[PREVIOUS]
 
The statute, as amended, requires the keeping of all necessary records relating to the taxpayer's liability for this tax and to claims for refund, credit, or exemption. This necessarily requires some additional bookkeeping records which may have been unnecessary for the taxpayer's purposes prior to the imposition of the tax. However, the records required by the Bureau regulations have been simplified as much as possible to conform to the ordinary records usually kept by the taxpayers in this industry and at the same time protect the Government's interest from tax avoidance and evasion.

The audit of returns of this tax requires a detailed examination of the opening and closing inventories, production records, plant uses of the product, sales and distribution records, and of the evidence supporting claims for exemption, refund, or credit.

While the collection of this tax has involved some administrative difficulties, it is believed that on the whole and particularly in view of the high yield, the collection cost is very low.

It is believed that no revision of the statute or the forms used in connection therewith is necessary at this time.

In view of the substantial revenue derived and since the administration has reached the point where but little difficulty is to be expected in the collection of the tax, it is the opinion of the Bureau that the instant tax on lubricating oil should be continued.

Tax On Brewer's Wort And Malt Products Section 601(c)(2) Of The Revenue Act Of 1932.


     Yield for the fiscal year -- 1936 -- $1,006,273.85
     Yield for the fiscal year -- 1937 -- 1,000,000.00 Estimated
     Number of taxpayers -- 40
     Rate of tax -- Brewer's wort -- 15 cents per gallon.
                    Malt products -- 3 cents per pound.

Statutory Background. -- The tax on the sale of brewer's wort, liquid malt, malt syrup, and malt extract by the manufacturer, producer, or importer thereof, was first imposed by section 601(c)(2) of the Revenue Act of 1932, effective June 21, 1932. The taxes are levied at the rates of 15 cents a gallon on brewer's wort and 3 cents a pound on liquid malt, malt syrup and malt extract, fluid, solid, or condensed, made from malted cereal grains in whole or in part. This section specifically exempts the sale of malt products by the manufacturer, producer, or importer to a baker for use in baking or to a manufacturer, or producer, of malted milk, medicinal products, foods, cereal beverages, or textiles, for use in the manufacture or production of such products. The section also provides that liquid malt containing less than 15 per cent of solids by weight shall be taxable as brewer's wort. By the Act of June 18, 1934 (Public No. 396 -- 73d Congress), effective June 18, 1934, the exemption mentioned was enlarged to include sales of malt products by the manufacturer, etc., "for resale" to bakers or to manufacturers or producers of malted milk, etc.

As originally enacted by Congress, section 601(c)(2) of the Revenue Act of 1932 was to be effective during the period June 21, 1932 to July 1, 1934. Section 212 of the National Industrial Recovery Act extended the expiration date to July 1, 1935. Public Resolution No. 36 -- 74th Congress extended such date to July 1, 1937. Unless further extended, this tax is automatically repealed as of July 1, 1937.

Economic Basis. -- This tax is an excise tax, but, due to the rate imposed, acts as a regulatory measure. The tax is payable by the manufacturer, producer, or importer, on his sale or use of the enumerated products. These products were used to manufacture beer in violation of the Prohibition laws. The industry is small and appears to be decreasing since repeal of Prohibition. This is indicated by the fact that in the fiscal year 1933, tax on brewer's wort was paid in 33 of the 64 collection districts, and on malt products in 31 of such districts, whereas for the fiscal year 1935, tax was paid in but 10 and 20 collection districts, respectively. A check of the returns for one month shows that the number of taxpayers filing returns for this tax is approximately 40.

No statistics are available in this Bureau from which the value of the products taxed may be determined, but in view of the nature of such products and the purposes for which used, the price evidently varies to a great extent according to supply and demand, channels of distribution, quality of the product, and the season of the year and the location in which sold.

Inequities. -- With respect to any conflict in the subject taxed, no doubt these products are indirectly affected by some of the excise taxes imposed by the several States, but the State taxes differ from the Federal tax in the basis for the tax, the method of computation, and the class of taxpayers affected.

