Rev. Rul. 78-276

The purpose of this revenue ruling is to update and restate, under current law, the position of the Internal Revenue Service in Rev. Rul. 56-467, 1956-2 C.B. 684, on the state and local government exemptions from the federal excise taxes for a certain toll road authority.

Rev. Rul. 56-467 concludes that the Iowa Toll Road Authority, created under Acts of the General Assembly of the State of Iowa, authorized and empowered to construct, operate, and maintain toll road projects, to issue toll road bonds, and to acquire property by the exercise of the power of eminent domain, is a political subdivision of a state and comes within the scope of the state and local governmental exemptions from the federal excise taxes imposed on amounts paid for transportation of persons and property and for communication services or facilities.

Although the Iowa Toll Road Authority is no longer in existence, the position set forth in Rev. Rul. 56-467 is applicable to similar toll road authorities created under state statutes. Members of such authorities are generally appointed by the state governor and may include one or more officials of the state government. The authorities have the right to fix and collect tolls to raise revenue for paying off toll road bonds, and to revise such tolls from time to time, if necessary. They are also authorized and empowered to regulate and police the operation of the toll road projects. The toll road authorities also have substantial powers of eminent domain.

Section 4041(g)(2) of the Code provides that no special fuels taxes shall be imposed with respect to the sale of any liquid for the exclusive use of any state, any political subdivision of a state, or the District of Columbia, or with respect to the use by any of the foregoing of any liquid as a fuel.

Section 4221(a)(4) of the Code provides that no tax shall be imposed under chapter 32 on the sale by the manufacturer of an article to a state or local government for the exclusive use of a state or local government. Section 4221(d)(4) provides that the term "State or local government" means any state or political subdivision thereof, or the District of Columbia.

Section 4253(i) of the Code provides that no tax shall be imposed under section 4251 upon any payment received for services or facilities furnished to the government of any state, or political subdivision thereof, or the District of Columbia.

The term "political subdivision" has been defined consistently for all federal tax purposes as denoting either a division of a state or local government that is a municipal corporation or a division of such state or local government that has been delegated the right to exercise sovereign power. Thus, for federal excise tax purposes, the term political subdivision may designate a true governmental subdivision or it may have a broader meaning denoting any subdivision of the state created for a public purpose although authorized to exercise a portion of the sovereign power of the state only to a limited degree. See Rev. Rul. 77-143, 1977-1 C.B. 340, which concludes that the Port of Oswego Authority is a political subdivision of a state and comes within the scope of the excise tax exemptions relating to states and political subdivisions thereof.

In general, the sovereign powers are the power of taxation, the power of eminent domain, and the power to police or regulate. In order to qualify as a political subdivision, an entity need not possess all three powers, but whatever powers it does possess must be substantial in their effect. See Rev. Rul. 77-164, 1977-1 C.B. 20, and Rev. Rul. 77-165, 1977-1 C.B. 21.

The toll road authorities in this case were created by state statutes for the public purpose of constructing and operating toll road projects, and are controlled by the state. In order to carry out these functions, they have substantial powers of eminent domain and substantial police or regulatory powers. Accordingly, the toll road authorities are political subdivisions of a state and come within the scope of the federal excise tax exemptions relating to states and political subdivisions thereof.

Therefore, where taxable articles are sold to the authorities in this case for their exclusive use, or where communication services or facilities are furnished to the authorities, the excise tax exemptions provided by sections 4041(g)(2), 4221(a)(4), and 4253(i) of the Code apply, provided the requirements of the law and applicable regulations with respect to the particular exemption are met.

However, as a result of the Airport and Airway Revenue Act of 1970, 1970-1 C.B. 361, the toll road authorities are not exempt from the transportation of persons and property taxes imposed by sections 4261 and 4271 of the Code on transportation beginning on or after July 1, 1970, the effective date of the Act, or the tax on civil aircraft imposed by section 4491 effective July 1, 1970.

Since the principles of Rev. Rul. 56-467 are restated under current law, that revenue ruling is superseded.