a prize of a retail value not greater than 5 cents, such as the well-known 1-cent "ball gum" machines which dispense prize balls generally entitling the player to a 5-cent bar of candy or some similar prize. Therefore, it is apparent that this is the only machine that the Ways and Means Committee had in mind. But, according to our earnings, which appear of record in the proceedings before the Ways and Means Committee, it is physically impossible to pay a $10 tax, and therefore we must have some relief. The CHAIRMAN. Well, we have your point. Senator CONNALLY. May I ask the witness a question? The CHAIRMAN. Yes. Senator CONNALLY. Your machine operates on a 1-cent basis? Senator CONNALLY. A copper? Mr. LANSING. Yes. Senator CONNALLY. You may get a prize or you may not, is that right? Mr. LANSING. That is correct. Senator CONNALLY. Why is not that a gambling machine? Mr. LANSING. Beg pardon? Senator CONNALLY. Why is not it a gambling machine? Mr. LANSING. Well, it is not a gambling machine. Senator CONNALLY. Gambling with coppers instead of, like the big shots at the race track, with a $2 bill? Mr. LANSING. I disagree with you, Senator. Senator CONNALLY. I am asking you a question. I am not testifying. Mr. LANSING. I shall attempt to answer it to the best of my ability. This machine dispenses merchandise. For each 1-cent inserted you get a 1-cent ball of gum. If you get a yellow-colored ball with the red stripe, you get a 5cent bar of candy in addition. Senator CONNALLY. You would lose money then. If you give out prizes at all, you are just out the prizes. Mr. LANSING. If we were losing money, I do not believe we would be here today, Senator. We are barely making a living on this machine. The additional candy bar is simply a sales stimulator. There is no gambling device or gadget incorporated in this machine. Senator CONNALLY. Thank you. The CHAIRMAN. All right; we have your point. Thank you very much. Mr. LANSING. May I ask leave to introduce my short written statement for the record, Mr. Chairman? The CHAIRMAN. Yes, you may. Senator CONNALLY. Is your machine working now? Mr. LANSING. Yes, sir. Senator CONNALLY. Let me try it. (The brief submitted by Mr. Lansing is as follows:) BRIEF OF HAROLD S. LANSING, OF BLANKSTEN & LANSING, CHICAGO, ILL., COUNSEL FOR NATIONAL VENDING MACHINE ASSOCIATION HONORABLE SIRS: The only amendment to section 3267 of the Revenue Act of 1941, as recommended by the House Ways and Means Committee, is with regard to our particular type of machine, and an examination of the proposed amend ment demonstrates at once that it was never intended that our machine be classed as a gaming device within the statutory definition thereof requiring a $50 yearly tax. It is apparent, as we argued before the Ways and Means Committee, that the inclusion of our machine in the $50-tax classification was a casualty resulting from unfortunately broad statutory wording. We believe it can safely be said that it was never intended to levy a tax in any amount against our particular type of machine, and this was the original opinion of authoritative indviduals in the Department of Internal Revenue. The vending machine in question, which is distributed and serviced by members of this association, is of simple design, containing a glass bowl filled wth candycoated ball gum of various colors. The customer inserts a penny in a slot, turns a lever, and receives a ball of chewing gum. Receipt of a ball of a certain particular color (commonly a yellow ball with a red stripe) entitles the customer to receive a small 5-cent candy bar from the shopkeeper. Nothing is inscribed on the machine, nor is there any attachment incorporated indicating that the person using the machine may be entitled to receive a chance award. This is a bona fide merchandise-vending machine containing no gambling reels, spinners, devices, or gadgets of any kind, and is not a slot machine as defined by the statute. The additional candy bar is a merchandising method which assists the ball-gum vendors in selling the ball gum. Whereas the manufacturers of trade-marked gum expend tremendous sums for advertising in order to stimulate sales, the sellers of ball gum, being unable to compete with such advertising, engage in this merchandising method to promote and stimulate normal sales. In defining so-called slot machines for the purpose of levying a $50 yearly tax, the legislature formulated foolproof wording in order to eliminate evasion by the well-known slot-machine operators. However, by this wording a strict and unrealistic construction would seem to place our machine in the same category as the so-called slot machine, requiring payment of a $50 tax. That our machine was never intended to be taxed was originally demonstrated by a written opinion rendered by D. S. Bliss, Deputy Commissioner of the Treasury Department, on October 9, 1941, shortly after the enactment of the statute. This opinion flatly exempted our type of machine from the tax imposed on coin-operated amusement and gaming devices. However, on March 16, 1942, the Bureau of Internal Revenue reversed its position because, as we understand it, its Legal Department felt that a strict construction of the terminology of the statute swept this machine into its terms. On April 13, 1942, we appeared before the House Ways and Means Committee, displayed our machine, and apprised the committee of the fact that the average gross yearly intake is approximately $30 per machine; that the gross profit amounts to approximately $8 per machine, and the net profit about $4 to the storekeeper, and $4 to the distributor. (Revenue revision of 1942, hearings before the Committee on Ways and Means, House of Representatives, vol. 3, p. 2682 et seq.) Reference