Rev. Rul. 80-1

1980-1 C.B. 45, 1980-1 I.R.B. 12.

                       Internal Revenue Service
                                 Revenue Ruling

                             SALES TAX; CALIFORNIA

                           Published: January 7, 1980

26 CFR 1.164-3: Definitions and special rules.

  Sales tax; California. The sales tax imposed by California on the retailer and paid to the retailer by the consumer is includible in the retailer's gross income. The tax is deductible by the consumer when paid to the retailer and by the retailer when accrued or paid to the State.

  The California State sales tax levied under section 6051 of the Cal. Rev. & Tax Code (West Supp. 1978) (California Code) is imposed on the retailer for purposes of section 164(a)(4) of the Internal Revenue Code and section 1.164- 1(a) of the Income Tax Regulations. Thus, the sales tax paid to the retailer by the consumer must be included in the retailer's gross income for federal income tax purposes and is deductible by the retailer (when paid or accrued by the retailer) as a tax under section 164(a)(4).

  Although the California State sales tax is imposed on the retailer, sections 6052 and 6052.5 of the California Code provide for its collection from the consumer.  The law provides that the retailer have a separate statement of the sales tax in a 'sales tax reimbursement schedule' available for inspection by the consumer or post a notice to consumers that the sales tax computed on the basis of such schedule is included in the posted or advertised price of an item.  Therefore, the tax is a separately stated general sales tax within the meaning of section 164(b)(5) of the Code.  Thus, when the sales tax is paid to the retailer by the consumer (other than in connection with his or her trade or business), the consumer may deduct such tax if either the consumer itemizes deductions or the sales tax is attributable to property held for the production of rents or royalties.  See sections 62(5) and 63 of the Code.

  In Diamond National Corp. v. State Board of Equalization, 425 U.S. 268  (1976) (per curiam), the Supreme Court of the United States held that the incidence of the California sales tax was on the purchaser national bank, and not the retailer because the California sales tax required the retailer to pass on the tax to the consumer.  In Diamond National the issue was whether the California sales tax was imposed on a purchaser national bank in the violation of the bank's immunity from state taxation under the former 12 U.S.C. section 548 (1964) (current version at 12 U.S.C. section 548 (1976)). The Diamond National case does not involve the incidence of a state sales tax for purposes of section 164(a)(4) of the Code and thus does not control the incidence of the California sales tax for purposes of section 164(a)(4) of the Code.

  For a statement of the tax results when the sales tax is paid by a consumer with respect to items used in connection with the consumer's trade or business, see Rev. Rul. 77-465, 1977-2 C.B. 61 at 63.

Rev. Rul. 80-1, 1980-1 C.B. 45, 1980-1 I.R.B. 12.