Rev. Rul. 85-52

1985-1 C.B. 58, 1985-17 I.R.B. 5.

PUBLIC UTILITIES TAX; GAS REVENUE TAX; MESSAGES TAX; ILLINOIS

Published: April 29, 1985

Section 164.-Taxes, 26 CFR 1.164-3: Definitions and special rules.

  Public Utilities Tax; Gas Revenue Tax; Messages Tax; Illinois. Effective with respect to taxes paid or accrued on or after January 1, 1984, the Illinois Public Utilities Tax, the Gas Revenue Tax, and the Messages Tax are deductible as general sales taxes if separately stated and paid by the consumer as required by section 164(b)(5) of the Code. Rev. Rul. 67-240 superseded.

ISSUE

  Whether the Public Utilities Tax, the Gas Revenue Tax, and the Messages Tax, all imposed by the state of Illinois, are deductible as general sales taxes under section 164(a)(4) of the Internal Revenue Code?

FACTS

  Effective January 1, 1984, Illinois Public Act 83-14 increased the tax rates for the following taxes from 4% to 5%: the Retailers' Occupation Tax; the Service Occupation Tax; the Use Tax; and the Service Use Tax. Collectively, these taxes constitute the Illinois general sales tax, because they apply to all transfers of tangible personal property at retail or pursuant to a service, with certain limited exceptions.

  Other Illinois statutory provisions, relating to the Public Utilities Tax, the Gas Revenue Tax, and the Messages Tax impose a 5% tax on the gross receipts derived from the provision of certain particular services. Each of these provisions requires the end user or consumer to reimburse the service provider for the payment of these taxes.

LAW AND ANALYSIS

  Section 164(a)(4) of the Code provides, in part, that state and local general sales taxes are allowed as a deduction for the taxable year within which paid or accrued.

  The term 'general sales tax' is defined in section 164(b)(2)(A) of the Code as a tax imposed at one rate in respect of the sale at retail of a broad range of classes of items.

  Section 164(b)(5) of the Code provides that if the amount of any general sales tax is separately stated, then, to the extent that the amount so stated is paid by the consumer (otherwise than in connection with the consumer's trade or business) to the seller, such amount will be treated as a tax imposed on, and paid by, such consumer.

  Section 1.164-3(f)(2) of the Income Tax Regulations provides that to qualify as a 'general sales tax,' the tax must be general; that is, it must be imposed at one rate in respect of the retail sales of a broad range of classes of items. A sales tax is considered to be general although imposed on sales of various classes of items at more than one rate provided that one rate applies to the retail sales of a broad range of classes of items. The term 'items' includes both commodities and services.

  Section 1.164-3(g)(1) of the regulations provides, 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 (with exceptions and additions). However, a sales tax that is selective, that is, a tax that applies at one rate with respect to retail sales of specified classes of items 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. For example, a tax that applies only to sales of alcoholic beverages, tobacco, admissions, luxury items, and a few other items is not general. Nevertheless, a selective sales tax may be deemed to be part of the general sales tax and hence may be deductible if imposed at the same rate as the general rate of tax that qualifies a tax in the taxing jurisdiction as a general sales tax.

  Rev. Rul. 67-240, 1967-2 C.B. 89, holds that the Illinois Public Utilities Tax is not deductible as a general sales tax under section 164(a)(4) of the Code, because the Public Utilities Tax does not apply to a broad range of classes of items, and the rate of such tax is different from that of the general sales tax.

  As a result of the enactment of Illinois Public Act 83-14, the Public Utilities Tax, the Gas Revenue Tax, and the Messages Tax are now imposed at the same rate (5%) as the Illinois general sales tax. The statement to the contrary in Rev. Rul. 67-240 ceased to be true as of January 1, 1984.

  Accordingly, because the Public Utilities Tax, the Gas Revenue Tax, and the Messages Tax are imposed by the State of Illinois at the same rate as the general sales tax, such taxes are deemed to be part of the general sales tax. See section 1.164-3(g)(1) of the regulations.

HOLDING

  Effective with respect to taxes paid or accrued on or after January 1, 1984, the Illinois Public Utilities Tax, the Gas Revenue Tax, and the Messages Tax are deductible as general sales taxes under section 164(a)(4) of the Code if such taxes are separately stated and paid by the consumer as required by section 164(b)(5). No deduction under section 164(a)(4) is allowed with respect to such taxes to the extent paid or accrued before January 1, 1984.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 67-240 is superseded.

Rev. Rul. 85-52, 1985-1 C.B. 58, 1985-17 I.R.B. 5.