78 T.C. 270">*270 Respondent determined a deficiency in Federal individual income tax against petitioners for 1973 in 78 T.C. 270">*271 the amount of $ 454. The issue for decision is whether petitioners may deduct under section 164¹ sales taxes paid (or deemed paid) by a contractor on materials used in constructing an addition to petitioners' residence.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.

When the petition in this case was filed, petitioners Benjamin W. Wise and Rosemarie Wise, husband and wife, resided in Richland, Mich.

On or about February 5, 1973, petitioners entered into 1982 U.S. Tax Ct. LEXIS 134">*137 a contract with Wesley D. Graham (hereinafter sometimes referred to as Graham), a building contractor, for the construction of an addition to their residence. Under the contract, Graham agreed to build the addition to the residence and furnish all materials and perform all work according to plans, specifications, and details attached to the contract; petitioners agreed to pay Graham $ 5,000 "as a fixed contractors fee" plus "The net cost of all labor & material, all fixed overhead on labor, all sub-contracts, all permits and fees, & contractor's labor while he is directly engaged in construction labor."

Graham bought the building materials necessary for constructing the addition. He selected the structural materials. Items such as appliances, paneling, and bathroom fixtures were selected by one or both of petitioners, either alone or together with Graham. All materials bought, even those selected by one or both of petitioners, were charged to Graham's account and generally invoiced to Graham as buyer. The invoices generally required delivery of the material to petitioners' residence or contained a notation such as "Wise job" or a similar notation. Graham employed the workers, 1982 U.S. Tax Ct. LEXIS 134">*138 selected the subcontractors, and supervised the work. Neither petitioner held a builder's license or a building contractor's license from the State of Michigan during 1973, nor had they ever engaged in the business of building residential homes. 78 T.C. 270">*272 During 1973, Graham neither held a Michigan sales tax license nor paid any amounts to Michigan as sales tax collected upon retail sales.

Petitioners paid Graham $ 61,999.62 during 1973 towards their liability to him arising out of the contract. Of this, $ 1,268.27 represented sales taxes which were generally separately listed on the invoices to Graham and paid by Graham to his suppliers and sellers of the materials used to build the addition. The addition to the house was completed during 1973. Petitioners were on the cash basis for 1973.

OPINION

Petitioners contend that they are entitled to deduct $ 1,268.27 ² as an amount separately stated as sales taxes and paid by them as consumers within the meaning of section 164(b)(5), under either section 1.164-3(e)(2), Income Tax Regs., or Michigan law. Respondent argues that petitioners are not entitled to the deduction because in determining who the State sales tax is imposed on1982 U.S. Tax Ct. LEXIS 134">*139 and who is the consumer under section 164, the Court should look to Michigan law, which (he asserts) defines Graham as the "final buyer or consumer."

We agree with respondent's conclusion.

Section 164³ provides for the deduction of State general sales taxes (sec. 164(a)(4)) imposed on the taxpayer ( Armentrout v. 78 T.C. 270">*273 , 43 T.C. 16">43 T.C. 16, 43 T.C. 16">19 (1964); see Magruder v. Supplee, 316 U.S. 394">316 U.S. 394, 316 U.S. 394">396 (1942)) in respect of retail sales (sec. 164(b)(2)(A)). However, where a general retail sales tax is imposed on the seller but is "separately stated" and paid by the "consumer," section 164(b)(5) treats the tax as being imposed on the consumer for purposes of deduction under section 164 if certain1982 U.S. Tax Ct. LEXIS 134">*140 requirements are met. ⁴

1982 U.S. Tax Ct. LEXIS 134">*141 Section 1.164-3(e), Income Tax Regs., ⁵ elaborates on the required retail nature of such deductible taxes, for purposes of section 164(b)(5).

