IRS clarifies definition of on-site sales under sec. 263A.

• Author: Newell, Christine

The IRS recently issued Chief Counsel Advice (CCA) 201302018, which provides that, for purposes of the uniform capitalization (UNICAP) costing rules under Sec. 263A, a sale is considered "on-site" only when the retail customer is physically present at the sales facility at some point during the sales transaction. The level of on-site sales at a facility determines whether the facility is treated as a retail sale or dual-function storage facility. The UNICAP rules do not require taxpayers to capitalize handling and storage costs incurred at retail sales facilities or at dual-function storage facilities to the extent they are attributable to property sold in on-site sales.

Although a CCA memorandum cannot be used or cited as precedent, the IRS's conclusions in the CCA may be helpful to retailers in analyzing whether certain sales transactions qualify as on-site sales.

Background

Sec. 263A requires taxpayers to capitalize into inventory certain direct and indirect costs to the extent that such costs are allocable to resale activities. Common indirect costs incurred by retailers include purchasing, handling, storage, and related administrative costs. The regulations generally permit retailers to deduct the amount of handling and storage costs that are attributable to a "retail sales facility" but require them to capitalize the costs attributable to non-retail sales facilities. These rules are described in more detail below.

Handling costs generally must be capitalized and include costs attributable to processing, assembling, repackaging, transporting, and other similar activities with respect to property acquired for resale. However, handling costs incurred at a retail sales facility, including unloading, unpacking, marking, and tagging goods for retail sales, are not subject to capitalization. A retail sales facility is defined as a facility where a taxpayer sells merchandise exclusively to retail customers in on-site sales (i.e., sales made to retail customers physically present at a facility). In addition, handling costs incurred at a dual-function storage facility are not required to be capitalized to the extent they are attributable to property sold in on-site sales (see Regs. Secs. 1.263A-1(e)(3)(ii)(G), 1.263A-3(c)(4)(i), and 1.263A-3(c)(5)(ii)).

Storage costs also generally must be capitalized and include the costs of carrying, storing, and warehousing property. Storage costs must be capitalized if they are attributable to an off-site...