Rev. Rul. 86-61

1986-1 C.B. 323, 1986-17 I.R.B. 11.

BOW AND ARROW COMPONENTS; NATIVE INDIAN HANDICRAFT

Published: April 28, 1986

Section 4221.-Certain Tax-Free Sales, 26 CFR 48.4221, Tax-free sale of articles to be used for, or resold for further manufacture

(Also Sections 4161, 4225; 48.4161(b)-1, 48.4225-1.)

  Bow and arrow components; native Indian handicraft. Bow and arrow component parts may not be sold tax free under section 4221(a)(1) and 42219d)(6)(A) of the code for use in the production of bows and arrows as articles of native Indian handicraft by Indian tribes Rev. Rul. 77-90 distinguished.

ISSUE

  May bow and arrow components be sold tax free under section 4221(a)(1) of the Internal Revenue Code for use in the manufacture by an Indian tribe of bows and arrows that, under section 4225, are exempt from manufacturers excise tax?

FACTS

  A manufacturer sells to an Indian tribe various components used in the production of bows and arrows. Utilizing Indians working on an Indian reservation, the Indian tribe produces finished handicraft bows and arrows from the components. The finished bows qualify as native Indian handicraft. The Indian tribe then sells the completed bows and arrows.

LAW AND ANALYSIS

  Section 4161(b)(1) of the Code, as amended by the Tax Reform Act of 1984, section 1017, 1984-3 (Vol. 1) C.B. 1, 529, imposes an 11 percent tax on the sale of certain bows and arrows by the manufacturer, producer or importer. Section 4161(b)(2)(A) imposes an 11 percent tax on the sale by the manufacturer, producer or importer of parts and accessories suitable for inclusion in or attachment to a bow or arrow described in section 4161(b)(1).

  Section 4221(a)(1) of the Code provides that no tax shall be imposed under section 4161 on the sale by the manufacturer of an article for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture.

  Section 4221(d)(6)(A) of the Code states that an article shall be treated as sold for use in further manufacture if such article is for use by the purchaser as material in the manufacture or production of, or as a component part of, another article taxable under Chapter 32 of the Code to be manufactured or produced by that purchaser.

  Section 4225 of the Code states, in pertinent part, that no tax shall be imposed under Chapter 32 on any article of native Indian handicraft manufactured or produced by Indians on Indian reservations.

  Section 48.4225-1 of the Manufacturers and Retailers Excise Tax Regulations provides that the exemption under section 4225 of the Code applies to articles taxable under chapter 32 of the Code that are of native Indian handicraft and are manufactured or produced by Indians on Indian reservations.

  Rev. Rul. 72-536, 1972-2 C.B. 573, concerns lubricating oil sold for use in the manufacture of light-duty trucks. Effective December 11, 1971, the manufacturer's excise tax previously imposed on those trucks was repealed. The ruling holds that, effective that date, lubricating oil could not be sold tax free under section 4221(a)(1) for use in the manufacture of those trucks, because they had ceased to be articles subject to the manufacturers excise tax.

  Rev. Rul. 77-90, 1977-1 C.B. 334, concerns the sale by a manufacturer of tread rubber for use in the further manufacture of tires that are sold for export prior to any other use. The ruling holds that under section 4221(a)(1) of the Code the sale of the rubber for tire manufacture is exempt from the manufacturers excise tax and the subsequent sale of the tires for export is exempt from tax under section 4221(a)(2).

  Section 4221(a)(1) of the Code exempts the sale of articles for further manufacture only if the article sold is to be used as material in the manufacture or production of, or as a component part of, 'another article taxable under (chapter 32).' Section 4221(d)(6)(A). As a result of the effect of section 4225, however, qualifying articles of native Indian handicraft that are otherwise taxable under chapter 32 are to have no tax imposed on them under chapter 32. See section 48.4225-1 of the regulations. Such articles, therefore, are not taxable under chapter 32, and material or components sold for use in the production of articles of native Indian handicraft are not sold for use in the production of articles taxable under chapter 32. The sale of material and components for that use, therefore, is not exempt under section 4221(a)(1). See Rev. Rul. 72-536.

  Although the tax on such a sale of material and components may be passed through in the form of higher prices to the producer of native Indian handicraft, the imposition of the tax on the sale does not subvert the purpose of section 4225 of the Code. Any subsequent sale by the producer of the handicraft is exempt from tax. Thus, in the present situation, the handicraft articles produced and sold by the tribe still enjoy an excise tax exemption to the extent that their value was contributed by the tribe's handiwork. It is that handiwork at which the policy of section 4225 is directed.

  The present situation is distinguishable from that in Rev. Rul. 77-90. In Rev. Rul. 77-90 the sale of tread rubber by the manufacturer to a tire retreader was exempt from tax under section 4221(a)(1) of the Code as a sale for further manufacture. The retreader's subsequent sale of the tires for export, however, was exempt under section 4221(a)(2), which exempts the sale of any article for export. Tires themselves are normally taxable articles under chapter 32 of the Code. Thus, the exemption for sale for further manufacture of taxable articles applies to the sale of tread rubber to a tire retreader, notwithstanding the exemption of the later sale. In contrast, articles of native Indian handicraft are always tax exempt, regardless of their subsequent disposition, whether abroad or domestic. Accordingly, parts sold for the manufacture of native Indian handicraft are necessarily sold for the manufacture of an article that is not taxable under chapter 32. For this reason, the exemption under section 4221(a)(1) does not apply.

  Furthermore the policy behind exempting from tax articles that are sold for export - to encourage United States exports - would not be served by exempting only the value contributed by the last manufacturer in a series of manufacturers. Because that policy is not concerned with who manufactured an article that is sold for export, there is no connection between the policy and the amount of value that is added by the last manufacturer. In contrast, here there is a relation between the policy behind section 4225 of the Code - to encourage Indian hand work - and the value contributed by the producer of native Indian handicraft, who is an Indian on a reservation.

  The bows and arrows described above are article native Indian handicraft and, therefore, pursuant to section 4225 of the Code, are not subject to the manufacturers excise tax. Consequently, the sales of bow and arrow component parts to be used in the production of the bows and arrows by the Indian tribe may not be made tax free under section 4221(a)(1) since the parts are not sold for use in the manufacture of another article taxable under chapter 32.

HOLDING

  The tax imposed by section 4161(b)(2) of the Code applies to the sale of bow and arrow component parts to Indians for use in the production of bows and arrows that are exempt from the manufacturers excise tax.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 77-90 is distinguished.

Rev. Rul. 86-61, 1986-1 C.B. 323, 1986-17 I.R.B. 11.