Rev. Rul. 86-18 1986-1 C.B. 324, 1986-6 I.R.B. 25.

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Revenue Ruling 86-18

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Headnote

Liability of unregistered manufacturer; sale for further manufacture. When a manufacturer that has not registered pursuant to section 4222(a) of the Code makes a sale for further manufacture pursuant to the tax-free sale provisions under section 4221(a)(1), the manufacturer remains liable for the manufacturers excise tax. The manufacturer’s vendee does not become the statutory manufacturer of the article under section 4223(a) and may file for a refund or claim a credit for any tax paid on its resale of the article.

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ISSUE

Is a manufacturer of an article subject to manufacturers excise tax under chapter 32 of the Internal Revenue Code liable for tax in the situation described below?

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FACTS

X, a manufacturer of an article subject to manufacturers excise tax under chapter 32 of the Code, sold the article for further manufacture without paying the tax thereon. X intended the sale to be tax-free pursuant to section 4221(a)(1) of the Code. All the requirements for a tax-free sale were met except that X was not registered with the Internal Revenue Service District Director as required by section 4222 and section 48.4222(a)-1 of the Manufacturers and Retailers Excise Tax Regulations. Although at the time of purchase Y, the purchaser, intended to use the article in further manufacture, Y instead resold the article and paid manufacturers excise tax on its sale pursuant to the provisions of section 4223.

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LAW AND ANALYSIS

Section 4221(a)(1) of the Code provides that, under regulations prescribed by the Secretary or his delegate, no tax shall be imposed under Chapter 32 (other than the section 4121 tax on coal) on the sale by the manufacturer of an article for use by the purchaser for use by such second purchaser in further manufacture. Section 4222(a) of the Code provides, with the exception of the transactions set forth in section 4222(b), which are not here pertinent, that section 4221 shall not apply with respect to the sale of any article unless the manufacturer, the first purchaser, and the second purchaser (if any) are all registered under this section. Registration must be made at such time, in such manner and form, and subject to such terms and conditions, as is prescribed by regulations. Section 48.4222(a)-1(b) of the regulations provides that any person who is eligible to sell or purchase articles free of a tax imposed by chapter 32 and who has not registered in accordance with the provisions of the regulations shall, prior to making a tax-free sale or purchase, file Form 637, Certificate of Registry, in duplicate, executed in accordance with the instructions contained on the reverse of Form 637. This form shall be filed with the District Director of Internal Revenue for the district in which the principal place of business of the applicant is located (or if the applicant has no principal place of business in the United States, with the Internal Revenue Service Center, Philadelphia, Pennsylvania). The person who receives a validated Form 637 shall be considered to be registered for purposes of selling or purchasing articles tax free. Section 48.4222(a)-1(d) of the regulations provides that if either the seller or purchaser is not registered as required by section 48.4222(a)-1, tax-free sales may not be made unless the sale is within one of the section 4222(b) exceptions. Section 4223(a) of the Code provides that for purposes of chapter 32, a manufacturer or producer to whom an article is sold or resold free of tax under section 4221(a)(1) for use in further manufacture shall be treated as the manufacturer or producer of such article. Under the facts described above, since X, the manufacturer, did not comply with the registration requirements prior to the sale of the article to Y for further manufacture, X is liable for tax on the sale of the article. Since registration must occur prior to sale of an article, registration after sale will not relieve the manufacturer of liability for the tax. Y is not treated as the manufacturer or producer of the article under section 4223(a) of the Code and, therefore, is not liable for tax on its sale because the sale from the manufacturer to the vendee was not a tax-free sale. Y, having mistakenly paid tax under section 4223 on its sale of the article, may file for a refund or claim a credit pursuant to the provisions of sections 6401(c) and 6402(a) for the tax Y paid on the sale, provided the conditions to allowance set forth in section 6416(a) are met.

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HOLDING

If a manufacturer who has not registered pursuant to section 4222(a) of the Code, makes a sale for further manufacture under section 4221(a)(1), the manufacturer remains liable for the manufacturers excise tax. The person to whom the article was sold for further manufacture does not become the statutory manufacturer or producer of the article under section 4223(a) because the unregistered manufacturer’s sale to the person was not tax-free.