Internal Revenue Service
Revenue Ruling sm

Rev. Rul. 68-659

1968-2 C.B. 511

IRS Headnote

The manufacturer's liability for tax where he distributes articles `free' to customers or authorizes his jobbers to offer articles `free'; S.T. 434 superseded.

Full Text

Rev. Rul. 68-659 /1/

The purpose of this Revenue Ruling is to restate, under the current statute and regulations, the positions set forth in S.T. 484, C.B. XI-2, 508 (1932).

The questions presented relate to the effect on the ad valorem manufacturers excise tax liability where certain `free goods' are distributed by the manufacturer thereof or by his jobbers in the situations described below.

Situation 1 . A manufacturer sold at his regular price certain articles subject to a manufacturers excise tax imposed under chapter 32 of the Internal Revenue Code of 1954, and shipped an additional number of the same articles to the purchaser without a further charge, because the purchaser's order exceeded a stated quantity. The specific question is whether, in computing the manufacturers excise tax due on the sale, the sale price of the articles should be adjusted by reason of, and to the extent of, the `free' articles shipped to the customer.

Situation 2 . A manufacturer sold certain articles subject to a manufacturers excise tax imposed under Chapter 32 of the Code to jobbers at his regular wholesale price and paid the manufacturers excise tax on such sales. Later, he authorized the jobbers to offer `free' a given number of the articles when the jobbers received orders in excess of a stated quantity. In such a case the manufacturer agreed to reimburse the jobbers with respect to the original purchase price attributable to any goods delivered `free.'

The specific question is whether the original sale price of the taxable articles is `readjusted,' under the provisions of section 6416(b)(1), when the manufacturer's jobbers are reimbursed for `free' articles given in connection with sales by the jobbers.

Section 6416(b)(1) of the Code provides that if the price of any article in respect of which a tax, based on such price, imposed by chapter 32, is readjusted by a bona fide discount, rebate, or allowance, the part of the tax proportionate to the part of the price repaid or credited to the purchaser shall be deemed to be an overpayment, and credit or refund shall be allowed or made in respect to such overpayments.

A manufacturer who bills goods at his regular price and in addition ships certain quantities of the same goods `free' because the purchaser has ordered in excess of a stated quantity has, in effect, reduced the regular price per article charged for the entire lot. Accordingly, under the circumstances of situation 1 , the tax applies to the total price charged for the entire shipment (assuming there is no basis for determining a constructive sale price for the transaction under the provisions of section 4216(b) of the Code).

A manufacturer who allows jobbers a rebate for `free goods' on which tax has been paid, because the jobbers delivered articles without charge in connection with an offer sponsored by the manufacturer, has made an overpayment of manufacturers excise tax within the meaning of section 6416(b)(1) of the Code. Accordingly, in situation 2 the manufacturer may readjust his original sale price and is therefore entitled to a credit or refund for that part of the tax which is proportionate to that part of the price rebated.

S.T. 484 is hereby superseded, since the provisions thereof are restated under current law in this Revenue Ruling.

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