A conflict with respect to Federal taxes may result by reason of the taxes imposed on distilled spirits and liquors.

With respect to the measure of the tax in relation to the value of the products taxed, in the absence of definite information as to manufacturer's selling prices, no accurate comparison can be made. It would seem, however, from the retail prices of such products that the tax may be considered excessive.

It is believed that an economic survey of this industry will show that generally there has been no retarding of trade, curtailment of consumption, or use of substitutes due to the imposition of this tax.

No flagrant attempts at tax avoidance or evasion have been disclosed in connection with the administration of this tax.

Administrative Difficulties. -- There is no involved Bureau procedure relative to the administration of this tax. The records, etc., required to be kept by the Bureau's regulations are no more than those usually required by these taxpayers for their own purposes.

No appreciable administrative difficulties have been encountered with respect to this tax, except in determining whether certain products were taxable as brewer's wort, or as a malt product, and in locating small manufacturers who supply law violators.

The audit of returns of this tax entails the usual verification of production and sales or other disposition records.

No statistics are available from which the actual cost of collecting this tax can be determined but the cost of collection is not out of line with the average cost of collecting the respective miscellaneous and sales taxes.

Since the repeal of the Eighteenth Amendment obviates any need for the retention of the tax on brewer's wort and on malt products, it is recommended that the expiration date of the tax be not further extended.

Tax On Grape Concentrate, Evaporated Grape Juice, And Grape Syrup. Section 601(c)(3) Of The Revenue Act Of 1932.


     Yield for the fiscal year -- 1936 -- $1,839.99
     Yield for the fiscal year -- 1937 -- (None estimated, Tax
                                          repealed.)
     Number of taxpayers -- 5
     Rate of tax -- 20 cents a gallon.

Statutory Background. -- Section 313(a) of the Revenue Act of 1917, effective October 4, 1917, first imposed a tax on all prepared syrups and extracts, which included grape products falling within the category (intended for use in the manufacture or production of beverages, commonly known as soft drinks, by soda fountains, bottling establishments, and other similar places) sold by the manufacturer, producer, or importer thereof, if so sold for not more than $1.30 per gallon, tax of 5 cents per gallon; if so sold for more than $1.30 and not more than $2.00 per gallon, a tax of 8 cents per gallon; if so sold for more than $2.00 and not more than $3.00 per gallon, a tax of 10 cents per gallon; if so sold for more than $3.00 and not more than $4.00 per gallon, a tax of 15 cents per gallon; and if so sold for more than $4.00 per gallon, a tax of 20 cents per gallon.

Section 313(b) of the Revenue Act of 1917 imposed a tax at the rate of 1 cent a gallon on all unfermented grape juice sold by the manufacturer, producer, or importer, in bottles or other closed containers.

These taxes were repealed on February 25, 1919, by section 1400(a) of the Revenue Act of 1918.

Section 628(a) of the Revenue Act of 1918, effective February 25, 1919, reenacted the tax on all unfermented grape juice sold by the manufacturer, producer, or importer in bottles or other closed containers, but changed the rate of tax to 10 per cent of the price for which sold. This tax remained in effect until its repeal on January 1, 1922, by section 1400(a) of the Revenue Act of 1921.

Section 602(b) of the Revenue Act of 1921, effective January 1, 1922, imposed a tax of 2 cents per gallon on all unfermented fruit juices, in natural or slightly concentrated form, or such fruit juices to which sugar had been added (as distinguished from finished or fountain syrups), intended for consumption as beverages with the addition of water or water. and sugar, and upon all imitations of any such fruit juices, sold by the manufacturer, producer, or importer. This tax was repealed on June 2, 1924, by section 1100(a) of the Revenue Act of 1924.

Section 601(c)(3) of the Revenue Act of 1932, effective June 21, 1932, imposed a tax at the rate of 20 cents a gallon on the sale by the manufacturer, producer, or importer of grape concentrate, evaporated grape juice, and grape syrup (other than finished or fountain syrup) containing more than 35 per cent of sugars by weight. This section specifically exempted the sale of any such products which contained a preservative sufficient to prevent fermentation when diluted, and also exempted sales to a manufacturer or producer of food products or soft drinks for use in the manufacture or production of the latter products.

