contends. Our reading of the Acts in question leads us to the same conclusion.
First, it should be noted that there is no question but that the Pennsylvania Cigarette Tax Acts in question impose a sales tax. In fact it has been so held. Rice Drug Company v. Pittsburgh, 1948, 360 Pa. 240, 61 A.2d 878.
From the definition of Dealer as presented in the Acts, as well as the other sections referred to above, it seems clear that a tax was being imposed either upon a wholesaler or a retailer engaged in selling cigarettes, depending upon the circumstances. If the wholesaler was to sell to a retailer for eventual resale, then the tax was imposed upon the wholesaler. If, however, the retailer obtained the cigarettes directly from the manufacturer, without an intervening wholesaler, then the retailer was to pay the tax by purchasing stamps from the Department of Revenue. The Acts specifically provide that only one sale was to be used in computing the tax. In effect this means that the tax could only be imposed on the sale by the wholesaler to the retailer or on the sale by the manufacturer to the retailer, whichever manner of distribution was used. Obviously, another tax could not then be imposed on the sale by the retailer to the consumer.
Certainly it would be naive not to recognize that the retailer would include the cost of the tax imposed upon him in the price of the cigarettes. But this is not mandatory and conceivably the retailer could sell the cigarettes to the consumer without passing on the tax burden. Nowhere in the Acts is any liability placed upon the consumer as a taxpayer. We are convinced that the tax levied on the wholesaler or retailer, depending upon the circumstances, can be considered as nothing more than an additional cost of operation which, in the present case, the defendant must bear.
That this Act imposed a tax upon the dealer as opposed to the consumer is also apparent from the few cases decided under the Act. In the Rice case, supra, it was clearly indicated that the seller of cigarettes is the party from whom the Commonwealth collects the tax. Commonwealth v. Flickinger, 1950, 365 Pa. 59, 73 A.2d 652, is a case in which the constitutionality of the Act was upheld. The Supreme Court of Pennsylvania affirmed the conviction of one acting as a dealer in whose possession were found 332 cartons of cigarettes upon which no Pennsylvania tax had been paid. Here again it was pointed out that the person who sells the cigarettes is the party responsible for paying the tax. And in Stephano Bros. v. Secretary of Revenue, 1944, 54 Dauph., Pa., 157, it was held that the legislature may properly classify vendors of cigarettes as subject to the imposition of the tax.
Defendant contends that the Internal Revenue Code of 1939, in effect during the contract period, in its treatment of state and local sales taxes with respect to deductibility by the consumer-taxpayer is in conflict with the present position of the Government. Defendant relies on Section 23(c)(3) of the Internal Revenue Code of 1939, Title 26 U.S.C.A., and Section 29.23 of Treasury Department Regulation 111 (1943).
The Code provides in pertinent part that in the case of a tax imposed by a state upon persons engaged in selling tangible personal property at retail, if the amount of such tax is separately stated, then to the extent that the amount so stated is paid by the purchaser to such person such amount constitutes a tax imposed upon and paid by the purchaser. The Statute permits the purchaser of tangible personal property from a retailer to deduct the amount of the tax imposed by State law upon the retailer if the tax is separately stated and is paid by the purchaser. From this defendant concludes that the tax was on the consumer's purchase, and since Congress allows it as a deduction from the consumer's gross income, it cannot be included in gross revenue by the defendant. Conceding for argument sake that the stamp can be considered as a separate statement of the tax, as defendant submits, we still do not believe that his conclusion is warranted.
Deductions from gross income for income tax purposes are a matter of legislative grace on the part of Congress. Commissioner of Internal Revenue v. Sullivan, 1958, 356 U.S. 27, 78 S. Ct. 512, 2 L. Ed. 2d 559. The fact that Congress permits one to deduct a tax such as we have here does not automatically make this a sales tax collected from the consumer. In fact, one of the requisites of the statute relied upon by defendant is that the tax must have been imposed upon the retailer. Granted what the retailer does in effect is collect the tax from the consumer, Congress realized, as do we, that the retailer would undoubtedly pass the tax onto the consumer in the price of the article. But the retailer does this solely for his own benefit to recoup the cost of the tax he had already paid.
The Government, in its supplemental brief on this motion, calls our attention, for comparison, to the Consumers Sales Tax of 1953, 72 P.S. § 3407-101 et seq.
Section 3407-201 reads in part:
'A tax is hereby imposed upon each separate sale at retail within this Commonwealth, which tax shall be collected by the seller from the purchaser and shall be paid over to the Commonwealth as herein provided.'
The above provision, as well as the short title of the Act, clearly indicates that the tax is being imposed upon the consumer. We believe that it was this type of tax which was contemplated by the parties to the contract under consideration.
It should also be noted that the Pennsylvania Cigarette Tax Act enacted in 1957, 72 P.S. § 3168-101 et seq., which repealed the previous Acts, for the first time specifically provided that the tax shall be conclusively presumed to be a direct tax on the retail purchaser or ultimate consumer, precollected for convenience. The failure to include this provision in the previous acts indicates to us that prior to 1957, the legislature did not consider that the tax was imposed on the ultimate consumer.
From what has been said above, it follows that the complaint states a claim upon which relief can be granted. That is the only motion presently before the Court. Whether the defendant has other and further defenses than the one here advanced will not be known until a responsive pleading is filed. The present motion will be denied and defendant may file his answer within twenty (20) days from the date hereof.
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