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 Rev. Rul. 78-35

1978-1 C.B. 358

Section 4221 -- Excise Tax Exemptions

IRS Headnote

Exemption; bicycle tires and tubes; use on adult tricycles. The exemption provided by section 4221(e)(4)(A) of the Code for sales of bicycle tires and inner tubes for use in the manufacture of bicycles also applies to sales of the tires and tubes for use in the manufacture of manually powered adult tricycles.

Full Text

Rev. Rul. 78-35

Advice has been requested whether, under the circumstances described below, bicycle tires and inner tubes subject to the manufacturers excise tax imposed by section 4071(a) of the Internal Revenue Code of 1954 may be sold tax free under the provisions of section 4221(e)(4)(A).

A company designs and manufactures manually-powered bicycles and tricycles that have identical wheels and are equipped with standard-size pneumatic bicycle tires. They are also available with solid tires for use where industrial plant floors or roadways present hazards from punctures. These bicycles and tricycles are sold for transportation use by commercial and industrial establishments. Adult tricycles are also sold for transportation and recreational use by individuals. The company offers baskets as options for both the bicycles and tricycles, and for its tricycles the company offers additional options, such as cabinets or platforms mounted between or over the dual front or rear wheels. The tires and tubes purchased by the company for use in the manufacture of the cycles are: 26" x 2.125", 24" x 2.125", 20" x 2.125", 26" x 1.375", 26" x 1.75" and 20" x 1.75". These tires are primarily designed for use on bicycle wheels.

Section 4071(a) of the Code imposes a tax on tires and inner tubes for tires, if wholly or in part of rubber, sold by the manufacturer, producer, or importer.

Section 4221(e)(4)(A) of the Code provides that no tax shall be imposed under section 4071 on the sale of a bicycle tire (or an inner tube for such a tire) by the manufacturer thereof if such tire or tube is sold for use by the purchaser as material in the manufacture or production of, or as a component part of, a bicycle (other than a rebuilt or reconditioned bicycle).

Section 4221(e)(4)(B) defines the term "bicycle tire" to mean a tire, composed of rubber in combination with fabric or other reinforcing element, that is not more than 28 inches in outer diameter and not more than 21/4 inches in cross section and that is primarily designed or adapted for use on bicycles.

The exemption for sales of bicycle tires and tubes for use in the manufacture of bicycles was added to the Code by Public Law 86-418, 1960-1 C.B. 786. In explaining the exemption, Senate Report No. 1136, 1960-1 C.B. 805, at 806, states:

Present law (sec. 4071) imposes a manufacturers' excise tax on bicycle tires . . . . [B]icycle tires and tubes (whether manufactured here or imported) are subject to tax when sold in the United States to bicycle manufacturers or others for mounting on new bicycles. Similarly, they are subject to tax if the tire and tube manufacturer . . . mounts a tire and tube on a bicycle, since such use is deemed to be a sale.

A problem has arisen, however, in the case of bicycle tires and tubes mounted on bicycles outside of the United States where the bicycles are then sold in the United States. In such cases no U.S. excise tax is paid on the bicycle tires and tubes. The effect of this is to discriminate against American producers of bicycles, since reflected in their costs, but not the costs of their foreign competitors, is the U.S. excise tax on the tires and tubes mounted on their bicycles.

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Another aspect of the problem is that industry surveys have shown that 90 percent of all bicycles sold in the United States are for use by children in the 5 to 12 age category. In the past, Congress has indicated that in general it did not desire to subject to excise tax articles primarily designed for children. . . .

In view of these considerations your committee provided in this bill for exemption from the tire and innertube taxes of bicycle tires and tubes sold for use in the manufacture, or production of new bicycles, or used by the tire and tube manufacturer for this purpose. . . .

It appears from the foregoing Committee Report that Congress' primary reason for enacting the exemption was to eliminate excise tax discrimination against American producers of bicycles in favor of their foreign competitors. All excise tax on the sale of bicycle tires used in the manufacture of adult tricycles would discriminate against American producers of such tricycles who, like bicycle producers, are faced with foreign competition. The bicycle tires and tubes, which are primarily designed for use on bicycles, are used in the manufacture of both bicycles and adult tricycles. The tricycles, like the bicycles, are manually powered, and have wheels of similar design. Thus, tires and tubes that are sold for use by the purchaser as material in the manufacture of the adult tricycles qualify for the exemption provided by section 4221(e)(4)(A) of the Code.

Accordingly, the tax imposed by section 4071(a) of the Code does not apply to the bicycle tires and tubes sold for use by the purchaser as material in the manufacture of the manually powered tricycles described above.