Rev. Rul. 61-202

Advice has been requested concerning the applicability of the manufacturers excise tax on certain electric, gas, and oil appliances to sales by the manufacturer of the oil-fired water heaters described below.

(1) An oil water heater of the pressure gun type with a storage capacity of 30 gallons and a recovery rate of 120 gallons per hour . This oil water heater consists of a heavy steel glass-lined cylindrical tank, a pressure type oil burner, and a refractory combustion chamber. The overall measurements of the heater are approximately 58 inches in height and 22 inches in diameter. It has a storage capacity of 30 gallons of water, a recovery rate of 120 gallons per hour, and an input rating of 140,000 B.T.U.'s per hour.

(2) An oil water heater of the pressure gun type with a storage capacity of 70 gallons and a recovery rate of 163 gallons per hour . This oil water heater consists of a heavy steel glass-lined cylindrical tank, a pressure type oil burner, and a refractory combustion chamber. The overall measurements of the heater are approximately 72 inches in height and 26 inches in diameter. It has a storage capacity of 70 gallons of water, a recovery rate of 163 gallons per hour, and an input rating of 190,000 B.T.U.'s per hour.

Prior to November 1, 1951, the statute imposed a manufacturers excise tax upon all electric, gas, or oil water heaters. However, the Revenue Act of 1951 limited the applicability of the tax to those water heaters `of the household type.'

This provision is now contained in section 4121 of the Internal Revenue Code of 1954, which imposes a tax upon the sale by the manufacturer, producer, or importer of numerous `articles of the household type,' including `electric, gas, or oil water heaters.'

In accordance with section 48.4121-2(a) of the Manufacturers and Retailers Excise Tax Regulations, the term `articles of the household type' includes all articles enumerated in section 4121 which have an actual, practical, commercial fitness, or are specifically designed and constructed, for household use.

In general, there are two basic types of oil-fired water heaters, which are distinguished by the different types of burners which are incorporated therein. One type has an `atmospheric pot' type burner, and the other has a `pressure gun' type burner.

In the atmospheric pot type heaters, gravity causes the oil to flow to the burner. In the pressure gun type heaters the oil is forced into the combustion chamber in an almost vaporized condition. The pressure gun type heaters produce much greater heat than do the atmospheric pot type heaters. Because of the differences in design, the pressure gun type heaters will heat water at a faster rate and, therefore, will produce greater quantities of hot water.

Since the amendment of the statute in 1951, it has been generally recognized that atmospheric pot type oil water heaters are of the household type. Therefore, they have been held to be subject to the manufacturers excise tax when sold by the manufacturer, producer, or importer.

On the other hand, at the time of the statutory amendment there was practically no household use of the pressure gun type heaters because their greater heating capacity was considerably beyond the household demands for hot water. Therefore, these heaters have generally been considered to be not of the household type and, accordingly, not subject to the manufacturers excise tax.

In recent years, however, there has been a considerable increase in the household consumption of hot water. A recent survey of the industry indicates that, as a result of this increased consumption, there has been a trend toward the manufacture and sale of oil water heaters of the pressure gun type specifically for household use . Consequently, it now is recognized by the industry, as well as by the Internal Revenue Service, that some of the pressure gun type heaters have an actual, practical, commercial fitness for household use or are specifically designed and constructed for household use.

It has been found that the two factors which primarily distinguish between those heaters of the household type and those not of the household type are (i) the water storage capacity and (ii) the recovery rate , that is, the number of gallons of water in which the heaters will increase the temperature a designated number of degrees in a specified time. In order to promote uniformity in the application of the tax, it seems advisable to establish an administrative test of taxability based upon these two factors.

Accordingly, in view of the current situation in the industry, oil water heaters of the pressure gun type which have either (i) a storage capacity of 50 gallons or less or (ii) a recovery rate of 150 gallons or less per hour based on a 100-degree Fahrenheit raise are considered to be of the household type, unless by reason of their design and construction they are primarily adapted for other than household use.

In accordance with these criteria, the heater described in (1) above is subject to the manufacturers excise tax imposed by section 4121 of the Code, and the heater described in (2) above is not subject to the tax imposed by that section.

Under the authority contained in section 7805(b) of the Code, the criteria established by this Revenue Ruling will be applied only to sales made by manufacturers, producers, or importers on and after January 1, 1962.