Internal Revenue Service
Revenue Ruling

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Rev. Rul. 68-509

1968-2 C.B. 508

IRS Headnote

Whether certain repackaging, transportation, delivery, and other charges are includible in the price for which an article is sold for purposes of ad valorem manufacturers tax; G.C.M. 21114 superseded.

Full Text

Rev. Rul. 68-509 /1/

The purpose of this Revenue Ruling is to restate under the current statute and regulations the conclusions set forth in G.C.M. 21114, C.B. 1939-1, (Part 1), 351. In G.C.M. 21114, several questions are answered on the subject of whether charges for transportation, delivery, insurance, installation, etc., are includible in the price for which an article is sold, for purposes of the ad valorem manufacturers excise taxes currently imposed under chapter 32 of the Internal Revenue Code of 1954.

The ad valorem manufacturers excise taxes imposed under chapter 32 of the Code are imposed on manufacturers', producers', or importers' sales of specified articles on the basis of `the price for which sold.'

Section 4216(a) of the Code provides that for the purpose of determining the price for which an article is sold, there shall be included any charge for coverings and containers of whatever nature, and any charge incident to placing the article in condition packed ready for shipment, but there shall be excluded the amount of tax imposed under chapter 32 of the Code, whether or not stated as a separate charge. The section also provides that a transportation, delivery, insurance, installation, or other charge (not required by the foregoing sentence to be included) shall be excluded from the price only if the amount thereof is established to the satisfaction of the Secretary of the Treasury or his delegate .

Section 4216(b)(1) of the Code provides that if an article is sold at retail, sold on consignment, or sold (otherwise than through an arm's length transaction) at less than the fair market price, the tax imposed under chapter 32 of the Code shall (if based on the price for which the article is sold) be computed on the price for which such articles are sold, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Secretary or his delegate. This section also provides that in the case of an article sold at retail, the computation under the preceding sentence shall be on whichever of the following prices is the lower, (a) the price for which such article is sold, or (b) the highest price for which such articles are sold to wholesale distributors, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Secretary or his delegate.

The questions presented and the answers thereto are as follows:

Question (1) .-A manufacturer offers articles for sale at a price which includes packaging in case lots. When the articles are manufactured they are packed and stored in case lots. If a customer wishes to buy the articles in less than a case lot they must be repackaged and an additional charge is made for this service. Is the additional charge for repackaging includible in the price for which the articles are sold?

Answer .-Section 4216(a) of the Code states that the price for which an article is sold shall include any charge for coverings and containers of whatever nature, and any charge incident to placing the article in condition packed ready for shipment. An additional charge made for repacking is includible in the price for which an article is sold even though the articles were packed in condition for shipment in case lots prior to being repacked. The term `packed ready for shipment', as used in section 4216(a), means the condition that exists when an article taxable under the law is enclosed in a covering or container so as to make it ready for delivery to a particular customer in accordance with the terms of a sale made by the manufacturer, producer, or importer.

Question (2) .-A manufacturer makes no sales involving delivery directly from the factory to the customer. All deliveries are made from branch warehouses in various cities. The price to the customer is the same at all the warehouses. Transportation expenses are incurred in shipping the articles from the factory to the various warehouses. In determining the price for which the articles are sold, may the manufacturer exclude from the sale price an amount representing the freight charges incurred in shipping his products from the factory to the warehouse prior to sale?

Answer .-With respect to the exclusion of delivery charges, only charges for expenses incurred in connection with the actual delivery of articles to a customer pursuant to a sale may be excluded from the sale price. Freight charges incurred in moving goods from a factory to a warehouse before a sale is made are expenses incurred in placing the article in condition for delivery to a customer. Accordingly, charges for shipping products from a factory to a warehouse before a sale is made are not excludible when determining the price for which an article is sold.

Question (3) .-A manufacturer maintains stocks of articles in warehouses in various cities. If he has a surplus stock of the articles in one warehouse, he reships them to another warehouse to increase a depleted stock. May charges for the expense incurred in connection with these transshipments between warehouses prior to sale be excluded in determining the price for which the articles are sold?

Answer .-For the reasons indicated in the answer to question (2), freight charges incurred by a manufacturer in reshipping goods from one of his warehouses to another before a sale of the articles is made are includible in the price for which the articles are sold.

Question (4) .-A manufacturer maintains a warehouse in the city where his factory is located, but the warehouse is some distance from the factory. May the expense of delivery from the factory to the warehouse be excluded if (a) an outside carrier is hired for the purpose, or (b) the manufacturer uses his own trucks for this purpose?

Answer .-It is immaterial whether the described expense of transfer is incurred as a charge made by a common carrier or whether the expense arises from the use of trucks owned by the manufacturer. If the delivery is made prior to sale and is solely for the benefit or convenience of the manufacturer, charges based on this expense may not be excluded from the price for which the articles are later sold. However, if the delivery is made subsequent to entering into a sales contract, and the shipment is made as a step in completing delivery to the customer, a charge for such transportation or delivery may be excluded from the price for which the articles are sold.

Question (5) .-A manufacturer receives an order for articles from a customer in another city. His warehouse near the customer does not have enough of the articles on hand to fill the order. Accordingly, a portion of the articles ordered are shipped from the factory and the remainder from the warehouse. What freight or transportation charges may be excluded in determining the price for which the articles are sold?

Answer .-The freight or transportation charges to be excluded from the sale price in the example given are only those that are actually incurred in the shipment of the goods to the customer, irrespective of whether the shipment is made from the factory, from the warehouse, or in part from both.

Question (6) .-In a situation where a charge for transportation cost from factory to warehouse may be excluded from the sale price, does the law permit exclusion of charges for other costs incurred at the warehouse, such as insurance, handling and other expenses?

Answer .-The items of `transportation, delivery, insurance, installation, or other charge' as used in section 4216(a) of the Code belong to the same general class of deductions. The described items of transportation, delivery, insurance, and installation have relation to events occurring after the goods leave the factory or the warehouse for delivery to the customer in connection with a sale. Accordingly, amounts representing these expenses may be excluded from the sale price. They may not be excluded, however, when incurred by the manufacturer for his own use or benefit before the goods leave the factory or the warehouse for delivery to the customer in connection with a sale. For example, the cost of insuring articles at the factory or warehouse is attributable to the manufacturer and should be reflected in the selling price.

Question (7) .-Where the Secretary or his delegate, for the purpose of computing tax, constructs the sale price of a taxpayer's product under section 4216(b)(1) of the Code, may any exclusion be allowed from such price for transportation charges or any other of the items enumerated in section 4216(a)?

Answer .-Section 4216(b)(1) of the Code and section 4216(a) are related in that any sale price constructed under section 4216(b)(1) is intended to reflect the same elements as a sale price determined under section 4216(a). Therefore, in constructing a sale price under section 4216(b)(1) of the Code, the Secretary or his delegate must necessarily take into consideration the same items that would be included or excluded under section 4216(a). Ordinarily, when the sale price under section 4216(b)(1) is constructed, the tax must be based on that price and the statute does not contemplate any further adjustments. However, in those instances where, in constructing a sale price, the Secretary or his delegate has not taken into consideration exclusions provided by section 4216(a) of the Code, or readjustments provided by section 6416(b)(1), subsequent adjustment of the sale price for these factors may be allowed. See, for example, Rev. Rul. 62-68, C.B. 1962-1, 216.

Since this Revenue Ruling restates under current law the conclusions set forth in G.C.M. 21114, C.B. 1939-1 (Part 1), 351, that G.C.M. is hereby superseded.

/1/ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.