Rev. Rul. 75-18 1975-1 C.B. 345

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Revenue Ruling 75-18

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Headnote

Bowfishing sets; taxable and nontaxable articles sold as a unit. Methods are given for determining the manufacturers excise tax on sales of bowfishing sets that include nontaxable items and items taxable under section 4161(a) and (b) of the Code at different rates, in situations where there are regular sales of the items separately at established prices, sales of sets in which not all items have established prices but the actual production costs are available, and sales of sets at prices that include tax due and the included items are normally sold separately.

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ISSUE

The Internal Revenue Service has been asked how to compute the manufacturers excise tax imposed by section 4161 of the Internal Revenue Code of 1954 on sales by manufacturers of bowfishing sets in the situations described below.

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FACTS

Manufacturers of sporting goods frequently sell taxable and nontaxable articles in sets for use in the sport of bowfishing. The taxable articles in a bowfishing set would typically include a bow, fish arrow, and bowfishing reel, and the nontaxable articles would include an armguard, shooting finger tab, fishing line, and instructional booklet. In some cases, the manufacturers also sell the articles in the sets separately and have separate established prices for them. In those cases, the selling price for the sets is normally less than the sum of the established separate prices. In other cases, manufacturers do not sell all the articles in the sets separately, and thus have no established separate selling price for each article in the set. In the following illustrative situations, the combination sale prices and their related separate selling prices are wholesale prices, and all such prices are prices at the same level of distribution. Situation 1. A manufacturer wishes to sell a bowfishing set as described above for $18 plus an amount equal to the tax due on the taxable portion of the set. The manufacturer normally makes separate sales at established prices of$12 for the bow and arrow (tax excluded), $3 for the bowfishing reel (tax excluded), and$5 for the nontaxable articles. Situation 2. A manufacturer wishes to sell a bowfishing set as described above for $25 plus an amount equal to the tax due on the taxable portion of the set. The manufacturer does not have established prices for separate sales for all the articles in the set. However, he has established that the actual costs of producing the articles (determined in accordance with generally accepted accounting principles) were$10 for the bow and arrow, $2 for the bowfishing reel, and$4 for the nontaxable articles. Situation 3. A manufacturer wishes to sell a bowfishing set as described above for $19.46, which price includes an amount equal to the tax due on the taxable portion of the set. The manufacturer normally makes separate sales of the articles in the set at established prices as set forth in situation 1.

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LAW AND ANALYSIS

Section 4161(a) of the Code imposes a tax at the rate of 10 percent on the sale by the manufacturer, producer, or importer of fishing rods, creels, reels, and artificial lures, baits, and flies. Section 4161(b) of the Code as amended effective January 1, 1975, by Pub. L. 92-558, section 201, 1972-2 C.B. 701, 702, and Pub. L. 93-313, 1974-2 C.B. 417, imposes a tax at the rate of 11 percent on the sale by the manufacturer, producer, or importer of any bow that has a draw weight of 10 pounds or more, any arrow that measures 18 inches overall or more in length, any part or accessory (other than a fishing reel) suitable for inclusion in or attachment to a taxable bow or arrow, and any quiver suitable for use with taxable arrows. For purposes of determining the price for which the taxable articles are sold under the circumstances described above, the single price for which the set of the articles is sold must be apportioned between the articles taxable at different rates and the nontaxable articles. The tax applies only to that portion of the sales price of the set properly attributable to the taxable article. When the manufacturer regularly makes separate sales of all the articles in the set at established prices, the taxable portion of the set is determined by applying to the manufacturer’s tax-excluded sale price of the set the ratio which the manufacturer’s separate sales price (tax excluded) of the articles subject to different rates of tax bears to the sum of the separate sale prices (tax excluded) of the taxable articles and the nontaxable articles. Thus, in situation 1, the set price of $18 is multiplied by the fractions determined by dividing$3 by $20 (3/20 or .15, for the reel), and dividing$12 by $20 (3/5 or .60, for the bow and arrow). The resulting$2.70 and $10.80 are the taxable portions of the set sale price allocable to the reel, and bow and arrow, respectively. The tax on the reel computed at the rate of ten percent is$.27, and the tax on the bow and arrow computed at the rate of eleven percent is $1.19. Thus, the tax-included sale price of the set is$19.46. When the manufacturer does not regularly make separate sales of all the articles in the set and therefore has no established separate prices, the taxable portion of the tax-excluded sale price of the set is determined on the basis of the ratios that the actual costs of producing the taxable articles that are subject to different rates of tax bear to the sum of the actual costs of producing the taxable and nontaxable articles. Thus, in situation 2, the set price of $25 is multiplied by the fractions determined by dividing$2 by $16 (1/8 or .125, for the reel), and dividing$10 by $16 (5/8 or .625, for the bow and arrow). The resulting$3.13 and $15.63 are the taxable portions of the set sale price allocable to the reel, and bow and arrow, respectively. The tax on the reel is$.31 and the tax on the bow and arrow is $1.72. The tax-included sale price of the set is$27.03. When, as in situation 3, the tax-included price for the set is known (rather than the tax-excluded price), the amount of the tax is determined by the use of the following formula: S tax-excluded ---------------- = price of the set. 1.00 + rtR + rtA “S” represents the tax-included sale price of the set; “r” represents the applicable tax rate; “tR” represents the portion of the tax-excluded price allocated to the reel; and “tA” represents the portion of the tax-excluded price allocated to the bow and arrow. In situation 3, the fractional parts of the unknown tax-excluded sale price of the set that are represented by tR and tA are determined by dividing $3 by$20 for the reel, and dividing $12 by$20 for the bow and arrow. The resulting .15 for the reel and .60 for the bow and arrow are multiplied by the ten and eleven percent tax rates to determine the fractions representing the tax (.015 and .066, respectively). Then $19.46 (the tax-included price of the set, or S) is divided by 1.081 (1.00 plus .015 plus .066), resulting in the tax-excluded sale price of the set,$18. The amount of the tax due on the sale of the set is $1.46 ($19.46 minus $18). To determine the portion of the tax applicable to the reel multiply the $18 by .015 (the fraction representing the reel tax) resulting in a tax of 27 cents. Using the fraction of .066 in the bow and arrow computation results in a tax of$1.19.