to the discussion between our representative and certain Congressmen of the committee, with respect to this situation, will disclose the reasons why the committee concluded that our machine is not of a type to be regarded as being subject to a tax under section 3267 of the Revenue Act of 1941. The Ways and Means Committee has, to our deep gratification, recognized our problem, and has singled out our machine as being entitled to special relief, but, unfortunately, and apparently in the rush of more pressing and urgent matters, has placed us in the category of amusement devices subject to a yearly tax of $10, which is fully as confiscatory for all practical purposes as the $50 tax. We wish particularly to call the attention of your honorable committee to the fact that the Ways and Means Committee, by its proposed amendment, has definitely removed our machine from the category of gaming devices. This, in itself, recognizes the incontrovertible fact that the giving of a 5-cent candy bar with a particularly colored ball of gum is strictly a small-scale merchandising method. By the same token, it is nothing less than an anomaly to classify our machine as an amusement device since the customer, who is not called upon to exercise any degree of skill, is, in the first and last instance, purchasing merchandise. It, therefore, becomes obvious that the Ways and Means Committee definitely intended to afford relief to our operators and storekeepers, but did not accomplish the result which it apparently felt we were entitled to. Ours is definitely not an amusement device, and, since it is not a gaming device, it does not fall within either classification provided in section 3267, and because of the fact that both the $50 tax and the $10 tax would be confiscatory, our class of machine should be wholly exempt from the provisions of section 3267. As stated before, our business is at an end upon the basis of a $10 tax, as well as a $50 tax, for the earnings and profit speak for themselves. The distributors of these machines are small businessmen who contribute their share of the tax burden of this country through the usual existing channels. By curtailing their net profit, as well as that of the shopkeeper, it is conceivable that they might afford to pay a yearly tax of $3 as a maximum. Based upon an approximate total of 300,000 machines now in operation throughout the country, this would bring a tax revenue of nearly $1,000,000 yearly. A tax higher than this figure would simply be uncollectible. While it is our firm conviction that it was never intended, at least for the time being, to obtain tax revenue from this type of machine, nevertheless, decision as to whether or not a $3 tax should be levied, or outright exemption granted, is submitted to the discretion of this honorable committee. Certainly the distributors and storekeepers are definitely in need of relief from the $10 amendatory tax now recommended by the House Ways and Means Committee. Before the House Ways and Means Committee, we proposed an amendment, part of the wording of which was adopted by the committee in reclassifying us an amusement device. We again urge this committee to give consideration to our proposed amendment of clause (2) of subsection (b) of section 3267 of the Revenue Act of 1941, to read as follows: "(2) So-called slot machines which operate by means of insertion of a coin, token, or similar object and which, by application of the element of chance, may deliver, or entitle the person playing or operating the machine to receive, cash, premiums, merchandise, or tokens. The term does not include bona fide vending machines in which are not incorporated gaming or amusement features, nor does it include vending machines dispensing merchandise exclusively, some of which merchandise, by virtue of its color, shape, or character, would entitle the person operating the machine to receive additional merchandise: Provided, however, That said type of machine is limited to operation by 1-cent coins and the additional merchandise given to the person operating the machine shall not exceed in retail value the sum of 5 cents for each insertion of the coin: And provided further, That said vending machine is not incorporated in or operated in conjunction with any slot machine." Respectfully, submitted. NATIONAL VENDING MACHINE ASSOCIATION. The CHAIRMAN. Mr. Bruntjen. STATEMENT OF HERMAN A. BRUNTJEN, REPRESENTING MIDLAND OPERATING CO., MINNEAPOLIS, MINN. The CHAIRMAN. You are appearing here on this same subject, Mr. Bruntjen? Mr. BRUNTJEN. Yes. May I proceed? The CHAIRMAN. Yes. Mr. BRUNTJEN. Mr. Chairman, I am the president of a small corporation from Minnesota and my name is Herman A. Bruntjen. This corporation operates 1,500 of the type of machines described by Mr. Lansing. For all practical purposes, it is the same machine, except our machine might be a little larger and the volume might be a little greater. This proposed tax of $10 is too much on this type of machine, for the simple reason that the earnings of these machines simply do not justify the expenditure of that $10 tax. I have a profit and loss statement from the operation of these 1,500 machines mentioned before, and it shows a very small profit per machine after allowing for depreciation of these machines on a 10-year basis. Our machines, by the way, cost $10 and after allowing this depreciation of $1 per year the machines show a net profit on a year's operation of each machine of 19.7 cents per month, or $2.36 per machine per year, which makes a net profit of $3,668.84 per year on these 1,500 machines. Senator TAFT. How much per month? Mr. BRUNTJEN. Nineteen and seven-tenths cents. Senator TAFT. Cents? Mr. BRUNTJEN. Yes. Now, these 1,500 