Internal Revenue Service
Revenue Ruling
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smRev. Rul. 72-66
1972-1 C.B. 395
IRS Headnote
Effective with respect to leases and installment sales made after June 30, 1972, a manufacturer of truck trailer chassis must prorate tire tax credit against the tax due on each installment or lease payment in accordance with a computation formula.
Full Text
Rev. Rul. 72-66
Advice has been requested as to the computation of the credit for tax paid on tires, inner tubes, etc., provided by section 6416(c) of the Internal Revenue Code of 1954, with respect to the transactions described below.
A manufacturer of truck trailer chassis purchased tires, in transactions subject to the manufacturers excise tax imposed by section 4071 of the Code, for sale on or in connection with the sale of his trailer chassis. The chassis are of a type subject to the tax on motor vehicle articles imposed by section 4061(a)(1) of the Code when sold by the manufacturer. In addition to making outright sales of the chassis, the manufacturer also sells them under conditional sales contracts and chattel mortgage arrangements, whereby the sales price is payable in installments. The manufacturer is also engaged in the leasing of such trailer chassis.
With respect to the ad valorem taxes imposed under chapter 32 of the Code, section 4216(c) provides that in the case of (1) a lease (other than a lease to which section 4217(b) applies), (2) a contract for the sale of an article wherein it is provided that the price shall be paid by installments and title to the article sold does not pass until a future date notwithstanding partial payment by installments, (3) a conditional sale, or (4) a chattel mortgage arrangement wherein it is provided that the sales price shall be paid in installments, there shall be paid upon each payment with respect to the article a percentage of such payment equal to the rate of tax in effect on the date such payment is due.
Section 4217(a) of the Code provides that, for purposes of the manufacturers excise tax, the lease of an article (including any renewal or any extension of a lease or any subsequent lease of such article) by the manufacturer, producer, or importer shall be considered a sale of such article. Section 4217(b) of the Code provides that in the case of any lease described in section 4217(a) of a taxable article, if the manufacturers excise tax is based on the price for which such articles are sold, there shall be paid on each lease payment with respect to such article a percentage of such payment equal to the rate of tax in effect on the date of such payment, until the total of the tax payments under such lease and any prior lease to which section 4217(b) applies equals the total tax.
Section 4217(c) of the Code defines the term "total tax" as used in section 4217 as the tax computed on the constructive sale price of the article that would be determined under section 4216(b) if the article were sold at retail on the date of the first lease to which section 4217(b) applies. Section 4217(d)(1) provides that the total tax limitation of section 4217(b) shall not apply to the lease of an article unless at the time of making the lease the lessor was engaged in the business of selling in arm's length transactions the same type and model of article.
Section 6416(c) of the Code provides as follows:
(c) Credit for tax paid on tires or inner tubes.--If tires or inner tubes on which tax has been paid under chapter 32 are sold on or in connection with, or with the sale of, another article taxable under chapter 32, there shall (under regulations prescribed by the Secretary or his delegate) be credited (without interest) against the tax imposed on the saleo f such other article, an amount determined by multiplying the applicable percentage rate of tax for such other article by--
(1) The purchase price (less, in the case of tires, the part of such price attributable to the metal rim or rim base) if such tires or inner tubes were taxable under section 4071 (relating to tax on tires and inner tubes); or
(2) If such tires or inner tubes were taxable under section 4218 (relating to use by manufacturer, producer, or importer), the price (less, in the case of tires, the part of such price attributable to the metal rim or rim base) at which such or similar tires or inner tubes are sold, in the ordinary course of trade, by manufacturers, producers, or importers thereof, as determined by the Secretary or his delegate.
Section 48.6416(c)-1(a)(1) of the Manufacturers and Retailers Excise Tax Regulations provides that if the manufacturer of the other article purchased the tire or inner tube tax paid, the amount of the credit shall be determined by applying to the purchase price of such tire or inner tube (computed by including tax passed on to such manufacturer and, in the case of a tire, excluding any part of such price attributable to the metal rim or rim base), the percentage rate of tax applicable to the sale of the other article.
