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 Rev. Rul. 67-63

1967-1 C.B. 47

Sec. 164

IRS Headnote

The use tax imposed by the State of North Dakota pursuant to the provisions of Chapter 57-40, North Dakota Century Code (1960), as amended, is a tax imposed upon the consumer and user and is deductible under section 164(a) of the Internal Revenue Code of 1954 as a general sales tax within the meaning of section 164(a)(4). If such tax is paid with respect to property purchased for use in the purchaser's trade or business, other than a trade or business consisting of the performance of services as an employee, the consumer may deduct the tax under section 62(1) of the Code in arriving at adjusted gross income, provided he does not elect to capitalize such amount as provided by section 266 of the Code.

Full Text

Rev. Rul. 67-63

Advice has been requested as to the deductibility, for Federal income tax purposes, of the use tax imposed by the State of North Dakota pursuant to chapter 57-40 of the North Dakota Century Code (1960), as amended, in view of the fact that the State of North Dakota no longer has a retail sales tax designated as such in the North Dakota code.

From 1935 until July 1, 1965, the State of North Dakota had a retail sales tax designated as such. This tax was imposed only for 2-year periods, and a completely new and independent sales tax law was enacted at each session of the State legislature, or, beginning in 1957, reenacted through amendment to the existing statute. As reenacted in 1963, the sales tax law was scheduled to expire on June 30, 1965. In 1965, the State legislature enacted a new sales tax law, designed to take effect on July 1, 1965. North Dakota Century Code, chapter 57-39 (supp. 1965).

In response to a referendum petition drafted in accordance with North Dakota law, which suspended operation of the new law a special election was held on September 21, 1965, at which the North Dakota electorate rejected the sales tax law enacted in 1965. The previous sales tax law, section 57-39-01 et seq. of the North Dakota Century Code (supp. 1963), terminated by its own provisions on June 30, 1965.

The expired sales tax was imposed at the rate of 2 1/4 percent upon the gross receipts of retailers from all sales at retail in North Dakota. Property subject to the tax generally included tangible personal property and the furnishing of certain services. North Dakota Century Code, section 57-39-02 (supp. 1963). Retailers were directed to add tax imposed to the retail sales price, and the tax so added was specifically made a debt from the consumer or user to the retailer. North Dakota Century Code, section 57-39-06 (supp. 1963). Revenue Ruling 56-611, C.B. 1956-2, 121, held that the sales tax imposed by the State of North Dakota was allowable as a deduction under section 164(a) of the Code, to the purchaser.

Section 57-40-02 of the North Dakota Century Code (supp. 1963), dealing with the State use tax, imposes a tax on the storage, use, or consumption of tangible personal property purchased at retail for storage, use, or consumption in North Dakota, at the rate of 2 1/4 percent of the purchase price of such property. This tax is also applicable to tangible personal property which, though not originally purchased for storage, use or consumption in North Dakota, is subsequently brought within the State. Section 57-40-03 specifically exempts from the use tax tangible personal property subject to the sales tax.

Under section 57-40-05, every retailer maintaining a place of business in North Dakota is required to collect and remit the use tax to the Tax Commissioner. When the use tax is not paid in conformity with this provision, the person storing, using or consuming tangible personal property within North Dakota is required to remit the tax directly to the Tax Commissioner.

Prior to the expiration of the sales tax, the attorney general of North Dakota ruled that the North Dakota use tax would replace the retail sales tax in most areas in the event that the electorate rejected the 1965 sales tax act. The attorney general indicated that in this event all retail sales subject to the sales tax would be subject to the use tax, with the exception of steam or communications services, tickets or admissions to places of amusement or entertainment or athletic events, the leasing of hotel or motel accommodations, and services furnished in repairing, altering, restoring, or cleaning tangible personal property. Upon the expiration of the sales tax, with these exceptions, a purchaser became liable for the use tax on any tangible personal property purchased at retail in North Dakota, in the same manner that he was formerly liable for the expired sales tax. Retailers in North Dakota were directed to charge their customers use tax on such purchases, and to remit the tax to the Tax Commissioner. When brought into the State, tangible personal property purchased outside North Dakota is subject, as before July 1, 1965, to the use tax. The retail sales tax rules and regulations were incorporated into the use tax rules and regulations by Use Tax Rule No. 121 as an aid in the administration of the use tax law.

Under the attorney general's ruling, it has become the duty of each seller holding a North Dakota retail sales and use tax permit to add the use tax to the retail sales price. The use tax, when now added to the sales price by a seller having a collection responsibility, is a debt owning by the buyer to the seller. As the use tax law pertaining to the filing of returns and the remittance of tax to the tax department is identical to the sales tax law, these tax returns must be filed by all retailers for the same periods for which returns were formerly required under the sales tax law, and remittances of use tax to the tax department must accompany these returns.

Section 164(a) of the Internal Revenue Code of 1954 sets forth the general rule that State and local general sales taxes shall be allowed as a deduction for the taxable year within which paid or accrued.

The term `general sales tax' is defined in section 164(b)(2)(A) of the Code as meaning a tax imposed at one rate in respect of the sale at retail of a broad range of classes of items. Under section 164(b)(2)(D) of the Code, a compensating use tax in respect of an item shall be treated as a general sales tax. The term `compensating use tax' means, in respect of any item, a tax which is imposed on the use, storage or consumption of such item and which is complementary to a general sales tax which is deductible with respect to sales of similar items.

Section 1.164-1(a) of the Income Tax Regulations provides that, in general, taxes are deductible only by the person upon whom they are imposed.

The North Dakota use tax, as presently construed and administered, has replaced the expired sales tax and has, in effect, become a sales tax as it applies to purchases in North Dakota. As applied to such purchases, the use tax meets the requirements for a general sales tax, set out in section 1.164-3(f) of the regulations, as it is a tax imposed in respect of sales at retail at one rate upon a broad range of classes of items. The tax is imposed directly upon the purchaser, as well as upon the user, of tangible personal property.

The tax is applicable to purchases of tangible personal property at retail both within and without the State of North Dakota, and is, therefore, performing a dual function. Therefore, the North Dakota use tax also qualifies as a `compensating use tax' within the meaning of section 164(b)(2)(D) of the Code as it applies to purchases outside North Dakota, notwithstanding the fact that it also qualifies as a `general sales tax.' Accordingly, the tax imposed by chapter 57-40 of the North Dakota Century Code (1960), as amended, is deductible under section 164(a) of the Code, in computing taxable income, by the consumer or user. In the case of an individual who elects to use the standard deduction or the optional tax table no deduction is allowable unless the subject tax is attributable to a trade or business carried on by him. If the use tax is paid with respect to property purchased by an individual for use in the purchaser's trade or business, other than a trade or business consisting of the performance of services as an employee, the consumer may deduct the tax under section 62(1) of the Code in determining adjusted gross income. The business consumer, whether an individual or other taxpayer, may elect to charge the tax to capital account, pursuant to section 266 of the Code and section 1.266-1 of the regulations, in lieu of taking the deduction.