeles does not constitute transportation which takes place in the United States within the meaning of section 4271(c) of the Code. Therefore, it is held that the tax on the transportation of property does not apply to the amount paid for transportation of the cargo from Africa to Los Angeles.