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     Yield for the fiscal year - 1936 - $ 3,110,604.75
     Yield for the fiscal year - 1937 -     290,000.00 Estimated
     Number of taxpayers                    2,900
     Rate of tax - 10 per cent of manufacturer's sole price.

Statutory Background. -- The Federal tax on the sale by the manufacturer, producer, or importer of any article commonly or commercially known as jewelry, whether real or imitation, was first imposed under section 600(e) of the Revenue Act of 1917, effective October 4, 1917. The tax was levied at the rate of 3 per cent of the sale price.

The tax on jewelry, etc., was continued by section 905 of the Revenue Act of 1918. This section, however, changed the basis and rate of the tax to a 5 per cent tax on the sale by a dealer in "all articles commonly or commercially known as jewelry, whether real or imitation; pearls, precious and semiprecious stones, and imitations thereof; articles made of, or ornamented, mounted or fitted with precious metals or imitations thereof or ivory (not including surgical instruments); watches; clocks; opera glasses; lorgnettes; marine glasses; field glasses; and binoculars".

The provisions of section 905 of the Revenue Act of 1918 were reenacted in section 905(a) of the Revenue Act of 1921, effective January 1, 1922, without change, other than the addition of eyeglasses and spectacles to the articles exempted from the tax.

The 5 per cent tax on sales was continued by section 604(a) of the Revenue Act of 1924, but the scope of the tax was enlarged to impose the tax on the lease as well as the sale of jewelry by a dealer and the exemptions were extended to include (1) the sale (or lease) of musical instruments, silver-plated flat table-ware, and articles used for religious purposes, in addition to the sale of surgical instruments, eyeglasses and spectacles, (2) articles sold (or leased) for an amount not in excess of $30.00, and (3) watches sold (or leased) for an amount not in excess of $60.00. This tax was repealed by section 1200(a) of the Revenue Act of 1926, effective February 26, 1926.

The tax on jewelry was revived by section 605 of the Revenue Act of 1932, but under this section the tax was again imposed upon the sale or use by the manufacturer, producer, or importer and the rate was increased to 10 per cent of the sale price. The tax applied to all "articles commonly or commercially known as jewelry, whether real or imitation; pearls, precious and semiprecious stones, and imitations thereof; articles made of, or ornamented, mounted, or fitted with, precious metals or imitations thereof or ivory (not including surgical instruments or silver-plated ware, or frames or mountings for spectacles or eye glasses); watches; clocks; parts for watches or clocks sold for more than 9 cents each; opera glasses; lorgnettes; marine glasses; field glasses; and binoculars." Any articles used for religious purposes, or any article (other than watch or clock parts) sold for less than $3.00 was specifically exempted from the tax. Section 609 of the Revenue Act of 1934, effective May 11, 1934, extended the exemption to apply to all articles subject to this tax when sold by the manufacturer, producer, or importer for less than $25.00.

As originally enacted by Congress, the tax under section 605 of the Revenue Act of 1932 was to be effective during the period from 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) further extended such date to July 1, 1937. The tax was repealed, however, by section 809 of the Revenue Act of 1936, effective June 23, 1936.

Economic Basis. -- The tax on jewelry, etc., was an excise tax payable by the manufacturer, producer, or importer on his sale or use thereof. In view of the fact that practically all wholesalers, jobbers, and retailers of jewelry fall within the category of a producer or importer, the tax applied to every branch of the industry, and tax was paid in every one of the 64 collection districts. A check of the returns for one month shows the number of taxpayers filing jewelry tax returns was approximately 2,900.

Inequities. -- There was undoubtedly some conflict in the subjects taxed, but this was due entirely to the marketing and distribution methods of the industry. For instance, the tax was imposed specifically on the sale of either a mounting or a precious stone as components of articles of jewelry, as well as on the completely mounted article of jewelry. If an imported stone was mounted and sold after the effective date of the Act, the tax was due and payable on such sale. If after passing through the hands of several individuals, the stone found its way back to some branch of the industry, through trade-in transactions or outright scale, and the wholesaler, jobber, or dealer remounted the stone in a new or modern type mounting, the sale of the new completed article was taxable in its entirety and no credit could be allowed for the tax previously paid on the stone, since the last producer could not establish or prove that tax was previously paid on the stone. There was no doubt some conflict by reason of the various custom duties imposed on most of the articles specifically mentioned in the statute, especially pearls, precious and semiprecious stones, watches and parts therefor.

