[Code of Federal Regulations]
[Title 26, Volume 15]
[Revised as of April 1, 2001]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR48.4218-5]

[Page 175-176]
 
                       TITLE 26--INTERNAL REVENUE
 
                  CHAPTER I--INTERNAL REVENUE SERVICE,
                       DEPARTMENT OF THE TREASURY
                               (Continued)
 
PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES--Table of Contents
 
     Subpart M--Special Provisions Applicable to Manufacturers Taxes
 
Sec. 48.4218-5  Computation of tax.

    (a) Tax based on price. Except as provided in paragraph (d) of this 
section, tax liability incurred on the use of an article shall be 
computed on the price at which such or similar articles are sold in the 
ordinary course of trade by manufacturers, producers, or importers 
thereof and in the absence of special arrangements. For additional 
provisions applicable in computing the tax in the case of the use of an 
article by a manufacturer and producer who purchased the article free of 
tax under section 4221(a)(1) for use by him in further manufacture, see 
section 423(b) and the regulations thereunder.
    (b) Articles regularly sold by manufacturer. If the manufacturer, 
producer, or importer of an article regularly sells such articles at 
wholesale in arm's length transactions, tax liability on his use of any 
such article shall be computed on his lowest established wholesale price 
for such articles in effect at the time of the taxable use. In 
establishing such price, there shall be included and excluded, as 
applicable, the charges and readjustments specified in sections 4216(a), 
4216(f), and 6416(b)(1), as in effect at the time tax liability on the 
use of the article is incurred, and the regulations thereunder contained 
in this subpart and Subpart O. If the manufacturer, producer, or 
importer of an article does not regularly sell such articles at 
wholesale in arm's length transactions, a constructive price on which 
the use tax shall be computed will be determined by the Commissioner. 
This price will be established after considering the selling practices 
and price structures of manufacturers, producers, and importers of 
similar articles.
    (c) Articles governed by section 4218(a) used in manufacture of 
nontaxable combination articles. If the manufacturer, producer, or 
importer of an article to which section 4218(a) applies does not 
regularly sell such article separately but uses it as material in the 
manufacture or production of, or as a component part of, a nontaxable 
combination article consisting of a taxable and nontaxable article, 
liability for tax on his use shall be computed on the constructive price 
of the taxable article at the time of use. To determine the constructive 
price of the taxable article in such case, the combination article is 
considered to be composed of (1) parts used exclusively in the 
functioning of the taxable article in the combination, (2) parts used 
exclusively in the functioning of the nontaxable article in the 
combination, and (3) parts, called common parts, which serve a dual 
function in connection with the parts in both subparagraphs (1) and (2) 
of this paragraph. The ratio which the cost of the parts in subparagraph 
(1) of this paragraph bears to the sum of the cost of such parts and the 
parts in subparagraph (2) of this paragraph is applied to the lowest 
established wholesale price for which like combination articles are at 
the time of the taxable use being sold by the manufacturer or producer 
in the ordinary course of trade. The resulting amount is the 
constructive sale price for the taxable article on which tax is to be 
computed. The cost of the common parts is allocable to the parts in 
subparagraphs (1) and (2) of this paragraph in the same ratio, and, 
therefore, need not be taken into account in the computation since the 
inclusion and allocation of the cost of such parts in the determination 
would not result in a different ratio. In determining the lowest 
established wholesale price for the combination article, there shall be 
included and excluded, as applicable, the charges and readjustments 
specified in sections 4216(a), 4216(f), and 6416(b)(1), as in effect at 
the time tax liability on the use of the taxable article is incurred, 
and the regulations thereunder contained in this subpart and Subpart O 
of this part. The tax applicable to the use of the article for which a 
constructive sale price has been computed is not affected by any charges 
or readjustments of the price for which the nontaxable combination 
article is sold, whether by reason of the

[[Page 176]]

return or repossession of the nontaxable article or its covering or 
container, or by a bona fide discount, rebate, allowance, or other 
factor. The application of this subparagraph may be illustrated by the 
following example:

    Example. A manufacturer of a nontaxable washer-drier combination 
produces and uses an electric clothes drier taxable under section 4121 
in the manufacture of the combination article. The lowest established 
wholesale price of the manufacturer for the washer-drier combination at 
the time of the taxable use is $150 with respect to identical 
combinations after including and excluding applicable charges and 
readjustments. The manufacturer does not regularly sell such drier 
separately. In the manufacture of the washer-drier the two units are 
integrated to the extent that certain component parts function both in 
the operation of the washer and of the drier. The parts used exclusively 
in the operation of the washer cost $30 and those used exclusively in 
the operation of the drier cost $20. The taxable cost ratio in this 
instance is 20/50, or 40 percent. Applying 40 percent to the 
manufacturer's lowest established wholesale price of $150 for the 
washer-drier results in $60 as the constructive price for the taxable 
article in the combination at the time tax liability is incurred. No 
additional charges or readjustments in connection with, or subsequent 
to, the sale of the washer-drier combination may affect the tax 
liability incurred at the time of use.

    (d) Tax based on weight or volume. Where liability for tax is 
incurred on the use of an article subject, if sold, to a tax based on:
    (1) The weight of the article (such as a tire), or
    (2) The volume of the article (such as gasoline or lubricating oil),

the tax due shall be computed on the basis which would be applicable if 
such article were sold.

[T.D. 6687, 28 FR 11781, Nov. 5, 1963]

   Application of Tax in Case of Sales by Other Than Manufacturer or 
                                Importer