Where the State imposes its sales tax on the seller, the buyer who is granted a deduction by section 164(b)(5) is that buyer who has paid 1982 U.S. Tax Ct. LEXIS 134">*142 the seller in the transaction which the State has chosen to tax. ⁶

1982 U.S. Tax Ct. LEXIS 134">*143 Read thusly, section 164(b)(5) has the effect that, generally, a 78 T.C. 270">*274 State sales tax will be deductible by the same person whether the State imposes its sales tax on the buyer or on the seller in the taxed retail transaction. See 5 J. Mertens, Law of Federal Income Taxation, sec. 27.35, pp. 66-67 (1980 rev.), and p. 2 (Cum. Supp. Oct. 1981).

Michigan imposes a tax on all persons engaged in the business of making sales at retail for the privilege of engaging in this business. ⁷Sims v. Firestone Tire & Rubber Co., 397 Mich. 469">397 Mich. 469, 245 N.W.2d 13">245 N.W.2d 13 (1976); Federal Reserve Bank of Chicago v. Department of Revenue, 339 Mich. 587">339 Mich. 587, 64 N.W.2d 639">64 N.W.2d 639 (1954). The term "sale at retail" includes "the sale of tangible personal property to persons directly engaged in the business of constructing, altering, repairing or improving real estate for others except property affixed to and made a structural part of the real estate of a nonprofit hospital or nonprofit housing." Mich. Comp. Laws sec. 205.51(1)(C) (Mich. Stat. Ann. sec. 7.521(c) (Callaghan 1971)).

1982 U.S. Tax Ct. LEXIS 134">*144 The Michigan sales tax is imposed "upon that which is consumed and used and exempts only that which is sold for resale; the basis of classification is the disposition of the goods made by the buyer, not the character of the business of the seller or buyer." Boyer-Campbell Co. v. Fry, 271 Mich. 282">271 Mich. 282, 271 Mich. 282">300, 260 N.W. 165">260 N.W. 165, 260 N.W. 165">172 (1935).

The Michigan Department of Treasury General Sales and Use Tax Regulations provide that "The term 'retailer' includes all persons who sell to the last or final buyer, user or consumer." Mich. Admin. Code R 205.6, Reg. 6 (1954 and Supp. 1973). In defining "consumer," these regulations focus on the distinction between resale and any disposition other than resale. Mich. Admin. Code R 205.8, Reg. 8 (1954 and Supp. 1973). ⁸1982 U.S. Tax Ct. LEXIS 134">*145 Under the Michigan Department of the Treasury General Sales and Use Tax Rules, a contractor (which term 78 T.C. 270">*275 includes those directly engaged in the business of "constructing, altering, repairing or improving real estate for others") is the consumer of materials used by him. Mich. Admin. Code R 205.71, rule 21 (1954 and Supp. 1973). ⁹

1982 U.S. Tax Ct. LEXIS 134">*146 The first step is to determine on whom the Michigan sales tax was imposed. Petty v. Commissioner, 77 T.C. 482">77 T.C. 482, 77 T.C. 482">485 (1981); Armentrout v. Commissioner, 43 T.C. 16">43 T.C. 19. From our analysis of Michigan law, supra, it is clear that the Michigan sales tax was imposed on Graham's suppliers, the sellers in the taxed transactions. ¹⁰

Imposition of the sales tax on the seller satisfies the prerequisite for application of section 164(b)(5). In order to prevail under this provision, petitioners must show that they paid the sellers in the taxed transactions. However, the parties have stipulated that the taxes were generally separately listed on the invoices 1982 U.S. Tax Ct. LEXIS 134">*147 to Graham and were paid by Graham to the suppliers. Petitioners paid only Graham. Graham was not the seller in the relevant transactions. Petitioners, then, did not pay the sellers upon whom the taxes were imposed by Michigan. As a result, petitioners do not come within the class entitled to benefits under section 164(b)(5). ¹¹

78 T.C. 270">*276 We conclude that petitioners are not entitled to deduct the Michigan sales tax. This result is consistent with our analysis of Michigan's sales tax law, under which Graham is regarded1982 U.S. Tax Ct. LEXIS 134">*148 as the "consumer" of the materials "regardless of the type of contract entered into" between Graham and petitioners (note 9 supra).