As originally enacted by Congress, section 601(c) (3) of the Revenue Act of 1932 was to be effective during the period June 21, 1932 to July 1, 1934. Section 212 of the National Industrial Recovery Act extended the expiration date to July 1, 1935. Public Resolution No. 36 -- 74th Congress (H.R. 324) extended such date to July 1, 1937. However, section 336 of the Liquor Tax Administration Act repealed this tax effective June 27, 1936.

Economic Basis. -- This tax was an excise tax and served also as a regulatory measure. The tax was paid by the manufacturer, producer, or importer on his sale of the taxable products. These products were used by consumers and others to manufacture intoxicating wines and liquors in violation of the Prohibition laws. The industry is comparatively small and appears to be decreasing since the repeal of prohibition. This is indicated by the fact that in the fiscal year 1933, this tax was paid in only 13 of the 64 collection districts, whereas in the fiscal year 1935, tax was paid in only 6 of such districts.

No statistics are available in this Bureau from which the value of the products taxed may be determined, but in view of the nature of such products and the purposes for which used, the price evidently varies to a great extent according to supply and demand, channels of distribution, quality of the product, and the location and season of the year in which sold.

Inequities. -- With respect to any conflict in the subject taxed, no doubt these products were indirectly affected by some of the excise taxes imposed by the several States, but the State taxes differed from the Federal tax in the basis for the tax, the method of computation, and the class of taxpayers affected.

A conflict with respect to Federal taxes may have resulted by reason of the taxes imposed on distilled spirits and liquors.

With respect to the measure of the tax in relation to the value of the products taxed, in the absence of definite information as to manufacturer's selling prices, no accurate comparison can be made.

It is believed that an economic survey of this industry will show that generally there was no retarding of trade, curtailment of consumption, or use of substitutes due to the imposition of this tax.

No flagrant attempts at tax avoidance or evasion were disclosed in connection with the administration of this tax.

Administrative Difficulties. -- There was no involved Bureau procedure relative to the administration of this tax. The records, etc., required to be kept by the Bureau's regulations were no more than those usually required by these taxpayers for their own purposes.

No appreciable difficulties were encountered in the administration of this tax, except in determining the sugar content by weight of some of the products.

The audit of the returns for this tax required the usual examination of production and sales or other disposition records and verification of claims for exemption, refund, or credit.

In view of the repeal of the Eighteenth Amendment and the small amount of revenue obtained, it is recommended that this tax be not re-enacted.

Tax On Tires And Inner Tubes Section 602 Of The Revenue Act Of 1932.


     Yield for the fiscal year -- 1936 -- $32,207,983.03
     Yield for the fiscal year -- 1937 -- 32,250,000.00 Estimated
     Number of taxpayers -- 150
     Rate of tax -- Tires -- 2 1/4 cents a pound.
                    Inner tubes -- 4 cents a pound.

Statutory Background. -- The tax on tires and inner tubes was first imposed under section 900(3) of the Revenue Act of 1918, effective February 25, 1919. Under that Act the tax was levied at the rate of 5 per cent of the sale price on the sale by the manufacturer, producer, or importer of tires and inner tubes for automobile trucks, automobile wagons, other automobiles and motorcycles, when sold to any person other than a manufacturer or producer of automobile trucks, automobile wagons, other automobiles and motorcycles.

Section 900(3) of the Revenue Act of 1921, effective January 1, 1922, reenacted the tax on tires and inner tubes for automobile trucks, etc., as imposed by section 900(3) of the Revenue Act of 1918, without change.

Section 600(3) of the Revenue Act of 1924, effective July 3, 1924, reenacted the tax on tires and inner tubes for automobile trucks, etc., as imposed by section 900(3) of the Revenue Act of 1921, but reduced the rate of tax to 2 1/2 per cent of the sale price.

It is to be noted that under the foregoing Revenue Acts the tax was imposed only on automobile and motorcycle tires and inner tubes.