Jewelry, etc., falls primarily in the class of luxuries and in view of the fact that this tax was revived during the depression period, when consumers curtail their purchases of luxuries, it can hardly be said that any retarding in trade, if any existed, was due entirely to this tax. The Bureau is not aware of any use of substitutes due to this tax.

With respect to the measure of the tax in relation to the value of the product, there are no statistics available in this Bureau from which an accurate comparison may be made. However, it is not believed that a 10 per cent tax on a manufacturer's, producer's, or importer's sale price is excessive.

Tax evasion by certain branches of this industry has always been an administrative problem. In view of the nature of the articles taxed and the marketing and distribution methods of the industry generally, tax evasion was taken as a matter of course by certain taxpayers. Various methods were used, such as failure to keep any records, duplicate records for tax purposes, false billing of complete articles as separate components to bring the sale prices below the exemptions provided, new articles sold as second-hand, erroneous claims for credit for tax which was never paid, erroneous use of claims for exemption, claims for losses through robbery or fire when in fact the articles were sold, sales of components separately which were later assembled for the customer, and the smuggling of imports, especially diamonds, watches and watch parts,

Administrative Difficulties. -- There was no involved procedure relative to the administration of this tax. Many administrative difficulties were, nevertheless, encountered. The statute imposed the tax on the sale by the manufacturer, producer, or importer and the Department interpreted the term "producer" to include those persons who assembled component parts of jewelry to produce complete taxable articles. Thus, there were included in the term "producer", retailers, wholesalers, jobbers, etc. In cases which involved sales exclusively at retail where the same or similar articles were not sold at wholesale, the Commissioner under the authority of section 619(b) of the Revenue Act of 1932, determined a "fair market price" upon which to base the tax. Before arriving at such price, it was necessary to conduct an extensive field investigation to determine the various methods used by manufacturers, producers, or importers in arriving at the price for which similar articles were sold by them. In determining the basis on which the tax should be paid by persons selling jewelry, etc., at retail, it was found necessary to fix the open market wholesale price as a definite percentage of the actual retail price. Where articles were sold under an installment or conditional sales contract, a different percentage or formula was required. The fair market price in these cases was determined by taking the cost of materials assembled and adding a 15 per cent mark-up, which resulted in a price at which similar completed articles could be purchased from the manufacturer thereof. While it was realized that the percentage so fixed would be a help to some and a hindrance to others, it was the opinion of this Bureau that a definite percentage of the retail sale price was the most equitable basis on which to compute the tax. The definite percentage fixed was applicable to all taxpayers selling taxable articles exclusively at retail, regardless of the section of the country in which they were engaged in business.

The statute required the keeping of all necessary records relating to the taxpayer's liability for the tax, and to claims for refund, credit or exemption. Such requirement may have necessitated additional bookkeeping changes and records, which were not necessary for the taxpayer's purposes prior to the imposition of this tax. However, the records required by the Bureau regulations were simplified as much as possible to conform to the ordinary records usually kept by taxpayers and at the same time protect the Government's interest from tax avoidance and evasion.

The audit of the returns of this tax required a detailed examination of 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.

No recommendation is made with respect to the reenactment of the tax on jewelry.

Tax On Automobile Chassis, Bodies, And Motorcycles. Section 606(a) And (b) Of The Revenue Act Of 1932.


     Yield for the fiscal year - 1936 - $ 55,201,136.49
     Yield for the fiscal year - 1937 -   56,200,000.00 Estimated
     Number of taxpayers                  950
     Rate of tax - (a) Auto truck chassis and bodies, 2 per cent
                       of manufacturer's, etc., sale price.
                   (b) Other auto chassis and bodies, and motor-
                       cycles, 3 per cent of manufacturer's etc.
                       sale price.

Statutory Background. -- Section 600(a) of the Revenue Act of 1917, effective October 4, 1917, first imposed the Federal tax on the sale by the manufacturer, producer, or importer of automobiles, automobile trucks, automobile wagons, and motorcycles at the rate of 3 per cent of the price for which sold.