Petitioners contend that section 164(b)(5), considered with section 1.164-3(e)(2), Income Tax Regs., set up a Federal standard of who may deduct the tax -- the ultimate user or purchaser -- and there is no need to refer to State law for the meaning of this term. From that contention, they argue that "ultimate" is defined in Webster's Third New International Dictionary (1971) as "final" or "Last in a progression," and that they are the final "user" or "purchaser" of the materials. Petitioners point out that section 164(b)(5) provides that the tax is deemed imposed on the consumer, if its conditions are satisfied, even though the State imposes the tax on the seller.

We agree that the standard to be applied is a Federal standard. However, we reject petitioners' view of what the Federal standard is. We conclude that petitioners have failed to meet this Federal standard. Firstly, as discussed supra, petitioners did not pay the Michigan sales tax to the seller upon whom the tax was imposed. Secondly, the regulations relied on by petitioners1982 U.S. Tax Ct. LEXIS 134">*149 focus on the required retail nature of the tax, distinguishing between users and sellers of the materials the sales of which give rise to the sales taxes sought to be deducted. Michigan's tax appears to be a tax at retail; it is imposed on the seller. Graham was the purchaser and, as a construction contractor, may properly be regarded as the user of the taxed materials. We see no conflict between the Federal standard and Michigan law, as they are applied to building contractors, at least on the record made by the parties in the instant case. Thirdly, petitioners read too much into the word "ultimate," as it appears in the Treasury Regulations. If we were to adhere to petitioners' analysis, then it might well be 78 T.C. 270">*277 argued that whoever buys the residence from petitioners has an even better claim to being the "ultimate user or purchaser," thereby ousting petitioners from eligibility for the deduction, even under petitioners' analysis. Fourthly, petitioners' analysis of section 164(b)(5) would lead to a peculiar result. If the Michigan tax were imposed on the buyer, then section 164(b)(5) would not apply, the sales tax would be imposed only on Graham, and petitioners1982 U.S. Tax Ct. LEXIS 134">*150 would get no deduction (except, perhaps, on an agency theory, see note 11 supra; see also 43 T.C. 16">Armentrout v. Commissioner, supra; Petty v. Commissioner, 77 T.C. 482">77 T.C. 487-490¹²). We can discern no congressional intent to give "downstream" acquirers or payors greater rights through section 164(b)(5) when the sales tax is imposed on the seller than they would have when the sales tax is imposed on the buyer.

Petitioners argue that they are the ultimate consumers of the materials because under their contract Graham agreed to "sell" needed materials upon delivery "at the job site," and under the Michigan Uniform Commercial Code Sales, Mich. Comp. Laws section 2401 (Mich. Stat. Ann. sec. 19.2401 (Callaghan 1964 and Supp. 1974)), title passed1982 U.S. Tax Ct. LEXIS 134">*151 from the sellers to Graham at the point of delivery, and, in turn, immediately from Graham to petitioners, all before the materials became attached to the home addition.

Petitioners' contention, that Graham sold to them the same materials that he had bought from the suppliers in transactions subjected to the Michigan sales tax, appears to be an argument that the sales tax was not correctly imposed under Michigan law. ¹³ We do not see how the asserted subsequent untaxed sale by Graham to petitioners (however treated by the Michigan Uniform Commercial Code) helps to show that petitioners paid the amount of the tax to suppliers who were the sellers in the transactions which gave rise to the only State sales taxes which petitioners claim to have paid.

