Rev. Rul. 58-283

The Internal Revenue Service has been requested to explain the retailers excise tax consequences of selling installment sale contracts as contrasted to collecting those accounts through collection agencies.

Articles subject to the retailers excise tax are sold by a retail dealer under contracts which provide that the price shall be paid by installments and that title to the articles so sold shall remain in the dealer until all installments are paid. Thereafter, the retailer may (1) collect the installment payments himself, (2) sell the accounts, usually at a discount, to a third party, or (3) turn the accounts over to an agency for collection under a percentage-fee arrangement. The excise tax consequences will vary, depending upon the way in which the retailer chooses to handle the accounts.

Sections 4001, 4011, 4021, 4031 of the Internal Revenue Code of 1954 impose upon certain articles when sold at retail a tax based on the price for which sold. Section 4053 of the Code provides, in part, that, in the case of a contract for the sale of an article wherein it is provided that the price shall be paid by installments and title to the article sold does not pass until a future date, there shall be paid upon each payment with respect to the article that portion of the total tax which is proportionate to the portion of the total amount to be paid represented by such payment.

Section 320.4 of Regulations 51, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides, in part, that in general the retailers excise tax attaches when the title to the article sold passes from the retailer to the purchaser. Section 4053 of the Code is in the nature of a relief provision applicable only in certain specified situations. While it does not affect the general rule that liability for the tax attaches when the sale of the article is made, its effect is to postpone the time for payment of the tax until such time as installments are received by the retailer from his vendee. The applicability of the section is contingent, however, upon the continued existence of the conditions which brought it into play in the first instance. Thus, so long as the retailer continues to receive the payment of the purchase price periodically in installments under the contract, he is liable for a proportionate tax based upon the installments received.

Therefore, it is held that if the retailer sells the accounts and receives payment therefor, either in whole or in part, the relief provided in section 4053 of the Code ceases to be effective. The retailer may no longer postpone payment of the balance of the tax due based upon the entire amount outstanding in the accounts. The tax is then subject to payment for the quarter in which the accounts were sold.

It is further held that, where the retailer elects to turn the accounts over to an agency for collection under a percentage-fee arrangement, such a situation does not constitute a sale of the accounts. Accordingly, under section 4053 of the Code, the retailer is liable for tax on the amounts collected from his vendees by the agency on his behalf at the time collections are effected. The tax is based upon the gross amounts collected from the retailer's vendees, with no exclusion from the tax base for any fees or commissions paid to, or retained by, the agency. See Revenue Ruling 56-412, C.B. 1956-2, 951, which holds that an amount retained by a collection agency as a charge for collecting for a retailer the balance due on credit sales does not constitute a bona fide discount, rebate, or allowance within the meaning of section 6416 of the Code.