Section 1200(a) of the Revenue Act of 1926, repealed the tax imposed by section 600(3) of the Revenue Act of 1924, on tires and inner tubes, effective as of February 26, 1926.

The tax was revived in section 602 of the Revenue Act of 1932, effective as of June 21, 1932, under which a tax is imposed on the sale or use of tires and inner tubes by the manufacturer, producer or importer, on the following basis:

"(1) Tires wholly or in part of rubber, 2 1/4 cents a pound on total weight (exclusive of metal rims or rim bases), to be determined under regulations prescribed by the Commissioner with the approval of the Secretary.

"(2) Inner tubes (for tires) wholly or in part of rubber, 4 cents a pound on total weight, to be determined under regulations prescribed by the Commissioner with the approval of the Secretary."

It is to be noted that the tax under section 602 of the Revenue Act of 1932 is not limited to tires and inner tubes for automobiles, etc., but applies to all types of tires and inner tubes, and that the tax is measured by the weight of the article instead of the sale price thereof, as prescribed in the previous Revenue Acts.

Section 620 of the Revenue Act of 1932, as amended, relating to tax-free sales of articles for use as material in the manufacture or production of, or as a component part of, another taxable article, specifically excludes tires and inner tubes from the provisions thereof. In other words, tires and inner tubes are considered as not being susceptible to further manufacture and, therefore, may not be sold tax free for such purposes.

Section 606(e) of the Revenue Act of 1932 provides that if tires or inner tubes are sold on or in connection with, or with the sale of an automobile or truck chassis, body, or motorcycle, a credit may be allowed against the tax due on the sale or use of such articles in an amount equal to, in the case of an automobile truck chassis or body, 2 per centum, and in the case of any other automobile chassis or body or motorcycle, 3 per centum (1) of the purchase price (less, in the case of tires, the part of such price attributable to the metal rim or rim base) if such tires or inner tubes were taxable under section 602 (relating to tax on tires and inner tubes); or (2) if such tires or inner tubes were taxable under section 622 (relating to use by manufacturer, producer, or importer) then of the price less, in the case of tires, the part of such price attributable to the metal rim or rim base) at which such or similar tires or inner tubes are sold in the ordinary course of trade by manufacturers, producers, or importers thereof, as determined by the Commissioner.

Section 606(f) of the Revenue Act of 1932 as amended by section 212 of the National Industrial Recovery Act and Public Resolution No. 36 -- 74th Congress provides that where prior to August 1, 1937, tires and inner tubes have been sold by the manufacturer, producer, or importer, and are on such date held by a dealer and intended for sale, the tax paid by the manufacturer, producer, or importer, will be refunded, or if the tax has not been paid, it shall be abated. This section also provides the manner in which such refunds and abatements shall be made.

As originally enacted by Congress, section 602 of the Revenue Act of 1932 was to be effective during the period June 21, 1932 to August 1, 1934. Section 212 of the National Industrial Recovery Act extended the expiration date to August 1, 1935. Public Resolution No. 36 -- 74th Congress extended such date to August 1, 1937. Unless further extended, this tax is automatically repealed as of August 1, 1937.

Economic Basis. -- This tax is an excise tax payable by the manufacturer, producer, or importer on his sale or use of the taxable products. Under the Bureau's interpretation of the word "tires", the tax applies to the sale of all rubber hoops or bands which fit or form the tread of vehicle wheels, and to the inner tubes thereof. The tire and inner tube industry ranks among the larger industries of the country, and tax is being paid in 56 of the 64 collection districts. A check of the returns for one month shows that the number of taxpayers filing returns for this tax is approximately 150.

Inequities -- With respect to any conflict in the subject taxed, it is possible that these products are indirectly affected by some of the excise taxes imposed by the several States. The State taxes, however, differ from the Federal tax in the basis for the tax, the method of computation, and the class of taxpayers affected.