Thus, based on an example provided by the regulations, if the sale price of a trailer chassis is $2,000, tax equivalent to 10 percent of such price (i.e., $200) is imposed under section 4061(a) on the sale of the chassis. If the tires sold on or in connection with such chassis were purchased by the manufacturer of the chassis for $80 (computed as provided above) a credit of $8 (10 percent of $80) is allowable against the tax imposed on the sale of the chassis. In accordance with this example, the net tax due is $192.
The specific question in the instant case is whether, with respect to trailer chassis sold under installment contacts or leased, the manufacturer of the chassis may take the tire tax credit in full against the proportionate tax due on the first installment or lease payment received.
As distinguished from some of the other credits or refunds allowable under the provisions of section 6416 of the Code, the credit provided by section 6416(c) is not dependent upon there having been an overpayment of tax. Rather, the credit is in the nature of an adjustment of the tax imposed on the "other article" (in the instant case, a truck trailer chassis). Moreover, the credit is allowable to the manufacturer of the "other article" rather than to the manufacturer of the tires and tubes. See Rev. Rul. 63-179, C.B. 1963-2, 620. Under the statute, the amount of the credit is computed by applying the applicable percentage tax rate imposed on the sale of "such other article" to the purchase price of the tires. The applicable rate of tax is the rate of tax in effect on the date each installment or lease payment is due.
The ultimate purpose of the tire tax credit is to compensate the manufacturer of the "other article" for the tax he would otherwise have to pay by reason of the fact that his resale price of the tires is reflected in his tax base for his sale of the "other article."
Accordingly, where the tax is to be reported and paid under the partial payment provisions of section 4216(c) of the Code or under the lease payment provisions of section 4217(b), the tire tax credit must be prorated to each installment or lease payment at the rate of tax then in effect.
Therefore, in the instant case, it is held that the manufacturer of the trailer chassis may not take the tire tax credit in full against the proportionate tax due on the first installment or lease payment. The credit must be prorated as an adjustment of the tax payable on each installment or lease payment on the basis of the amount of each payment attributable proportionately to the purchase price of the tires. As indicated previously, the rate to be applied to such amount is the rate of tax applicable to the trailer chassis on the date each installment is due or each lease payment is made.
The computation of the tire tax credit in the instant case may be illustrated by the following formula:
i / t X p X r = c
"i" represents the amount of the installment or lease payment (tax-excluded).
"t" represents the total tax-excluded sales price of the chassis (determined in accordance with section 4216 of the Code), or in the case of a lease, the tax-excluded constructive sale price of the chassis computed under section 4216(b) of the Code for a sale at retail.
"p" represents the purchase price of the tires (tax-included).
"r" represents the rate of tax applicable to the sale of the chassis on the date the installment is due or lease payment is made.
"c" represents the portion of the tire tax credit allowable against the tax to be reported on the installment payment.
Using the same figures as in the example in the regulations cited above and assuming the sales price is payable in ten equal installments, or assuming in the case of a lease that ten level lease payments will equal the constructive sale price of the chassis computed for a retail sale under section 4216(b) of the Code, the actual computation on each installment is set forth below.
Installment due or lease payment
made on December 31, 1971________________________ $200.00
Rate of tax when installment is
due or lease payment is made_____________________ 10%
Tax to be reported________________________________ $20.00
Less tire tax credit allowable
using formula:
$200 / $2,000 X $80 X 10 percent equals___________ $0.80
-------
Net tax due on this installment or
lease payment____________________________________ $19.20
Under the authority granted by section 7805(b) of the Code, the Internal Revenue Service will require use of the foregoing formula for computing the section 6416(c) tire tax credit only with respect to installment sales or leases entered into by a manufacturer on and after July 1, 1972. With respect to installment sales or leases entered into prior to July 1, 1972, the Service will accept a tire tax credit computed on any basis that results in the same total tire tax credit computed under the foregoing formula, but without regard to whether the tire tax credit taken is premature as compared with the result obtained through use of the method set forth in this Revenue Ruling.