While the tax was continued in the Revenue Act of 1918, its scope was slightly extended and the rate changed in part, effective February 25, 1919, as follows:

Section 900(1) imposed a tax of 3 per cent on the sale or lease by the manufacturer, producer, or importer of automobile trucks and automobile wagons (including tires, inner tubes, parts and accessories therefor, sold on or in connection therewith, or with the sale thereof); and

Section 900(2) imposed a tax of 5 per cent on the sale or lease of other automobiles and motorcycles (including tires, inner tubes, parts and accessories therefor, sold on or in connection therewith, or with the sale thereof).

The taxes as imposed under sections 900(1) and 900(2) of the Revenue Act of 1918 were continued without change in sections 900(1) and 900(2) of the Revenue Act of 1921.

It is to be noted that in the statutes cited above the tax was based on the sale or lease of the complete automobile truck, automobile wagon, or other automobile or motorcycle.

The basis of the tax was changed in the Revenue Act of 1924, effective July 3, 1924. Section 600(1) imposed a tax of 3 per cent on the sale or lease by the manufacturer, producer, or importer of (a) automobile truck chassis, and automobile wagon chassis, when sold or leased for an amount in excess of $1,000.00 and (b) automobile truck bodies and automobile wagon bodies, when sold or leased for an amount in excess of $200.00, including in both cases, tires, inner tubes, parts and accessories therefor, sold on or in connection therewith, or with the sale thereof. Section 600(2) imposed a tax of 5 per cent on the sale or lease by the manufacturer, producer, or importer of other automobile chassis and bodies and motorcycles, (including tires, inner tubes, parts and accessories therefor, sold on or in connection therewith, or with the sale thereof), without any exemption, however, in respect to the amount for which sold.

Both subsections (1) and (2) of section 600 of the Revenue Act of 1924 provided that the sale or lease of a complete automobile truck, automobile wagon, or other automobile would be considered, for purposes of the tax, as the sale or lease of a chassis and a body. In addition, the Revenue Act of 1924, like the Revenue Acts of 1918 and 1921, also specifically exempted tractors from the tax.

The tax imposed by section 600(1) of the Revenue Act of 1924 on the sale or lease of automobile truck and automobile wagon chassis and bodies was repealed on February 26, 1926, by section 1200(a) of the Revenue Act of 1926, while the tax imposed by section 600(2) of the Revenue Act of 1924 on the sale or lease of other automobile chassis and bodies and motorcycles was continued in section 600(1) of the Revenue Act of 1926 at the reduced rate of 3 per cent of the price for which such articles were sold or leased. The latter tax remained in effect until its repeal on May 29, 1928, by section 421 of the Revenue Act of 1928.

The tax was revived in section 606 of the Revenue Act of 1932, effective June 21, 1932, with the rates reduced in part and with certain other changes in the administrative provisions of the law. Subsection (a) of section 606 imposes a tax of 2 per cent on the sale (or lease) by the manufacturer, producer or importer of automobile truck chassis and automobile truck bodies, including, in both instances, tires, inner tubes, parts and accessories therefor, sold on or in connection therewith, or with the sale thereof. Subsection (b) of such section imposes a tax of 3 per cent on the sale (or lease) by the manufacturer, producer or importer of other automobile chassis and bodies and motorcycles, including tires, inner tubes, parts and accessories therefor, sold on or in connection therewith, or with the sale thereof. As in the prior Acts, this section provides that the sale of a completed machine shall be considered as the sale of a chassis and a body and likewise specifically exempts tractors from the tax.

As originally enacted, sections 600(a) and (b) of the Revenue Act of 1932 were 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 (H. R. 324) 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 articles specified. The automobile industry ranks among the largest industries of the country and tax is being paid in all but 2 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 950.

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 in general differ from the Federal tax in the basis for the tax, the method of computation, and the class of taxpayers affected.

A conflict from the standpoint of Federal taxes may result between this tax and the tax on parts and accessories imposed by section 606(c), or the tax on chassis where the body manufacturer is not the manufacturer of the chassis. However, the statute lessens, if not eliminates, any real conflict as to the tax on parts and accessories by providing that chassis and body manufacturers may purchase parts and accessories tax free under regulations prescribed by the Commissioner. This same privilege is afforded a chassis manufacturer with respect to purchasing bodies, but no such privilege is given the body manufacturer with respect to the purchase of a chassis.

