Internal Revenue Service TaxLinks.com sm Rev. Rul. 63-86 1963-1 C.B. 252 IRS Headnote The exemption from the manufacturers excise taxes, provided by section 4221(a)(5) of the Internal Revenue Code of 1954, does not apply to sales of taxable articles by manufacturers to a cooperative organization which does not come within the meaning of the term `nonprofit educational organization.' However, under the provisions of section 6416(b)(2)(D) of the Code, a manufacturer may claim a credit or refund of the tax paid on his sale of those articles which are resold by the cooperative to a member institution which qualifies as a `nonprofit educational organization.' Full Text Rev. Rul. 63-86 Advice has been requested whether sales of taxable articles by manufacturers to a cooperative organization described below come within the scope of the exemption from the manufacturers excise taxes provided by section 4221(a)(5) of the Internal Revenue Code of 1954 with respect to sales to `nonprofit educational organizations.' The organization is a pool-buying cooperative whose member stockholders include colleges, universities, and preparatory schools located throughout the United States. The purpose of the cooperative is to purchase articles of merchandise for delivery to these various institutions which, as members of the cooperative, are its only customers. The cooperative is governed by a board of directors, elected by the member institutions. The cooperative works closely with its member institutions in order to ascertain their needs and to determine what merchandise is in common use or in demand among the institutions. The cooperative negotiates contracts with various manufacturers for the purchase of merchandise, and, after it has made such arrangements, the cooperative furnishes the member institutions with contract sheets listing the products, the manufacturers, prices, specifications, shipping data, cash terms, and other information. When one of the member institutions wishes to purchase merchandise, it sends a purchase order to the cooperative. The cooperative orders the merchandise from the manufacturer, who ships the merchandise directly to the institution. The manufacturer sends the invoice to the cooperative, which immediately pays the manufacturer for the merchandise. The cooperative then bills the institution for the merchandise at cost plus a small service charge to cover operational expenses. At the end of each fiscal year, any excess of the service charges not required for operating expenses is refunded to the member institutions in proportion to their participation. The majority of the member institutions individually qualify as `nonprofit educational organizations' for purposes of the exemption from the manufacturers excise taxes provided by section 4221(a)(5) of the Code. Specifically, the question is whether sales of taxable articles by the manufacturers to the cooperative for delivery to these member institutions are considered to be sales to a `nonprofit educational organization' for purposes of the exemption from the manufacturers excise taxes. Section 4221(a)(5) of the Code provides that, under regulations prescribed by the Secretary of the Treasury or his delegate, no manufacturers excise taxes shall be imposed with respect to the sale of articles to a `nonprofit educational organization' for its exclusive use. Under the provisions of section 4221(d)(5) of the Code, the term `nonprofit educational organization' means an educational organization which is exempt from income tax under section 501(a) of the Code and which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are carried on. A cooperative organization which purchases and resells articles to its member institutions in the manner described in the instant case does not come within the scope of Revenue Ruling 63-15, page 189, which relates to nonprofit associations which have been created and are operated exclusively to carry out various activities of their member organizations, each of which comes within the scope of the term `nonprofit educational organization.' Furthermore, there is no provision of law which permits a manufacturer to sell taxable articles on a tax-exempt basis to dealers, distributors, or other persons, such as the cooperative organization in this case, for resale to `nonprofit educational organizations.' Accordingly, it is held that sales of taxable articles by the manufacturers to the cooperative do not come within the scope of the exemption from the manufacturers excise taxes provided by section 4221(a)(5) of the Code, even though the articles are resold by the cooperative to those member institutions which qualify as `nonprofit educational organizations.' However, under the provisions of section 6416(b)(2)(D) of the Code, a manufacturer may claim a credit or refund of the tax paid on his sale of taxable articles if such articles are sold by any person to a `nonprofit educational organization' for its exclusive use. Accordingly, in the instant case, a manufacturer may claim a credit or refund of the tax paid on his sale of taxable articles to the cooperative if those articles are resold by the cooperative to a member institution which qualifies as a `nonprofit educational organization.' This claim must show that the manufacturer has complied with the provisions of section 6416(a) of the Code and that the cooperative has obtained the required exemption certificate establishing that the articles have been resold by the cooperative to a `nonprofit educational organization' for its exclusive use. Form 2670, Credit or Refund-Exemption Certificate for Use by a Nonprofit Educational Organization, has been prepared for this purpose and may be obtained from any District Director of Internal Revenue. Whether the exemption from manufacturers excise taxes relating to `nonprofit educational organizations' applies to sales of articles to an association composed entirely of nonprofit educational organizations. See Rev. Rul. 63-15, page 189. |