machines represent an investment of $31,150, including the cost of placing the original merchandise in the machines and various other expenses. If we were to pay a tax of $10 per machine per year this would mean we would have to pay $15,000 taxes, against net income of $3,568.84. I would like to make this observation in addition, that these machines are placed in small combination confectionery stores and small grocery stores and these stores have a hard time existing as their prices have gone up without their having the ability to charge more, because the candy bar is still 5 cents, and the ice-cream cone is still 5 cents. Senator VANDENBERG. On the basis of your statement, you could not pay a $3 tax? Mr. BRUNTJEN. Correct, I disagree with Mr. Lansing on that. We could not even pay the $3 per machine per year. However, I grant this: An individual might be able to operate these machines more profitably than a corporation could. A corporation is naturally more subject to expenses than an individual would be, but even a $3 tax would put us completely out of business. These machines serve as trade stimulators in the stores. The most a person can get is 5 cents' worth of merchandise, retail value, costing the merchant about 3 cents. The way we operate our machines is as follows: If the person gets the so-called striped gum ball, he would have a choice of either an icecream cone, pop, or candy bar. It is up to them, whatever they want. The stores are interested in selling, of course, such an item as ice cream because it is a good profit item to them. We have had no complaints from anybody on these machines in any way that these machines constitute gambling or corrupt the morals of anybody. Senator CONNALLY. Does your machine give a prize that is capable of being rigged? Mr. BRUNTJEN. No. We place 1,000 gum balls in this machine, and to every 1,000 gum balls, we put 100 yellow-striped balls in the machine, on which the prize is given, making a total of 1,100 gum balls in the machine. That proportion always remains the same. When the machines are checked, we pay the merchant $5 for these 100 yellow-striped gum balls from the machine. In other words, the merchant has sold $5 worth of merchandise, which might be candy bars. ice cream, or soft drinks. In addition to that, we give the merchant 10 percent of the balance. That leaves us nominally $5.40 every time the machine empties, out of which we pay the cost of collections, general overhead, the cost of the merchandise, and the cost of installation of the machine. Now, we do business with 1,500 of these small storekeepers in Minnesota and Wisconsin, and the storekeepers really appreciate the few cents that they make on these machines. They do not make much, but it is something that gives some of them an opportunity to compete with the larger stores. These are the smaller stores where the machines are placed. The chain stores and large drug stores are not interested in these machines, for the simple reason that it takes too much time, too much effort to bother with them. However, the small storekeeper will take the time, because he likes to have a little more money to pay his telephone bill or light bill. Now, I have letters, which I shall not take the time to submit, from the small storekeepers that were written to us, in which they express their desire of keeping these machines in operation in their place of business and their appreciation for the help they received from these machines. The CHAIRMAN. Well, sir, we thank you for your presentation. The CHAIRMAN. Mr. Daubin. STATEMENT OF MEREDITH M. DAUBIN, WASHINGTON, D. C., REPRESENTING AUTOMOTIVE PARTS REBUILDERS' ASSOCIA TION The CHAIRMAN. Mr. Daubin, we have three witnesses here on parts and accessories. Are they all speaking to the same point? Mr. DAUBIN. No, they are not, Mr. Chairman; they are covering different phases of the industry. The CHAIRMAN. You may proceed. Mr. DAUBIN. Mr. Chairman, and gentlemen of the committee: My name is Meredith M. Daubin. I am an attorney in the Munsey Building, Washington. I appear as attorney for the Automotive Parts Rebuilders' Association, consisting of auto parts repairmen covering the entire United States. The Bureau of Internal Revenue has held that the repairing or rebuilding of used automobile parts is the manufacturing or producing of an auto accessories and that the sale thereof is taxable under section 3403 (c), Internal Revenue Code, which at present rate is 5 percent. The Automotive Parts Rebuilders' Association is a national nonprofit organization formed last year by auto parts repairmen in order to bring before this committee the exact situation involved. There are present today three members of the association, all repairmen of auto parts known throughout the trade as rebuilders. Their method of business is typical of that of all the auto parts rebuilders throughout the United States. To have brought more members here today to testify would have been merely repititious and cumulative. This application of the excise tax emanates from the Bureau of Internal Revenue in construing that repairing and rebuilding of used parts is "manufacturing" under the statute and that the sale is taxable. We do not believe it was the intention of Congress to tax the mere repairing or rebuilding of auto parts and that Congress had in mind the sale of only the newly manufactured auto part. The situation today as between the Bureau, the collectors, and the repairmen is in complete confusion throughout the entire country. First: The Bureau of Internal Revenue, though repeatedly requested, has failed to issue a public ruling on just that (a) auto accessories or parts are to be taxed; (b) the distinction, if any, be 76093-42-vol. 1-73 |