Attorney-at-Law

STAMP OUT SMOKING

In Uncategorized on 11/19/2013 at 19:14

But while it’s still legal, you might as well tax it.  New York State, which at one time billed itself as The State That Has Everything, certainly has taxes.

And echoing King George III, specifically 5 George III, c. 12, 1765, New York State has a stamp tax, this one on cigarettes. Each package of the weed must bear the colophon of the Empire State, thereby verifying that the contents have been duly subjected thereto.

Comes now City Line Candy & Tobacco Corp., 141 T. C. 13, filed 11/19/13, a stamper. City Line buys the stamps from the State (or from New York City), buys packages of cigarettes in enormous bulk, affixes the stamps to the packages, and sells them to subjobbers, licensed retailers and vending machine operators.

Of course, the price paid by the subjobbers and others includes the stamp tax. And while the consumer ultimately pays the price, the stamper is in some sense responsible for the tax.

City Line is a licensed reseller, and thereby hangs the tale. City Line wants to be a small reseller, so as to avail itself of the Section 263A(b)(2)(B) exemption from the Section 263A UNICAP rules. To do so, City Line must show gross receipts less than $10 million.

But should the stamp tax amounts included in the price City Line receives be part of gross proceeds?

It falls to Judge Marvel to smoke out (sorry guys) the answer. And it doesn’t help City Line; they must capitalize the cost of the stamps, and include any leftovers in year-end inventory. And that kicks them over the $10 million barrier.

City Line’s problem: “For all relevant years petitioner used the accrual method of accounting for income and expenses and the first-in, first-out method of accounting for inventory. Petitioner did not introduce its financial statements for each of the relevant years into evidence. However, the profit and loss statement for 2004 that is in the record confirms that for financial statement purposes petitioner calculated its gross receipts from cigarette sales by totaling the gross sale prices of cigarettes sold without any reduction for the cost of the cigarette tax stamps that was included in the sale prices.” 141 T. C. 13, at pp. 5-6.

And of course, one of City Line’s witnesses drives the nail in even deeper: “Mr. Kun Sang Ruy, one of petitioner’s shareholders, testified that the amount reported as gross receipts on its tax returns reflected a ‘net’ amount.” 141 T. C. 13, at pp. 18-19.

There’s much accounting byplay, involving storage and handling costs as against administrative costs, and cost absorption ratio. And discussion about the deductibility of the stamps, but that’s not gross proceeds, that’s net taxable income.

Bottom line: “For tax and financial accounting purposes a taxpayer must first calculate total sales revenue determined in accordance with its method of accounting. For financial accounting purposes petitioner did just that. For income tax reporting purposes, however, petitioner reduced its total gross receipts from cigarette sales by the cost of the cigarette tax stamps it purchased during the taxable year to arrive at a gross receipts figure that was substantially lower than the figure used for financial accounting purposes.” 141 T. C. 13, at p. 19.

You gotta tell the same story. Or your case goes up in smoke (sorry, guys).

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