Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-87

1976-1 C.B. 49

Section 62 -- Adjusted Gross Income
Section 164 -- Deduction for Taxes
Section 266 -- Carrying Charges

IRS Headnote

New York sales and use taxes. The New York State sales and use taxes imposed by the State, the sales and use taxes authorized by the State to be imposed by cities and counties, and the temporary sales and use taxes imposed by the State only in New York City are deductible under section 164(a)(4) of the Code unless capitalized under section 266; the temporary tax on the parking, garaging, and storing of motor vehicles imposed by the State only in New York City is not deductible. Rev. Rul. 65-242 superseded.

Full Text

Rev. Rul. 76-87

Advice has been requested concerning the deductibility under section 164(a)(4) of the Internal Revenue Code of 1954 of (1) sales and use taxes imposed by the State of New York throughout the State under sections 1105 and 1110 of the New York Tax Law (McKinney 1975), (2) sales and use taxes authorized under section 1210 to be imposed by cities and counties, and (3) temporary sales and use taxes imposed by the State under section 1107 only in New York City.

Section 1105 of the New York Tax Law imposes a sales tax of 4 percent upon (a) receipts from every retail sale of tangible personal property, (b) receipts from every sale, other than sales for resale, of gas, electricity, refrigeration and steam, and telephone and telegraph services within the State, (c) receipts from every sale, except for resale, of various enumerated services, (d) receipts from the sale of food and beverages sold by restaurants and caterers, (e) rent for occupancies of hotel and motel rooms, and (f) admission charges to places of amusement, cabarets and similar places, and club dues.

Section 1110 of the New York Tax Law imposes on every person, with certain exceptions and limitations, a use tax of 4 percent for the use within the State of any tangible personal property or various enumerated services. No use tax is imposed on property or services subject to the sales tax.

Under sections 1131 and 1132 of the New York Tax Law, every vendor of tangible personal property or services, every recipient of amusement charges, and every operator of a hotel is required to collect the tax from the customer when collecting the price, amusement charge or rent to which it applies. If the customer is given any sales slip, invoice, receipt or other statement or memorandum of the price, amusement charge or rent paid or payable, the tax shall be stated, charged and shown separately on the first of such documents given to the customer. The tax is payable to the person required to collect it for the State.

Section 1133 of the New York Tax Law provides that the person required to collect a sales tax shall be liable for such tax. However, that person shall have the same right to collect the tax from the customer as if the tax were a part of the purchase price. Where a customer has failed to pay a sales tax to the person required to collect the tax, the tax is payable by the customer directly to the State tax commission.

Section 1139 of the New York Tax Law provides for refunds or credits of improperly collected sales and use taxes. A customer who actually paid the tax may apply for a refund or credit. Such application may be made by a person required to collect the tax, who has collected and paid such tax to the tax commission, provided that such person has repaid the customer for the amount of tax for which the application for refund or credit is made. Under section 1210 of the New York Tax Law, cities (other than New York City) and counties are authorized to "impose sales and use taxes uniformly with the State sales and use taxes at uniform rates of up to 3 percent for a combined State and local tax of up to 7 percent. These local taxes are administered, collected, and returned by the State to the various local jurisdictions less costs to the State for administration and collection.

On June 10, 1975, the New York State Municipal Assistance Corporation Act enacted and amended several sections of the New York Tax Law. Also on June 10, 1975, the Municipal Assistance Corporation for the city of New York Act created the Municipal Assistance Corporation for the city of New York, which operates solely for the benefit of New York City. Under new section 1210(f) of the New York Tax Law, New York City's authority to impose any general sales and use taxes was temporarily suspended. Under new section 1212-A(f), New York City's authority to impose a special tax on the service of parking, garaging, and storing vehicles was also temporarily suspended. However, under new section 1107, temporary 4-percent sales and use taxes and a temporary 6-percent tax on the service of parking, garaging, and storing motor vehicles were imposed as of July 1, 1975, by the State only in New York City.

The revenues from the temporary taxes imposed only in New York City do not go into the general fund of the State as do the revenues from the state-wide sales and use taxes. Rather, the revenues from the temporary taxes are placed in a trust fund special account for the Municipal Assistance Corporation for the city of New York. The revenues from these taxes remaining after the corporation meets its obligations are to be turned over to New York City. The temporary taxes replace the 4-percent sales and use taxes and the 6-percent tax on the service of parking, garaging, and storing motor vehicles that, prior to their suspension, were imposed by New York City pursuant to State authority granted under sections 1210 and 1212-A of the New York Tax Law.

