Rev. Rul. 59-124

Advice has been requested whether liability for the retailers excise tax is incurred by so-called `gift clubs' under the circumstances described below.

Ordinarily `gift clubs' operate in a similar manner, in that they maintain an established place of business in the United States, members are obtained through newspaper and magazine advertisements, payments described as `dues' are made on a monthly basis, and members receive a gift' that is mailed from a foreign country for each month that they are `members' in good standing. The operators of the clubs select `gifts' from samples received from foreign suppliers and execute contracts with the suppliers for the `gifts' to be mailed to members. Payment for the articles is made by the operators from `dues' received from the members.

The member deals only with the club and looks only to the club for delivery of the articles to which he has become entitled by payment of the so-called `dues.' Any adjustments in cases of dissatisfaction on the part of the members are made by the club. While the club does not physically handle the articles delivered to its members, it exercises complete domination over the articles which it directs the foreign suppliers to ship to its members.

Sections 4001, 4011, 4021, and 4031 of the Internal Revenue Code of 1954 impose a tax upon jewelry and related items, furs, toilet preparations, and luggage, handbags, etc., respectively, sold at retail. Section 320.3 of Regulations 51, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that every person who sells at retail any taxable article is liable for the tax. Section 320.1(b) provides that the phrase `every person who sells at retail' means any person engaged in the business of selling articles at retail.

Upon a consideration of all the facts, it is held that the `gift clubs' described above are engaged in the business of selling articles to a purchaser at retail within the United States. Therefore, such `gift clubs' are liable for retailers excise tax with respect to sales of articles coming within the scope of sections 4001, 4011, 4021, and 4031 of the Code. The tax is based on that portion of the `dues' which is allocable to a particular taxable article. For example, if a member receives one `gift' for each month of membership and if the `dues' are $5.00 for two months, $9.00 for four months, or $12.00 for six months, the tax base for the taxable articles received by the members, computed on a per gift per month basis, would vary from $2.50 to $2.00.