An inequity in the application of the tax arises from the exemption of tractors. Tractors were originally exempted in the Revenue Act of 1918 on behalf of the farmer since tractors were then used mainly for agricultural purposes. Tractors, however, have been developed and improved so that now they compete seriously with taxable "machines".

After the World War, the automobile truck was developed to a stage where it took over freight transportation in this country in direct ratio to the increase of paved streets and highways. By 1925 the paving construction industry had solved the problem of building paved highways strong enough to accommodate the heaviest of motor vehicles. Since that time, not only has the production of automobile trucks increased, but of late years the trend has been, both in the truck and motor-bus fields, toward a two-unit vehicle, sometimes called a "commercial tractor". It consists of a truck chassis with a wheelbase so short as to be generally incapable of accommodating a body, and a trailer-body which is attached to the chassis by a "fifth wheel", or similar attachment. The number of such vehicles is increasing rapidly in proportion to the number of automobile trucks and automobile busses, as such tractors have the triple advantage of (1) being able by reason of their construction to carry heavier loads; (2) being able to turn in a much shorter radius; and (3) depositing loaded trailer bodies at delivery points and hauling away another loaded trailer body without waiting for the unloading of the first load. In addition to truck tractors, there has recently developed an expanding demand for passenger trailers, consisting of a chassis containing the motive power, and a trailer containing living quarters.

At the present time neither the chassis nor the body of such "tractors" is taxed by reason of the exemption for tractors. Because of the confusion and competition existing between manufacturers who make both automobile trucks and tractor-trailer vehicles, certain of these manufacturers have expressed to the Bureau of Internal Revenue a desire to see such automotive tractors taxed where capable of operation on paved streets or paved highways. They have urged that a tax-exempt tractor be defined as one "not adaptable or legal for use on the highway". This language is not considered entirely satisfactory for the reason that the requirements of the different States vary as to the weight of vehicles which may be legally used on their highways. Although it is understood that the major automobile manufacturers have been notified through their association that such a recommendation has been made to the Bureau, this office has received no objection to this proposal. In fact, many representatives of individual manufacturers have expressed approval.

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 are encountered in the collection of this tax. In fact, this tax is one of the least troublesome of the large revenue producers to administer.

The audit of the returns of this tax requires the usual examination of production and sales records and the evidence relied upon to support claims for exemption, refund, or credit.

The actual cost of collecting this tax has never been separated by the Bureau from the average cost of collecting taxes generally, but it is considered this tax is one of the easiest and cheapest to collect of all the taxes now in effect.

To remedy the inequity discussed above, it is recommended that subsections (a) and (b) of section 606 of the Revenue Act of 1932 be amended to read as follows:

(a) Automobile truck chassis, automobile truck bodies, automobile trailer chassis, truck bodies for automobile trailers, and tractors (except agricultural tractors), including in each case parts of accessories therefor, sold on or in connection therewith or with the sale thereof, 2 per centum. A sale of an automobile truck shall, for the purposes of this subsection, be considered to be a sale of the chassis and of the body.

(b) Other automobile chassis and bodies, including passenger bodies for automobile trailers, and motorcycles (including in each case parts or accessories therefor sold on or in connection therewith or with the sale thereof) except agricultural tractors, 3 per centum. A sale of an automobile shall, for the purposes of this subsection, be considered to be a sale of the chassis and of the body.

It is estimated that such a change would produce additional tax of approximately $260,000.00 per year.

Since the tax yields a substantial revenue and entails but little difficulty in collection, it is recommended that the tax be continued either in its present form or in amended form us suggested herein.

Tax On Parts And Accessories For Automobile Trucks, Other Automobiles, And Motorcycles. Section 606(c) Of The Revenue Act Of 1932.


     Yield for the fiscal year -- 1936 -- $7,110,188.33
     Yield for the fiscal year -- 1937 --  7,500,000.00 Estimated
     Number of taxpayers                   2,600
     Rate of tax -- 2 per cent of manufacturer's, producer's, or
                    importer's sale price.

