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Revenue Ruling 69-394

1969-2 C.B. 206

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Headnote

Methods of determining the manufacturers tax base where taxable and nontaxable articles are sold as a unit at a single price.

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ISSUE

The Internal Revenue Service has been asked how to compute the tax due on the sale of articles subject to ad valorem manufacturers excise taxes, imposed under chapter 32 of the Internal Revenue Code of 1954, in situations where such articles are sold in combination with nontaxable articles.

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FACTS

Manufacturers frequently sell for a single price a combination consisting of a taxable article and a nontaxable article. In most cases, the manufacturer also sells the two articles separately and he thus has a separate established price for each. When he sells the two articles together, the price for the combination is normally less than the sum of the established separate prices. However, some manufacturers who sell such combinations never sell both articles separately and thus have not established a separate selling price for each article. The various situations may be illustrated by the examples set forth below, each involving taxable articles with respect to which the tax rate is ten percent. It is assumed in the examples given that the combination sale prices and their related separate selling prices are wholesale prices, and that all such prices are prices at the same level of distribution. Situation 1. A manufacturer wishes to sell a taxable article of his manufacture and a nontaxable article (which he either manufactured or purchased) in combination for $180 plus an amount equal to the tax due on the taxable portion of the combination. The manufacturer normally makes separate sales of the articles at established prices of$160 (tax excluded) for the taxable article and $40 for the nontaxable article. Situation 2. A manufacturer wishes to sell a taxable article of his manufacture and a nontaxable article (which he either manufactured or purchased) in combination for $96 plus an amount equal to the tax due on the taxable portion of the combination. The manufacturer does not have established prices for separate sales of both articles. However, he has established that the actual costs of producing the articles (determined in accordance with generally accepted accounting principles) were$45 for the taxable article and $15 for the nontaxable article. (If the nontaxable article was purchased, the$15 represents his purchase price.) Situation 3. A manufacturer wishes to sell a taxable article and a nontaxable article in combination for $208 including an amount equal to the tax due on the taxable portion of the combination. The manufacturer normally makes separate sales of the articles at established prices of$104 (tax excluded) for the taxable article and $156 for the nontaxable article.

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LAW AND ANALYSIS

Various sections of chapter 32 of the Code impose upon certain articles a tax amounting to a specified percent of the price for which the articles are sold by the manufacturer, producer, or importer thereof. In determining the price for which a taxable article is sold, under the definition provided in section 4216(a) of the Code, the amount of the tax is excluded, whether or not stated as a separate charge. For purposes of determining the price for which the taxable article is sold under the circumstances described above, the single price for which the combination of two articles is sold must be apportioned between the taxable article and the nontaxable article. The tax applies only to that portion of the combination sale price properly attributable to the taxable article. If the manufacturer regularly makes separate sales of both articles at established prices, it is held that the taxable portion of the combination is to be determined by applying to the manufacturer’s tax-excluded sale price of the combination the ratio which the manufacturer’s separate sale price of the taxable article (tax excluded) bears to the sum of the separate sale prices of the taxable article (tax excluded) and the nontaxable article. Thus, in situation 1, the combination price of $180 should be multiplied by a fraction determined by dividing$160 by $200 (4/5 or .8). The resulting$144 is the taxable portion of the combination sale price. The tax, computed at the rate of ten percent, is $14.40, and the tax-included price of the combination is$194.40. If the manufacturer does not regularly make separate sales of both articles and therefore has no established separate prices, it is held that the taxable portion of the tax-excluded sale price of the combination is to be determined on the basis of the ratio that the actual cost of producing the taxable article bears to the sum of the actual costs of producing both the taxable and nontaxable articles. Accordingly, in situation 2, the combination price of $96 should be multiplied by a fraction determined by dividing$45 by $60 (3/4 or .75). The resulting$72 is the taxable portion of the combination sale price. The tax is $7.20 and the tax-included price of the combination is$103.20. From the foregoing, it will be noted that the tax-included price of each combination is made up of three distinct segments, illustrated as follows: t + n + rt = S “t” represents the portion of the tax-excluded price allocated to the taxable article (determined as explained above). “n” represents the portion of the price allocated to the nontaxable article. (Thus, “t plus n” represents the tax-excluded price of the combination.) “rt” represents the tax (applicable tax rate, “r,” multiplied by “t”). “S” represents the tax-included price of the combination. (Dollar amounts, percentages, or fractions, as appropriate, may be substituted for the symbols in applying the foregoing equation.) If, as in situation 3, the tax-included price of the combination is known (rather than the tax-excluded price), the amount of the tax may be determined through use of a formula, stated and explained below. S --------- = The tax-excluded price of the combination. 1.00 + rt In situation 3, the fractional part of the unknown tax-excluded single price of the combination that is represented by “t” is determined by dividing $104 by$260 (the sum of the separate prices). The result (.4) is multiplied by the tax rate (10%) to determine the fraction (.04) representing the tax. Then, $208 (the tax-included price of the combination, or "S") is divided by 1.04 (1.00 plus .04), resulting in$200, the tax-excluded price of the combination. The amount of the tax due on the combination sale is $8 ($208 minus $200).