Internal Revenue Service
Revenue Ruling
TaxLinks.com
smRev. Rul. 59-62
1959-1 C.B. 290
Caution: Obsoleted by Rev. Rul. 69-227
IRS Headnote
In an advertising and promotional plan sponsored by an association of jewelers, the winners in a contest are awarded a certificate entitling them to an unmounted diamond which must be mounted in some article of jewelry the winner already owns or in some article of jewelry which he may purchase at the store awarding the certificate. As an alternative, the certificate may be applied as a credit toward the purchase price of any article of jewelry in the store. Held , the certificate is, in effect, a gift certificate or a trade discount; accordingly, the retailers excise tax on jewelry and related items attaches to the net amount charged the customer for whatever he may purchase with the certificate. Held further , where the winner accepts the diamond and purchases a mounting for such diamond which the jeweler assembles into a complete article, the retailers excise tax on jewelry and related items applies to the total amount charged for the mounting and setting of the diamond.
Full Text
Rev. Rul. 59-62
Advice has been requested as to the basis for computing the retailers excise tax on jewelry and related items when articles are sold in connection with a promotional contest under the circumstances described below.
As an advertising and sales promotional plan, an association of jewelers sponsors a public contest. Through an advertisement in the local newspapers, contestants are invited to count the number of diamonds shown in a picture and mail the entry blank to the association. Each of the winners of the contest is awarded an unmounted diamond. The entry blank specifies that the diamond must be set and there will be a setting charge. After the entry blanks are submitted, the numerous winners in the contest receive the prizes in the form of certificates for a $50 diamond. In a letter, the winners are given instructions as to the name and address of the authorized jeweler who will select and award the diamond. In order to obtain the diamond, the winner must have it mounted in some article of jewelry he already owns or in some article of jewelry purchased at the authorized store. In either case, the jeweler makes a charge for the setting of the diamond. As an alternative, the winner may apply the $50 as a credit toward the purchase price of any article of jewelry in the store.
Section 4001 of the Internal Revenue Code of 1954 imposes a tax on the sale of jewelry and related items when sold at retail. Section 320.5(a) of Regulations 51, make applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that the retailer's sales price is the basis for the tax and that, in general, this should be the retailer's actual price at the point of distribution or sale.
Where a contest winner is awarded a certificate entitling him to an unmounted diamond worth $50 and the certificate may be applied toward the purchase of other articles of jewelry, it is held that the certificate is, in effect, a gift certificate or trade discount. Accordingly, the retailers excise tax imposed by section 4001 of the Code attaches to the net amount charged the customer for whatever he may purchase with the certificate. For example, if the selling price of a diamond ring, watch, or other article of jewelry is $125 and the customer, in lieu of accepting an unmounted diamond, is allowed a $50 credit toward the purchase of the ring or other article, the retailers excise tax is based on $75 ($125 less the $50 allowance), which is the net amount the customer pays the jeweler. Thus, in accordance with the regulations, the tax is computed on the actual price charged the customer at the point of sale, the discount being made at the time of the sale.
Revenue Ruling 56-454, C.B. 1956-2, 787, holds that a mounting is an article made of, or ornamented, mounted, or fitted with, precious metals or imitations thereof, the sale of which is subject to the retailers excise tax imposed by section 4001 of the Code. A diamond supplied by a jeweler is a precious stone, the sale of which likewise is subject to the tax. Any additional charge for setting the diamond in the mounting is considered to be attributable to the cost and labor involved in producing the mounting and is also subject to the tax. On the other hand, the tax will not apply to any separate charge for setting a customer's diamonds, provided it is shown as a separate item on the jeweler's records or on the customer's invoice.
In the instant case, where the winner, in order to receive the diamond which he won in the contest, purchases from the authorized store a mounting into which the diamond is to be set and there is a charge for the setting, the customer is not considered to have received the diamond as a gift. Instead the transaction is regarded as a sale of a diamond and a mounting at a combined price or the sale of a diamond ring at a reduced price. Therefore, in accordance with Revenue Ruling 56-454, the retailers excise tax attaches to the total amount paid for the mounting and setting of the diamond. However, where the winner in the contest accepts the diamond and has it mounted in an article of jewelry which he already owns, the retailers excise tax will not apply to any separate charge for setting the diamond, provided it is identified as a charge for labor on the jeweler's records or on the customer's invoice.