Statutory Background. -- Section 900(3) of the Revenue Act of 1918, effective February 25, 1919, first imposed the tax on the sale or lease of parts and accessories, including tires and inner tubes, for automobiles trucks, automobile wagons, and other automobiles and motorcycles, when sold to any person other than a manufacturer of such trucks, wagons, automobiles or motorcycles, at the rate of 5 per cent of the price for which sold or leased. The tax was reenacted without change by section 900(3) of the Revenue Act of 1921, effective January 1, 1922. The tax was also reenacted by section 600(3) of the Revenue Act of 1924, effective July 3, 1924, in which section, however, the rate was reduced to 2 1/2 per cent of the sale price. The tax was repealed on February 26, 1926, by section 1200(a) of the Revenue Act of 1926.

The tax was revived by section 606(c) of the Revenue Act of 1932, effective June 21, 1932, which imposes a tax on the sale by the manufacturer, producer, or importer of parts and accessories for automobile truck chassis and bodies, other automobile chassis and bodies, and motorcycles. This section specifically excludes tires and inner tubes as parts or accessories, and specifically includes within such term, spark plugs, storage batteries, leaf springs, coils, timers, and tire chains, which are suitable for use on or in connection with, or as component parts of such chassis, bodies, or motorcycles, whether or not primarily adapted for such use. It also provides that parts or accessories may be sold tax free, under regulations prescribed by the Commissioner with the approval of the Secretary, to manufacturers or producers of such chassis, bodies, or motorcycles, who shall then be considered the manufacturer of the parts or accessories so purchased.

As originally enacted by Congress, section 600(c) 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 (H. R. 324) 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 articles specified. This tax affects any article, the primary use of which is to improve, repair, replace, or serve as a component part of automobile trucks or other automobile chassis or body, or motorcycles, and any article designed to be attached to or used in connection with such vehicle or article to add to its utility or ornamentation, as well as any article the primary use of which is in connection with such vehicle or article whether or not essential to its operation or use.

Inequities. -- So far as known, no State has imposed a tax on automobile parts and accessories as such although such articles may be subject to local retail sales taxes upon sales by dealers.

With respect to the measure of the tax in relation to the value of the subjects taxed, it is apparent from the low rate of the tax that the tax is not excessive. 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. A few manufacturers have for many years been selling their products to selling subsidiaries at an arbitrary sale price, or at less than the fair market price. In such cases, the Commissioner, under the authority of section 619(b)(3) of the Revenue Act of 1932, has computed the tax on the fair market 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 chief difficulties encountered have been the classification of certain articles which have uses for purposes other than as parts and accessories of automobiles and the determination of the taxability of certain articles which are entirely or partly rebuilt for further service. These difficulties have been largely overcome by thorough field investigations and surveys of the industry, and by several court decisions in specific cases.

The audit of the returns of this tax requires a detailed examination of 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.

No statistics are available from which the actual cost of collecting this tax may be determined, but from the yield of revenue obtained and the fact that only a part of the time of a few employees is consumed in the administration thereof, it is apparent that the cost of collection is lower than the average.

The taxing statute as now worded is clear and simple and since most of the difficulties have been overcome, no change in the law or the forms used in connection therewith is deemed necessary.

Substantial revenue is derived from this source and it is recommended this tax be continued.

Tax On Chassis, Cabinets, Tubes, Reproducing Units, Power Packs, And Phonograph Mechanism, Suitable For Use In Connection With Or As A Part Of Radio Receiving Sets Or Combination Radio And Phonograph Sets, And Phonograph Records. Section 607 Of The Revenue Act Of 1932.


     Yield for the fiscal year -- 1936 -- $5,075,270.82
     Yield for the fiscal year -- 1937 --  5,300,000.00 Estimated
     Number of taxpayers                   300
     Rate of tax -- 5 per cent of manufacturer's producer's, or
                    importer's sale price.

Statutory Background. -- The Federal tax on the sale of phonograph records by the manufacturer, producer, or importer thereof was first imposed by section 600(b) of the Revenue Act of 1917, effective October 4, 1917. The tax was levied at the rate of 3 per cent of the price for which such records were sold by the manufacturer, etc. This tax was reenacted by section 900(4) of the Revenue Act of 1918, effective February 25, 1919, with an increase in the rate from 3 to 5 per cent of the price for which such records were sold by the manufacturer, etc. This tax was repealed by section 1400(a) of the Revenue Act of 1921, effective as of January 1, 1922.