Section 164(a)(4) of the Code allows as a deduction state and local general sales taxes paid or accrued within the taxable year.

Section 164(b)(2)(A) of the Code defines the term "general sales tax" as meaning a tax imposed at one rate in respect of the sale at retail of a broad range of classes of items. Section 164(b)(2)(C) provides that, except in the case of a lower rate of tax applicable in respect of certain items described in section 164(b)(2)(B), no deduction is allowable under section 164 for any sales tax imposed in respect of an item at a rate other than the general rate of tax.

Section 1.164-3(g)(1) of the Income Tax Regulations states, in part, that a sales tax that is general is usually imposed at one rate in respect of the retail sales of all tangible personal property. A selective sales tax is one that applies at one rate with respect to retail sales of specified classes of items and also qualifies as general if the specified classes represent a broad range of classes of items. A selective sales tax that does not apply at one rate to the retail sales of a broad range of classes of items is not general.

Section 164(b)(2)(D) of the Code provides that a compensating use tax in respect of an item shall be treated as a general sales tax, and defines the term "compensating use tax" as meaning, in respect of any item, a tax which (1) is imposed on the use, storage, or consumption of such item, and (2) is complementary to a general sales tax, but only if a deduction is allowable under section 164(a)(4) in respect of items sold at retail in the taxing jurisdiction which are similar to such item.

Section 1.164-3(i)(1) of the regulations provides, in part, that, in general, a use tax on an item is complementary to a general sales tax on similar items if the use tax is imposed on an item which was not subject to such general sales tax but which would have been subject to such general sales tax if the sale of the item had taken place within the jurisdiction imposing the use tax. Section 1.164-3(i)(2) provides, in part, that, since a compensating use tax is treated as a general sales tax, it is subject to the rule of section 164(b)(2)(C) of the Code.

Section 1.164-1(a)(5) of the regulations provides, in part, that, in general, taxes are deductible only by the person upon whom they are imposed.

The sales tax imposed by the State of New York under section 1105 of the New York Tax Law is imposed at one rate in respect of the sale at retail of a broad range of classes of items. Thus, it is a general sales tax within the meaning of section 164(b)(2)(A) of the Code. The sales tax is imposed directly upon the consumer, although the seller is required to collect the tax.

The use tax imposed by the State under section 1110 of the New York Tax Law is imposed on the use of various items of personal property or services and is complementary to the State's general sales tax. Thus, it is a compensating use tax within the meaning of section 164(b)(2)(D) of the Code. The use tax is imposed upon the person using the property or services subject to the tax.

Similarly, the local sales and use taxes authorized by section 1210 of the New York Tax Law are, respectively, general sales taxes and compensating use taxes, within the meaning of section 164(b)(2)(A) and (D) of the Code, imposed directly on the consumer or user.

Accordingly, the sales and use taxes imposed by the State of New York under sections 1105 and 1110 of the New York Tax Law and the local sales and use taxes authorized by section 1210 to be imposed by cities (other than New York City) and counties are deductible by the consumer under section 164(a)(4) of the Code. Since the 4-percent general sales and use taxes imposed by the State only in New York City under section 1107 of the New York Tax Law are local general sales taxes, they are also deductible under section 164(a)(4).

If any of these taxes is paid by the consumer in respect of certain items, enumerated in section 1.266-1(b)(1) of the regulations as items that may be treated as chargeable to a capital account, the consumer may elect to capitalize (rather than deduct) the tax pursuant to section 266 and the regulations thereunder.

Further, the 6-percent tax on the service of parking, garaging, and storing motor vehicles imposed by the State of New York only in New York City is a local selective sales tax imposed at a rate other than the general rate of tax, and is, therefore, not deductible under section 164(a)(4) of the Code.

The New York State sales and use taxes and the local sales and use taxes paid by the consumer are deductible by the consumer if the consumer itemizes deductions, or if such taxes are attributable to the consumer's trade or business (other than performance of services as an employee under certain circumstances) or to property held by the consumer for the production of rents or royalties. See section 62 of the Code and the regulations thereunder.

The amount of sales or use taxes collected by a retailer from a consumer is not includible in the gross income of the retailer and no deduction is allowable to the retailer with respect to the remittance of such tax(es) to the state taxing authority.

Rev. Rul. 65-242, 1965-2 C.B. 46, which holds that the State and local sales and use taxes imposed pursuant to Articles 28 and 29 of the New York Laws 1965 are deductible under section 164(a) of the Code, is superseded since the position set forth in Rev. Rul. 65-242 is restated under current law in this Revenue Ruling.