78 T.C. 270">*278 1982 U.S. Tax Ct. LEXIS 134">*152 Petitioners also argue that they are the "ultimate user or purchaser" for purposes of the Michigan General Sales Tax Act. They contend that the act itself does not define that term, and they rely upon certain statements in R.C. Mahon Co. v. Department of Revenue, 306 Mich. 660">306 Mich. 660, 11 N.W.2d 280">11 N.W.2d 280 (1943), to the effect that final use or consumption of materials is by the transferee of a contractor using them in construction, alteration, or improvements of real estate for others. In R. C. Mahon, a declaratory decree was issued finding that under the 1939 version of the Michigan statute defining "sale at retail," sales tax was imposed on the contractor on the transfer of the materials to the party with whom he contracted to construct, alter, or improve real estate. The Michigan statute involved in R. C. Mahon did not include Mich. Comp. Laws sec. 205.51(1)(C) (Mich.Stat. Ann. sec. 7.521(c) (Callahan 1971)) which provides that the term "sale at retail" includes "the sale of tangible personal property to persons directly engaged in the business of constructing, altering, repairing or improving real estate for others." Thus, the statements1982 U.S. Tax Ct. LEXIS 134">*153 made in R. C. Mahon have no application to the Michigan law as in effect for the instant case.

Finally, petitioners seek to (1) distinguish the instant case from 43 T.C. 16">Armentrout v. Commissioner, supra, on the basis that Armentrout involved Florida statutes (not Michigan statutes) or, alternatively, (2) contend that Armentrout was erroneously decided.

In Armentrout, a construction company agreed to purchase the materials needed to build a house for the Armentrouts and to furnish the necessary labor, in return for the Armentrouts' payment on a cost-plus contract basis (cost plus a percentage thereof as overhead and profit). The Armentrouts claimed a deduction for the Florida sales taxes paid by that company to its sellers for the materials. This Court held that the Armentrouts were not entitled to the deduction because the construction company was the consumer of the materials it purchased for use in the construction of the Armentrouts' residence under the relevant Florida statutes, and rules and regulations. The Court also concluded that the Florida sales tax was imposed on the construction company (citing Fla. Stat. Ann. sec. 212.07, providing1982 U.S. Tax Ct. LEXIS 134">*154 that the retailer should add the tax imposed on him to the sales price charged the purchaser).

78 T.C. 270">*279 We agree that the framework of the Florida statutes, regulations, and rules as to the sales tax imposed by that State differs from that of Michigan. Nevertheless, we find appropriate the Armentrout analysis, looking to State law to determine, for purposes of section 164, (1) what is the transaction on which the sales tax is imposed, and (2) who are the seller and buyer in that transaction. That analysis was recently used by this Court in finding that the contractor was the consumer under the North Carolina sales tax for purposes of section 164(b)(5). Petty v. Commissioner, 77 T.C. 482">77 T.C. 487. We see no reason not to apply that analysis to the Michigan sales tax.

Petitioners argue that 43 T.C. 16">Armentrout v. Commissioner, supra, is erroneous on two bases. First, they contend that that decision is incorrectly based on "the general rule" of looking to State law to determine on whom the taxes are imposed for deductibility under section 164. However, the Armentrout opinion indicates that that decision is instead based on 1982 U.S. Tax Ct. LEXIS 134">*155 a determination of whether the Armentrouts were consumers in the taxable transaction under Florida law for purposes of the predecessor provision of section 164(b)(5). Armentrout v. Commissioner, 43 T.C. 16">43 T.C. 19-20. Second, they maintain that this Court erred in making an ultimate finding of fact "that the contractor [construction company] was the ultimate consumer within the meaning of the Code" because "For example, light fixtures (as well as all building materials) are not consumed when put in place by the contractor for use by the home owner."

What the Court concluded in Armentrout v. Commissioner, was that, under Florida law, the contractor was the "ultimate consumer" and as such was the person on whom the tax was imposed. 43 T.C. 16">43 T.C. 20. Since the tax was imposed on the buyer in the taxable transaction, there was no room for section 164(c)(1) (the predecessor of sec. 164(b)(5)) to treat the tax as imposed on the Armentrouts. For the reasons stated at pages 276-278 supra, we reject petitioners' proposed standard of who is the "consumer" for purposes of section 164(b)(5); we conclude that petitioners' light-fixtures1982 U.S. Tax Ct. LEXIS 134">*156 contention does not help to illuminate this portion of the Internal Revenue Code.

On the one issue presented, we hold for respondent.

Decision will be entered for the respondent.