With respect to the measure of the tax in relation to the value of the subject taxed, complaints have been made that the tax applies inequitably to tires for such articles as children's wagons, scooters, wheelbarrows, etc. Thus it is contended that computed on a weight basis the tax on tires for the articles mentioned equals approximately 50 per cent of the cost, whereas the tax on tires and inner tubes for automobiles, trucks, and motorcycles is only approximately 7 1/2 per cent of the sale price thereof.

It is believed that an economic survey of the industry will show that there has been no retarding of trade, curtailment of consumption or use of substitutes due to the imposition of this tax.

There have been no flagrant attempts at tax avoidance or evasion with respect to this tax. However, a number of manufacturers of these products did attempt to avoid some of this tax by transferring, immediately preceding the effective date of the Act, large inventories of finished products to old or newly organized selling subsidiaries. The Bureau has held that the tax attaches to the subsequent sales made by the subsidiary companies.

Administrative Difficulties. -- There is no involved Bureau procedure relative to the administration of this tax. The records, etc., required to be kept by the Bureau's regulations are no more than those usually required by these taxpayers for their own purposes.

The audit of the returns of this tax requires a detailed examination of the opening and closing inventories, production records, uses of the products by taxpayer, sales and other distribution records and evidence supporting claims for exemption, refund, or credit.

No statistics are available from which the actual cost of collecting this tax may be determined, but based on the experience of the Bureau, it is believed that this tax falls in the class of taxes having a low collection cost.

In view of the substantial revenues derived and the simplicity of its administration, this Bureau recommends that the tax on tires and inner tubes be continued.

Tax On Toilet Preparations, Etc. Section 603 Of The Revenue Act Of 1932.


     Yield for the fiscal year -- 1936 -- $ 13,301,754.65
     Yield for the fiscal year -- 1937 -- 13,000,000.00 Estimated
     Number of taxpayers -- 6,100
     Rate of tax -- (a) Perfumes, cosmetics, etc., 10 per cent of
                        manufacturer's, producer's, or importer's
                        sale price.

                    (b) Toothpaste, toilet soaps, etc., 5 per cent
                        of manufacturer's, producer's, or importer's
                        sale price.

Statutory Background. -- Section 600(g) of the Revenue Act of 1917, effective October 4, 1917, first imposed a Federal tax on the sale by the manufacturer, producer, or importer of perfumes, essences, extracts, toilet waters, cosmetics, petroleum jellies, hair oils, pomades, hair dressings, hair restoratives, hair dyes, tooth and mouth washes, dentifrices, tooth pastes, aromatic cachous, toilet soaps and powders, or any similar substance, article or preparation by whatsoever name known or distinguished, used or applied or intended to be used or applied for toilet purposes. The tax was levied at the rate of 2 per cent of the sale price.

The tax on toilet preparations was continued in the Revenue Act of 1918, but the rate and basis of the tax were changed as follows:

Section 900(21), effective February 25, 1919, imposed a tax on the sale or lease of toilet soaps and toilet soap powders, at the rate of 3 per cent of the price for which sold; and

Section 907(a)(1), effective May 1, 1919, imposed a tax of 1 cent for each 25 cents or fraction thereof of the amount paid for perfumes, essences, extracts, toilet waters, cosmetics, petroleum jellies, hair oils, pomades, hair dressings, hair restoratives, hair dyes, tooth and mouth washes, dentifrices, tooth pastes, aromatic cachous, toilet powders (other than soap powders), or any similar substance, article, or preparation by whatsoever name known or distinguished, used or applied or intended to be used or applied for toilet purposes, when sold by or for a dealer or his estate for consumption or use.

It is to be noted that the tax as imposed under the latter section was changed from a manufacturer's sales tax to a tax on a dealer's sale for consumption or use. In addition, this statute authorized the Commissioner to prescribe the use of adhesive stamps as the medium for collecting the tax imposed under section 907(a)(1) and such tax was accordingly administered and collected as a stamp tax. The taxes so imposed by the Revenue Act of 1918 were repealed on January 1, 1922, by section 1400(a) of the Revenue Act of 1921.

