Rev. Rul. 83-4
1983-1 C.B. 102.
Internal Revenue Service
Revenue Ruling
INSTALLMENT METHOD FOR DEALERS IN PERSONAL PROPERTY; STATE SALES TAX
IMPOSED ON CONSUMER; SALES TAX EXCLUDED FROM TOTAL CURRENT PRICE
Published: January 3, 1983
SECTION 453A. - -INSTALLMENT METHOD FOR DEALERS IN PERSONAL PROPERTY, 26 CFR 1.453-2(c): Installment income of dealers in personal property
Installment method for dealers in personal property; state sales tax imposed on consumer; sales tax excluded from total current price. In cases in which the state sales tax is imposed on the consumer, the sales tax must be excluded from the total contract price for purposes of computing taxable income from installment sales under section 453A of the Code and the regulations thereunder.
ISSUE
In cases in which the state sales tax is imposed on the consumer, is the sales tax excluded from the total contract price for purposes of computing taxable income from installment sales under section 453A of the Internal Revenue Code and the regulations thereunder?
FACTS
X, a retailer in state Y, is a dealer in personal property and regularly sells on the installment plan under section 453A of the Code and section 1.453- 2(c) of the Income Tax Regulations. X uses an accrual method of accounting for federal income tax purposes and reports income from the sale of personal property on the installment method of accounting.
State Y imposes a consumer sales tax that is due and payable by the consumer at the time of the initial sale. X is responsible for the collection of the tax, and its payment to state Y.
LAW AND ANALYSIS
Section 453A(a)(1) of the Code provides that under regulations prescribed by the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year that the gross profit, realized or to be realized when payment is completed, bears to the total contract price.
Section 1.453-1(b) of the regulations provides that in the case of dealers in personal property, gross profit means sales less cost of goods sold. Section 1.453-2(c) provides that the income from installment sales of a dealer, that is a person regularly engaged in the sale of personal property on the installment plan, may be ascertained by treating as income that proportion of the total payments received in the taxable year from installment sales (such payments being allocated to the year against the sales of which they apply) that the gross profit realized or to be realized on the total installment sales made during each year bears to the total contract price of all such sales made during that respective year.
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 1.164-1(a) of the regulations provides that in general taxes are deductible only by the person upon whom they are imposed.
If a state sales tax is imposed on the retailer instead of the consumer for purposes of section 1.164-1(a) of the regulations, Rev. Rul. 60-53, 1960-1 C.B. 185, as amplified by Rev. Rul. 79-196, 1979-1 C.B. 181, requires the retailer to include the tax in its total contract price as defined in section 1.453-2(c)(2). This is the case because, while the retailer includes in the price charged for a taxable article an amount equal to the tax, such amount becomes a part of the price payable by the customer for the article rather than a payment of tax. If, on the other hand, state sales tax is imposed on the consumer, the tax must be excluded from the total contract price since the tax does not represent part of the price payable by the customer for the article. Section 1.453-2(c)(3) of the regulations provides that, in the case of sales by dealers in personal property made during taxable years beginning after December 31, 1963, the income from which is returned on the installment method, if the carrying charges or interest with respect to such sales is not included in the total contract price, payments received with respect to such sales shall be treated as applying first against such carrying charges or interest. Similarly, in the instant case in which the state sales tax is not included in the total contract price, payments received with respect to such sales shall be treated as applying first against the sales tax.
In the instant case, since the state Y sales tax is imposed on the consumer, X must exclude the sales tax from the total contract price. For example, assume a sale by X for 100x dollars, a sales tax of 10x dollars, and a cost of goods sold of 50x dollars. Moreover, assume that payments will be made in 10 equal annual installments. X's total contract price would be 100x dollars, its gross profit, 50x dollars (100x dollars less 50x dollars), and its gross profit percentage, 50 percent (50x dollars/100x dollars). However, since the total payments received by X over the 10 year period will equal 110x dollars (100x dollar total contract price plus 10x dollar sales tax), the payments received by X must be reduced by the 10x dollars sales tax amount before the gross profit percentage (50 percent) may be applied against the balance. Therefore, the 11x dollar payment received by X in the year of sale will be considered first the receipt of the 10x dollar sales tax, with the remaining 1x dollar payment applied against the total contract price. Taxable income reported in the year of sale is therefore .5x dollars ((11x dollars less 10x dollars) x 50 percent). Each installment payment received thereafter will be treated as payment against the total contract price.
HOLDING
In cases in which the state sales tax is imposed on the consumer, the sales tax must be excluded from the total contract price for purposes of computing taxable income from installment sales under section 453A of the Code and the regulations thereunder.
Any change from a taxpayer's present method of accounting for state consumer imposed sales tax paid or accrued to the correct method as set forth in this revenue ruling is a change in a method of accounting to which sections 446 and 481 of the Code and regulations thereunder apply.
Rev. Rul. 83-4, 1983-1 C.B. 102.