The Federal tax on the sale or use of chassis, cabinets, tubes, reproducing units, power packs, and phonograph mechanisms, suitable for use in connection with or as a part of radio receiving sets or combination radio and phonograph sets (including in each case parts or accessories therefor sold on or in connection therewith or with the sale thereof), by the manufacturer, producer, or importer thereof, was first imposed by section 607 of the Revenue Act of 1932, effective June 21, 1932, at the rate of 5 per cent of the price for which sold by the manufacturer, etc. This section also imposes a tax on the sale or use of "records for phonographs" by the manufacturer, etc., at the rate of 5 per cent of the sale price. It is to be noted that the tax is not imposed on the sale or use of "complete radio receiving sets", as such, but on the components specifically named.

As originally enacted by Congress, this tax was to be effective during the period from 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) further extended such date to July 1, 1937. Unless further extended, this tax is automatically repealed as of July 1, 1937.

Economic Basis. -- The tax is an excise tax on the sale or use of the products named, by the manufacturer, etc., and is measured by his sale price thereof. This industry grew rapidly and spread over practically the whole country when radio receiving sets became perfected for use in the home. While this tax is being paid in 39 of the 64 collection districts, the larger percentage thereof is confined to only 20 such collection districts. A check of the returns filed for one month shows that the number of taxpayers filing returns of this tax is approximately 300.

The prices for which components of radio receiving sets are sold depends largely upon the type of product produced, the patent rights, the royalties paid, supply and demand, the locality in which sold, and constant changing of models and types of cabinets.

Inequities. -- There are no conflicting Federal taxes in this instance. However, it should be noted that some radio sets, parts or accessories made for use in automobiles are so constructed as to fit only in particular makes of cars. Hence, such sets, etc., being in the category of automobile accessories come within the scope of section 606(c) of the Revenue Act of 1932, and are taxable at the rate of 2 per cent of the manufacturer's sale price, instead of the 5 per cent tax upon radio components imposed by section 607.

It is not believed the tax has been a serious burden on the industry. The measure of the tax in relation to the value of the subjects taxed is low.

Attempts to avoid or evade this tax have been limited to a few methods or trade practices, the most common being that of organizing separately incorporate selling subsidiaries to which the manufacturing corporation sells its products at a fictitious sales price, or at less than the fair market price thereof. The Commissioner, under the authority of section 619(b)(3) of the Revenue Act of 1932, has determined a taxable sale price in such cases equivalent to that for which the product is ordinarily sold in the open market.

Administrative Difficulties. -- As this tax is not imposed on the sale of complete radio receiving sets, some of the components specifically taxed, particularly cabinets, are complete taxable articles in themselves when sold by the manufacturer, etc., thereof, and as such may not be sold tax free under the provisions of section 620(1) or (2) of the Revenue Act of 1932, as amended, for further manufacturing purposes. For that reason some difficulty has been encountered in the determination of the sale price of the various components, where a manufacturer sells a complete set for a flat sum, which set consists of certain components manufactured by him and assembled with components purchased from other manufacturers.

Thus, in the radio industry, the chassis manufacturer is usually the assembler of the complete radio receiving set, but almost universally he does not make the cabinets used by him. The cabinets are usually made by persons engaged in the wood-working industry. Under the present law, when the manufacturers of cabinets, tubes, etc., sell their products to the chassis manufacturer or to the assembler of radio receiving sets, they are compelled to pay the tax on such sales, which the purchaser of the parts at first objected to, as it meant having a portion of his working capital tied up in tax prior to the time he assembled and sold the receiving set. Further, the receiving set manufacturer sells his assembled product for a lump sum price and, unless he shows his customers the sale price of the taxable components which he manufactured, as distinguished from those he purchased, he might be required to pay the tax on the full price at which the set is sold under the principle sustained by the United States Court of Claims in the case of Brewster and Company, Inc. v. United States, 1935 C.C.H. para. 9195. The Bureau, desiring to avoid duplicate taxation in the radio field, has made exhaustive investigations of the books of radio receiving set assemblers in order to ascertain the sale price of the taxable components actually manufactured by such assemblers. This procedure has not been satisfactory not only because it is at variance with the decisions made by the Bureau and by the courts with respect to all other taxes under Title IV, but because it is uncertain and shifts an undue burden and expense on the Government. Furthermore, it interferes with the taxpayer's usual method of keeping records and doing business.

