Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 69-99

1969-1 C.B. 285

IRS Headnote

Exemption from tax on sales of articles for future delivery to vessels for use as supplies thereon or where vessels are diverted from foreign to domestic trade or from domestic to foreign trade; S.T. 710 superseded.

Full Text

Rev. Rul. 69-99 /1/

Advice has been requested as to the application of the exemption from the manufacturers excise tax for sales of "supplies for certain vessels," provided by section 4221(a)(3) of the Internal Revenue Code of 1954, in the situations set forth below.

Situation 1. A manufacturer of articles subject to the manufacturers excise taxes imposed under Chapter 32 of the Code sells such articles to a purchaser who will use an undetermined number of the articles as supplies on vessels referred to in section 4221(d)(3) of the Code. The articles are not delivered to a specific vessel at the time of sale but are sold to a shipping company in large quantities and stored in its warehouses in several United States ports. Subsequently, they are delivered to various vessels, as and when needed. The question asked is whether, under these circumstances, the manufacturer may sell the articles taxfree under the provisions of section 4221(a)(3) of the Code.

Situation 2. A manufacturer of articles subject to the manufacturer's excise tax sells articles tax free directly to the owner of a vessel for immediate use as supplies on the vessel which, at the time of sale, is engaged in foreign trade. Before the supplies are used or entirely consumed, the vessel is diverted from foreign trade to trade between domestic ports on one of the United States coast lines. The manufacturer had no knowledge at the time of sale that the vessel would be so diverted. The question asked is whether the fact that the vessel was diverted from foreign to domestic trade after the supplies had been sold tax free will in any way affect the status of the tax-free sale by the manufacturer.

Situation 3. A manufacturer of articles subject to the manufacturers excise tax sells articles tax paid directly to the owner of a vessel for immediate use as supplies on the vessel which, at the time of sale, is engaged in trade between domestic ports on a coast line of the United States. Before the supplies are used or entirely consumed, the vessel is diverted to foreign trade. The question presented is whether the fact that the vessel is diverted from domestic trade to foreign trade affects the taxable status of the manufacturer's sale.

Section 4221(a)(3) of the Code provides that, under regulations prescribed by the Secretary of the Treasury or his delegate, no manufacturers excise tax shall be imposed on the sale by the manufacturer of an article for use by the purchaser as supplies for certain vessels but only if such use is to occur before any other use.

Under the provisions of section 4221(d)(3) of the Code, the term "supplies for vessels" means "fuel supplies, ships' stores, sea stores, or legitimate equipment" on vessels of war of the United States or of any foreign nation, vessels employed in the fisheries or in the whaling business, or vessels actually engaged in foreign trade or trade between the Atlantic and Pacific ports of the United States or between the United States and any of its possessions.

Section 4222(a) of the Code provides a general requirement for the registration of manufacturers and purchasers. However, under the provisions of section 4222(b)(5) of the Code, registration will not be required if a purchaser of supplies for vessels complies with such regulations relating to the use of exemption certificates in lieu of registration as the Secretary of the Treasury or his delegate shall prescribe.

In accordance with section 148.1-3 of the Temporary Regulations Under the Excise Tax Technical Changes Act of 1958, a manufacturer who makes a tax-free sale under the registration provisions must use reasonable diligence to satisfy himself that the tax-free sale is warranted by law. If the manufacturer has knowledge at the time of his sale that the article sold by him is not intended for use as indicated by the purchaser, the manufacturer is liable for the tax and is not relieved of liability by reason of the registration of the purchaser or the furnishing of an exemption certificate by the purchaser. In lieu of registration, section 145.4-1 of the Temporary Regulations Under the Excise Tax Reduction Act of 1965 provides that, in order to establish exemption from tax on the sale of articles by the manufacturer for use by the purchaser as supplies for a vessel, the manufacturer must obtain (prior to or at the time of sale) from the owner, charterer, or authorized agent of the vessel and retain in his possession a properly executed exemption certificate in the form prescribed by the regulations. The authorized person furnishing the certificate must certify, among other things, that the article or articles will be used only for supplies on a vessel belonging to one of the classes of vessels to which section 4221(a)(3) of the Code applies.

In order for the sale of articles to be exempt under section 4221(a)(3) of the Code, it must be known at the time of sale by the manufacturer, producer, or importer that the articles are sold for an exempt use on a type of vessel specified in the statute. In situation 1, the supplies are stored by the purchaser in various ports for future delivery to vessels when needed. Thus, the particular vessel or class of vessels to which the supplies will eventually be delivered and the nature of their trade is unknown at the time of sale. Consequently, since the purchaser is unable to furnish the manufacturer with the required registration information or exemption certificate at the time of sale, in situation 1 the sale of articles by the manufacturer cannot be made tax free under the provisions of section 4221(a)(3).

In situation 2, where the manufacturer sells articles tax free for use as supplies on a vessel actually engaged in foreign trade, the fact that the vessel is later diverted to coastwise trade before the supplies are used or entirely consumed does not disturb the tax free nature of the manufacturer's sale, and the remaining supplies may be used or consumed without incurring tax liability.

In situation 3, because the vessel is engaged in coastwise trade at the time the supplies are sold for use thereon, the sale of the articles is subject to tax even though the possibility exists at the time of the manufacturer's sale that before the supplies are used or entirely consumed, the vessel may be diverted to foreign trade.

However, in situations 1 and 3 if, prior to any other use, tax-paid articles are used by any person, or sold by any person for use by the purchaser, as "supplies for vessels" (as that term is defined in section 4221(d)(3) of the Code), the manufacturer is entitled to a credit or refund of the tax paid, in accordance with the provisions of section 6416(b)(2)(B) of the Code and section 48.6416(b)-2 of the Manufacturers and Retailers Excise Tax Regulations.

The conclusions stated herein are equally applicable with respect to the exemption from the retailers excise tax provided by section 4041(e) of the Code for special motor fuel sold for use or used as supplies for vessels.

S.T. 710, C.B. XII-2, 349 (1933), 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.