Taxation of Negotiable Instruments; Checks, Drafts, Promissory Notes, and Acceptances

Trade and Bank Acceptances, being in the same class as other negotiable instruments, are subject to the same laws pertaining to stamp taxes as are checks, drafts and promissory notes.

Classes of Negotiable Instruments Taxable By the Federal Revenue Act of 1918, in effect April 1, 1919, there is imposed a tax on such negotiable instruments as above mentioned, payable otherwise than at sight or on demand, upon their acceptance or delivery within the United States, whichever is prior, and on promissory notes, except those given below as exempt, and on each renewal of the same,-2 cents on each $100. or fractional part thereof. Amounts not exceeding $100. are taxable to the extent of 2 cents. The "United States" as given in this law, includes the District of Columbia, Hawaii and Alaska.

Text of Law

The text of the law as relates to such taxation follows: -Drafts or checks (payable otherwise than at sight or on demand), upon their acceptance or delivery within the United States, whichever is prior, promissory notes, except bank notes issued for circulation, and for each renewal of the same, for an amount not exceeding $100. are taxed 2 cents, and for each additional $100. or fractional part thereof, 2 cents.

Analysis of Negotiable Instruments taxable

Included amongst the taxable instruments payable otherwise than at sight or on demand are the following:

1. Trade Acceptances.

2. Bankers' Acceptances.

3. Time drafts which are drawn on a domestic bank to secure money to be used in purchasing goods for exportation.

4. Time drafts which are drawn against the proceeds of time drafts directly covering exports to a foreign country, and which constitute an inherent, necessary and bona fide part of the actual process of exportation.

5. Drafts which state no time for payment, but which are accepted payable on a certain future date.

6. Time drafts which cover articles shipped from the United States, Alaska and Hawaii to the Canal Zone, if such drafts are delivered within the United States, Alaska or Hawaii.

7. Time drafts which do not cover exports, drawn and delivered or accepted in the United States and payable in foreign countries.

8. Post-dated checks which are expressly payable after their date.

9. Time drafts which are drawn against shipments from the Philippines, Virgin Islands, and Porto Rico into the United States, if delivery or acceptance of such drafts first takes place within the United States, Hawaii or Alaska.

When and where Negotiable Instruments Exempt from Taxation

The following checks and drafts are exempt from taxation under this law:

1. All checks and drafts drawn on demand.

2. Post-dated checks which are not expressly payable after their date.

3. Drafts which are drawn abroad on a foreign drawee with a foreign payee and pass through a bank in the United States in the course of collection, unless delivered by an agent of the drawer to an agent of the payee within the United States.

4. Time drafts which are drawn on domestic banks against export shipments delivered to the first carrier for transportation, covering the period of transit from the interior point to the seaboard.

5. Time drafts which cover shipments to the Philippines, the Virgin Islands and Porto Rico.

6. Time drafts which directly cover exports to a foreign country, and constitute an inherent, necessary and bona fide part of the actual process of exportation.

Promissory Notes Included; When and Where Taxable Promissory notes as outlined in the following, and renewals of same, are also negotiable instruments upon which a tax is imposed:

1. Notes which are given for security only.

2. Notes which are payable on demand or after date.

3. Promissory notes which are secured by bonds of the War Finance Corporation.

4. Promissory notes which accompany mortgages of joint-stock land banks.

5. Instruments which are in the form of promissory notes, representing the interest upon promissory notes, not included in (5) below, and either separate from or prepared in a form and for the purpose of being separated from the principal note.

6. Promissory notes which are executed and mailed in the United States to a payee in Canada.

7. Extensions or renewals of promissory notes which are brought about by extensions of mortgages by which such notes are secured.

8. Policy loan and premium extension agreements which contain an unqualified promise to pay a specified sum of money at a certain date, excepting where the only remedy of the payee is to reduce or cancel the rights of the insured in case of non-payment of the premiums or loans.

Promissory Notes; when and where exempt from Taxation The following promissory notes are exempt from taxation:

1. Certificates of deposit.

2. Bank notes which are issued for circulation.

3. Promissory notes which are issued directly by foreign governments and which are placed in this country for sale.

4. Promissory notes which are executed and mailed in Canada to a payee within the United States.

5. Coupons attached to a principal obligation which are substantially repetitions of the promise to pay interest contained in the principal obligation.

6. Promissory notes which are secured by certificates of indebtedness issued by the Director General of Railroads.

7. Promissory notes which are secured by United States bonds or obligations issued after April 24, 1917, or secured by the pledge of a promissory note which itself is secured by the pledge of such bonds or obligations. Such bonds must have a par value of not less than the amount of such notes to exempt the latter.