The tax on toilet preparations, or articles used or applied or intended to be used or applied for toilet purposes, was revived by section 603 of the Revenue Act of 1932, effective June 21, 1932. Under this section the tax is again imposed on the sale by the manufacturer, producer, or importer, and is levied at the following rates:

10 per cent of the sale price with respect to perfumes, essences, extracts, toilet waters, cosmetics, petroleum jellies, hair oils, pomades, hair dressings, hair restoratives, hair dyes, aromatic cachous, and toilet powders, and any similar substance, article, or preparation, by whatsoever name known or distinguished; and

5 per cent of the sale price with respect to tooth and mouth washes, dentifrices, tooth pastes, and toilet soaps, and any similar substance, article, or preparation, by whatsoever name known or distinguished.

As originally enacted, section 603 of the Revenue Act of 1932 was to be effective during the period June 21, 1932 to July 1, 1934. Section 212 of the National Industrial Recovery Act extended the expiration date to July 1, 1935. Public Resolution No. 36 -- 74th Congress (H.R. 324) extended such date to July 1, 1937. Unless further extended, this tax will be automatically repealed as of July 1, 1937.

Economic Basis. -- This tax is an excise tax payable by the manufacturer, producer, or importer on his sale or use of the articles specified. The tax on perfumes, etc., is being paid in every one of the 64 collection districts, while tax on tooth pastes, etc., is being paid in all but 4 of such collection districts. A check of the returns filed for one month shows the number of taxpayers filing returns of these taxes is approximately 6,100.

The prices for which the articles enumerated in this section are sold vary to a great extent according to cost and quality of the ingredients used, ownership of the formula for the product, the manufacturer thereof, extent of advertising, supply and demand, the character of the container of the product, and the channels through which distributed.

Inequities. -- With respect to any conflict in the subject taxed, no doubt these products are indirectly affected by some of the excise taxes imposed by the several States, but in general, the State taxes differ from the Federal tax in the basis for the tax, the method of computation, and the class of taxpayers affected.

The only conflicting Federal tax is that imposed by section 601(c)(1) of the Revenue Act of 1932 on the sale of lubricating oils. Certain of these oils are used as basic ingredients in the manufacture of certain hair oils, cosmetics, and creams. However, the administrative provisions of the statute lessen, if not entirely eliminate, a real conflict by permitting tax-free sales of materials for further manufacture between manufacturers of taxable articles.

While the tax applies to all manufacturers alike, its application may be inequitable under certain conditions. Some manufacturing chemists manufacture toilet preparations only in bulk which are sold to distributors who in turn package the product without any change in its form or consistency and sell it under their own brands or trade names as their own product. Thus, the same product may be marketed by various distributors under different brands or trade names. Other manufacturers package their product under their own brands or trade names for distribution to the trade in the form in which the toilet preparations are ultimately sold to consumers. The value of these products is attributable not to basic ingredients from which made, but to the demand created therefor usually through widespread and costly advertising. Hence, the bulk sales of the manufacturer in the first case care made on a much lower price level than the sales of the packaged product of the manufacturer in the second case. Since the tax is based upon the sale price of the taxable product, the first manufacturer bears a correspondingly lighter tax burden than the second manufacturer so that the tax might be regarded as discriminatory against the manufacturer who packages his own product for distribution under his own brands or trade names. As explained below, this fact has been taken advantage of by manufacturers desiring to minimize the tax.

With respect to the measure of the tax in relation to the value of the product, the margin of profit on these articles is tremendously high when compared to cost of ingredients and manufacture, but the apparently excessive mark-up is largely absorbed by advertising and selling costs. Many manufacturers have complained that the 10 per cent tax rate exceeds their profit.

It is believed that an economic survey of this industry will show that there has been no retarding of trade, curtailment of consumption, or use of substitutes due to the imposition of this tax.

