Rev. Rul. 59-287

The Internal Revenue Service has been asked to rule on the question of the application of retailers excise taxes on jewelry, luggage, etc., imposed by sections 4001, 4011, 4021, and 4031 of the Internal Revenue Code of 1954 to sales of taxable articles, by concerns engaged in both wholesale and retail activities, for use or disposition by their customers as awards, premiums, prizes, advertising media, or for similar purposes, referred to herein as `Gellman-type sales.'

In Revenue Ruling 58-125, C.B. 1958-1, 561, the Service announced that it would recognize the decisions in the cases of Nathan Gellman, et al. v. United States , 235 Fed.(2d) 87 (CCA 8, 1956), and Torti v. United States , 249 Fed.(2d) 623 (CCA 7, 1957), as precedents in the disposition of other cases involving similar factual situations. Thus, the retailers excise taxes would not apply where the circumstances are similar to those present in the cited court decisions, that is, Gellman-type sales made by wholesalers.

In Technical Information Release 112 /2/, dated November 25, 1958, the Service further announced that sales of the specified type made by retailers are subject to the retailers excise taxes. The effect of these two interpretations was to make it clear that sales by retail dealers to business concerns, organizations, and others for use or disposition by them as advertising media, awards, premiums, and prizes, are subject to tax while similar sales made by wholesalers are not.

These holdings are in conformity with Service position that under the Gellman and Torti decisions, the application of the retailers excise tax to the types of sales there involved is not to be determined solely by reference to the particular sale without regard to the nature of the seller's business; that to qualify as wholesale sales not subject to the retailers excise tax under those decisions, the Gellman-type sales must be made as a part of or in the course of a regularly established wholesale business.

The Service has given consideration to the application of the retailers excise taxes in the case of Gellman-type sales by concerns engaged in carrying on both a business of selling at wholesale and a business of selling at retail. As to such concerns, it is the position of the Service that, where it can be established that the taxpayer is carrying on a separately identifiable and clearly recognizable wholesale activity as a trade or business, Gellman-type sales made as a part of the wholesale activity will not be subject to the retailers excise taxes. The determination as to whether the taxpayer is carrying on a separately identifiable distinct wholesale activity is essentially a question of fact to be determined upon the basis of all pertinent factors.

In making such a determination, consideration will be given to such factors as: whether the concern claims to be and is recognized by the trade and the public as being engaged in a wholesale business as well as a retail business; the extent and character of each phase of the business including, for example, the extent and character of the measures taken to promote and carry on the respective activities, i.e., advertising, catalogues, personnel, etc., devoted to each, and whether employees are exclusively assigned to one or the other of these activities; and whether, considered in the entirety, the wholesale activity is such as to constitute and be recognizable as a separate and distinct business of the concern. These factors are not all inclusive nor is any one of them determinative but the business of the concern must be viewed as a whole.

Manufacturers, wholesalers, distributors, and jobbers engaged exclusively in making Gellman-type sales in conformity with general wholesale practices are generally recognized as carrying on a regularly established wholesale activity. In the case of manufacturers, wholesalers, distributors and jobbers who are also engaged in selling at retail, the taxpayer must establish that the Gellman-type sales are made (1) as a part of its regularly established wholesale activity, or (2) in the course of a separately indentifiable wholesale trade or business which meets the general criteria outlined above.

The following examples and conclusions are illustrative of the general rules stated above.

Example (1). X company is a manufacturer of rings, pins, trophies, medals, leather novelties, etc., which it sells at retail. These retail sales constitute the principal portion of the total dollar volume of X's business. In addition, X company conducts a wholesale business through a separate division within the company structure. The wholesale or commercial division has its own executive personnel, billing, order and sales department, catalogue, and price list. The invoices, statements, accounts, and records of the division relate only to its transactions.

Under the circumstances X company is carrying on a wholesale activity through a division identifiable as a separate and distinct business of the concern. Accordingly, Gellman-type sales by the wholesale division in the course of its business will not be subject to the retailers excise taxes.

Example (2). Y company is a retailer engaged in the business of selling jewelry and related items. Y will, on occasion, make sales of taxable articles to business and industrial firms, charitable, fraternal, service organizations, etc, on both a recurring and non-recurring basis, for use by these customers as advertising media, awards, premiums and prizes at prices representing varying discounts from established retail list prices. These Gellman-type sales are made by Y in the normal course of the conduct of his business as a retailer.

In such a case, Y's Gellman-type sales are not made under circumstances and in a manner which can be considered as establishing that they are made in the course of a regularly conducted wholesale business carried on in such a way as to constitute a business separate and distinct from Y's retail business. Accordingly, such sales, as well as all other sales of taxable articles by Y , are subject to the retailers excise taxes.

¹ Based on Technical Information Release 170, dated August 18, 1959.

² TIR 112 was made the subject of an announcement which appeared in I.R.B. 1958-51, 60.