Rev. Rul. 62-40

Advice has been requested as to the deductibility, for Federal income tax purposes, of the tax imposed by the State of California on cigarettes under the California Cigarette Tax Law as amended in 1961.

The California Cigarette Tax Law is found in Part 13 of Division 2 of West's Annotated California Revenue and Taxation Code, Enacted Statutes 1959, Chapter 1040, effective July 1, 1959.

Revenue Ruling 60-239, C.B. 1960-2, 61, holds, in part, that the cigarette tax imposed by the California Cigarette Tax Law of 1959 is deductible under section 164(a) of the Internal Revenue Code of 1954 by the distributor who affixes the stamps, or imprints such stamps by means of a meter stamping device, or otherwise makes payment to the State Board of Equalization, and that since the tax is not a retail sales tax, it is not deductible by the purchaser of the cigarettes under the provisions of section 164(c) of the Code.

Section 4 of Assembly Bill No. 818, Enacted Statutes 1961, Chapter 2193, effective September 15, 1961, added section 30016 to Chapter 1 of Part 13 of the California Revenue and Taxation Code. Section 30016 provides as follows:

All taxes paid pursuant to the provisions of this part shall be conclusively presumed to be direct taxes on the retail consumer precollected for the purpose of convenience and facility only. When the tax is paid by any other person, such payment shall be considered as an advance payment and shall be added to the price of the cigarettes and recovered from the ultimate consumer or user. Any person selling cigarettes at retail shall state or separately display in the licensed premises a notice of the amount of the tax included in the selling price and charged or payable pursuant to this part. The provisions of this section shall in no way effect the method of collection of such tax as provided by this part.

Section 5 of Assembly Bill No. 818, supra , reads as follows:

The Legislature hereby declares that its intent in enacting Section 4 of this chapter is to enable those who are subject to the taxes imposed by the federal tax laws to avail themselves of the deductions respecting state and local taxes specified in section 164 of the Federal Internal Revenue Code of 1954 in computing their taxable income.

Section 164(a) of the Code provides, in effect, that in computing taxable income there shall be allowed as a deduction taxes paid or accrued within the taxable year, with certain exceptions not here material.

Section 1.164-1 of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed.

In view of the intent of the California Legislature to impose the State cigarette tax upon the consumer, it is held that such tax on cigarettes is, on and after September 15, 1961, the effective date of the amendment, deductible under section 164(a) of the Code in computing taxable income by the purchaser or consumer who pays the tax to the retailer. In the case of an individual who elects to use the standard deduction or the optional tax table, no deduction is allowable unless the tax is attributable to a trade or business carried on by him. If the tax is attributable to a trade or business carried on by the individual, the amount of the tax is deductible from gross income in computing adjusted gross income. See section 62 of the Code.

On and after September 15, 1961, no deduction is allowable to the distributor or retailer paying the cigarette tax to the State Board of Equalization and no portion of the price paid by the consumer to the distributor or retailer for cigarettes which represents the California State tax is includible in the gross income of such distributor or retailer.

Revenue Ruling 60-239, C.B. 1960-2, 61, insofar it holds that the California cigarette tax is deductible by the distributor or retailer making payment to the State Board of Equalization, is not applicable to the tax on cigarettes imposed by the State of California on or after September 15, 1961.