Due, perhaps, to the sharp competition prevailing in this industry, various schemes have been tried to avoid or evade the tax. The method most commonly used was grounded on the fact that a manufacturer selling only bulk product would be taxed less than a manufacturer selling packaged product. Thus, in some cases, a corporation, which was engaged in manufacturing and distributing packaged product prior to enactment of the Revenue Act of 1932, would after the tax became effective organize subsidiary companies to carry on the manufacturing and packaging operations. Corporation "A" would be formed as the "manufacturer" and it would sell the bulk product at cost plus a nominal profit exclusively to corporation "B". The latter in turn would package the product and sell. the entire output, again at cost plus a nominal profit, to the original or parent company. The parent company would continue as before to conduct the expensive advertising operations and sell the finished product to the trade. Since by this method, if successful, the tax would be restricted to the nominal cost of the "manufacturer" or corporation "A", it is readily apparent that the tax would be greatly minimized.

Section 619(a) and (b)(3) of the Revenue Act of 1932 provides that there shall be included in the price for which an article is sold any charge for coverings and containers of whatever nature and that if an article is sold otherwise than through an arm's-length transaction and at less than the fair market price, the tax shall be based on the price for which similar articles are sold in the ordinary course of trade by other manufacturers as determined by the Commissioner. These sections of law clearly indicate that Congress was cognizant of the fact that the corporate form could be used to circumvent the statute. The Bureau in considering these sections has taken the position that in a situation as outlined above, the sales between the related corporations are made otherwise than through an arm's-length transaction and that the fair market price is the price for which the articles are sold outside the affiliated group in the open market, or in this instance, the price for which the articles are sold by the parent or original company.

Administrative Difficulties. -- There is no involved Bureau procedure relative to the administration of this tax. The records, etc., required to be kept by the Bureau's regulations are no more than those usually required by these taxpayers for their own purposes.

The audit of the returns of this tax requires a detailed examination of the corporate set-up, the opening and closing inventories, production and cost records, uses of the products by taxpayer, sales and other distribution records and evidence supporting claims for exemption, refund, or credit.

By reason of the various problems involved in the administration of this tax, the collection cost may be somewhat above the average for the respective miscellaneous and sales taxes.

Substantial revenue is obtained from this source and it is recommended that the tax be continued. However, to obviate any inequity, to lessen the possibility of tax avoidance, and to simplify the administration, it is suggested that the statute be amended to tax the sale of the person who prepares or packages toilet preparations in the form in which they are to be sold to the consumer for consumption or use, or amend the statute to specifically define "manufacturer, producer, or importer" to include a person who prepares and packages such preparations in the form in which sold to the consumer. For example, the following could be added to section 603 as subsection (b) and (c):

(b) As used in this section the term "producer" includes any person who claims to have (1) any private formula, secret or occult art for making or preparing any of the articles enumerated in this section, or (2) who has or claims to have any exclusive right or title to the making or preparing of such articles, or (3) who prepares, utters, vends, or exposes any such articles for sale under any letters, patent or trademark, or (4) who (whether or not prepared by him under any formula, published or unpublished) bottles, or packages any product in a form in which it will be sold for consumption and holds it out or recommends to the public that such product is to be used or applied, or is intended to be used or applied for toilet purposes.

(c) The provisions of section 620, subsections (1) and (2), as amended, shall not apply with respect to the sale of any of the articles enumerated in this section.

Tax On Furs Section 604 Of The Revenue Act Of 1932.


     Yield for the fiscal year -- 1936 -- $ 3,321,067.14
     Yield for the fiscal year -- 1937 -- 2,750,000.00 Estimated
     Number of taxpayers -- 2,100
     Rate of tax -- During the period June 21, 1932 to June 23,
                    1936, 10 per cent of the sale price. On and
                    after June 25, 1936, 3 per cent of the sale
                    price.

Statutory Background. -- Section 900(19) of the Revenue Act of 1918, effective February 25, 1919, first imposed a tax on the sale or lease by the manufacturer, producer, or importer of articles made of fur on the hide or pelt and articles of which such fur was the component material of chief value. The tax was levied at the rate of 10 per cent of the sale price. This tax was repealed on January 1, 1922, by section 1400(a) of the Revenue Act of 1921.