The administrative difficulties could be minimized if the tax were broadened to include complete radio receiving sets as well as the component parts now enumerated. However, attention is called to the fact that this would increase the tax burden on this industry since the sale price of complete sets is higher than of the component parts unassembled and includes not only the cost of assembly and assembler's profit, but also many small parts not at present taxed when sold separately.

The audit of the returns of this tax requires a detailed examination of 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.

No statistics are available from which the actual cost of collecting this tax may be determined. Although certain problems arose in the administration of the tax, it is believed, based on the administrative experience as a whole, that the collection cost is close to the average cost of collecting the respective miscellaneous and sales taxes.

The Bureau recommends the continuation or reenactment of this tax.

Tax On Mechanical Household Type Refrigerators And Certain Components Thereof. Section 608 Of The Revenue Act Of 1932.


     Yield for the fiscal year - 1936 - $ 7,939,063.75
     Yield for the fiscal year - 1937 -   8,200,000.00 Estimated
     Number of taxpayers                  100
     Rate of tax - 5 per cent of manufacturer's, producer's or
                   importer's sale price.

Statutory Background. -- The Federal tax on the sale by the manufacturer, producer, or importer of household type refrigerators operated with electricity, gas, kerosene, or other means, and the sale of cabinets, compressors, condensers, expansion units, absorbers, and controls for, or suitable for use as a part of or with such household type refrigerators, except when sold as component parts of complete refrigerators or refrigerating or cooling apparatus, was first imposed by section 608 of the Revenue Act of 1932, effective June 21, 1932, at the rate of 5 per cent of the sale price. This section provides that under regulations prescribed by the Commissioner with the approval of the Secretary, sales of refrigerator components may be made tax free to manufacturers or producers of refrigerators or refrigerating and cooling apparatus. It also provides that if refrigerator components are so purchased and resold by the vendee otherwise than on or in connection with, or with the sale of, complete refrigerators or refrigerating or cooling apparatus, manufactured or produced by such vendee, then for the purposes of the tax, such vendee shall be considered the manufacturer or producer of the refrigerator components so resold.

As originally enacted by Congress, this tax was to be effective during the period from 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) further extended such date to July 1, 1937. Unless further extended, this tax is automatically repealed as of July 1, 1937.

Economic Basis. -- The tax is an excise tax on the sale or use of the products named by the manufacturer, producer, or importer and is measured by his sale price thereof. This industry has grown steadily since the perfection of mechanical refrigeration for use in the home. While tax is being paid in 34 of the 64 collection districts, all but a small percentage of the collections are made from a few manufacturers located in only 12 of the collection districts. A check of the returns filed for one month shows that the number of taxpayers filing returns on this tax is approximately 100.

The prices for which mechanical household type refrigerators, and components thereof, are sold depends largely upon the type and manner of operation, the patent rights and royalties paid, supply and demand, the locality in which sold and constant changes in models and types of cabinets.

Inequities. -- The tax on electrical refrigerators was carefully drafted to fit conditions in the industry and no inequities, either as to rates or application, have been discovered.

There have been no attempts, so far as this Bureau is aware, to avoid or evade the 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, and the industry has shown a uniform disposition to abide by the law and regulations.

The audit of the returns of this tax requires a detailed examination of 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.

No statistics are available from which the actual cost of collecting this tax may be determined, but from the yield of revenue obtained and the relative absence of administrative difficulties, it is one of the most economical to collect.

The taxing statute as now worded is clear and simple and no revision of the provisions thereof, nor of the forms used in connection therewith, is deemed necessary.

The Bureau recommends that this tax be continued, either by further extension of the expiration date or by reenactment.

Tax On Sporting Goods, Games And Parts Of Games Section 609 Of The Revenue Act Of 1932.

 
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