The tax was revived, effective June 21, 1932, by section 604 of the Revenue Act of 1932 in the same form as imposed under the Revenue Act of 1918. The statute was amended by section 608 of the Revenue Act of 1934, effective May 10, 1934, to provide an exemption from the tax for articles selling for less than $75.00. The statute was further amended by section 810 of the Revenue Act of 1936, effective June 23, 1936, so as to reduce the rate of tax to 3 per cent of the sale price and to eliminate the exemption for articles selling for less than $75.00.

The statute at the present time imposes a tax on the sale by the manufacturer, producer, or importer of articles made of fur on the hide or pelt, and articles of which such fur is the component material of chief value, at the rate of 3 per cent of the sale price regardless of the price for which sold.

As originally enacted by Congress, section 604 of the Revenue Act of 1932 was to be effective during the period June 21, 1932 to July 1, 1934. Section 212 of the National Industrial Recovery Act extended the expiration date to July 1, 1935. Public Resolution No. 36 -- 74th Congress (H. R. 324) extended such date to July 1, 1957. Unless further extended, this tax is automatically repealed as of July 1, 1937.

Economic Basis. -- This tax covers certain articles of wearing apparel which have a wide range in value. The tax applies not only to the luxurious class of fur coats, etc., but also in many instances falls upon cloth garments trimmed with cheap furs. The enterprises affected by the tax are several, namely, (a) manufacturers of fur trimmings, (b) manufacturers of articles made completely of fur, (c) manufacturers of coats (cloth with fur trimmings), (d) manufacturers of suits (fur-trimmed) and (e) manufacturers of dresses (fur-trimmed). The tax also affects the many small neighborhood or retail furriers scattered throughout the country who manufacture articles of fur, as well as make fur repairs.

From the foregoing, it can be seen that in general, the size of the industry affected is large and that the tax is widely scattered in its application. Tax is being paid in all but 8 of the 64 collection districts. However, approximately 75 per cent of all collections are made in the Third District of New York. A check of the returns for one month shows that the number of taxpayers filing returns for this tax is approximately 2,100.

Inequities. -- The articles subjected to this tax are also subject to the local retail sales taxes wherever imposed. Insofar as known, there are no other taxes, whether Federal or State, which could be considered as conflicting with the instant tax.

The administration of the tax disclosed some attempts at avoidance or evasion. The most commonly used means of evasion prevailed during the effective period of the exemption for articles selling for less than $75.00. By reason of such exemption, certain manufacturers endeavored to bring their product within the exempt class by means of false billing under secret arrangements with buyers, or selling an inexpensive muff with an expensive fur garment and charging enough of the price of the fur garment against the muff, so as to reduce its sale price to less than $75.00, etc. The possibility of evading the tax by such means has been removed by the elimination of the exemption based on the amount of the sale price.

Administrative Difficulties. -- There is no involved Bureau procedure relative to the administration of this tax. The records, etc., required to be kept by the Bureau's regulations are no more than those usually required by these taxpayers for their own purposes.

The administration of the tax involved some difficulty with respect to (1) the determination in the case of fur-trimmed cloth garments whether the fur trimming constituted the component material of chief value so as to make the particular garment taxable, and (2) the determination of a "fair market price" in the case of articles sold by the manufacturer or producer only at retail. The latter question arose mainly from the practice followed by certain retail establishments of repairing fur garments and making individual garments on special order. These difficulties have been largely overcome. In cooperation with the members of the industry a standard formula has been devised for use in determining which material of fur-trimmed garments is the component of chief value and a specified percentage of the retail price has been adopted as representing the "fair market price" for use. in computing the tax applicable to articles sold only at retail.

The audit of the returns of this tax requires a detailed examination of production and cost records, particularly to determine the relative values of the components of fur-trimmed garments, and the usual examination of sales and other disposition records and of the evidence relied upon to support claims for exemption, refund, or credit.

While the actual cost of collecting this tax is not known, it is believed that the collection cost is in line with the average cost of collecting the respective miscellaneous and sales taxes.

The Bureau recommends continuing the tax on fur articles in its present form.

Tax On The Sale Or Use Of Jewelry, Etc. Section 605 Of The Revenue Act Of 1932.

 
[Next]