Recently, attorney Adam Kraut with Firearms Industry Consulting Group, a division of Prince Law Offices, P.C., blogged about the guidance recently issued by the Directorate of Defense Trade Control (DDTC) relating to its interpretation of what constitutes manufacturing under the Arms Export Control Act (AECA) and its implementing regulations, the International Trafficking in Arms Regulations (ITAR). Although I have blogged about ITAR’s applicability to the Firearms Industry for a long time, including my 2012 article that DDTC was stepping up enforcement of ITAR against the Firearms Industry and thereafter, ATF’s notice to firearm and ammunition manufacturers that they are likely required to register, the Firearms Industry has generally responded in absolute shock to DDTC’s recent guidance that AECA/ITAR regulates the Firearms Industry, even though it has since its implementation in 1976. While some of DDTC’s guidance does go beyond AECA/ITAR, such as requiring gunsmiths to register if they’re merely threading barrels, that is a battle that will need to be fought in court, if the Firearm Industry wants to challenge DDTC.
Nevertheless, there is another, potentially more encompassing law, the Firearm and Ammunition Excise Tax (FAET), which was first imposed by the Revenue Act of 1918. You can find it at 26 U.S.C. §§ 4181-4219 and the regulations at 27 C.F.R. Part 53. It is currently enforced by a separate agency, the Alcohol and Tax Trade Bureau, although referred to as TTB.
So, if you thought it was difficult enough remembering the definition of a “firearm” or what constitutes “manufacturing” under the Gun Control Act (GCA) and now AECA/ITAR, get ready, because FAET’s definition of a firearm and manufacturing is separate and distinct. While a book could be written on the intricacies of FAET, the exemptions, and the exceptions (yes, exemptions are different from the exceptions), this article is merely intended to give the Firearms Industry a heads up that they need to ensure their compliance not just with the GCA or AECA/ITAR, but also the FAET.
The FAET provides that a tax of 10% is due on the sale price for pistols/revolvers and 11% on all other firearms and shells and cartridges. Anyone manufacturing or importing any taxable product must file quarterly with the TTB on its 5300.26 Form (except, you do NOT need to submit a return for periods where no tax is due). BUT, what is a firearm? What are shells and cartridges? And what constitutes manufacturing or importing? And there are exceptions/exemptions, right?
As I mentioned about FAET’s definition is NOT identical to the definition found in the GCA. FAET defines a firearms as:
Any portable weapons, such as rifles, carbines, machine guns, shotguns, or fowling pieces, from which a shot, bullet, or other projectile may be discharged by an explosive.
So, if the firearm is not “portable,” it is not taxable; however, pursuant to ATF Ruling 97-2, portable means the weapon can be lifted and carrier by an average person. In that ruling, ATF found that a Model 1919 was portable.
Further, for a firearm to be taxable, it must be complete. Thus, frames and receivers are not taxable; however, selling a firearm in breakdown condition (e.g. all parts present but not assembled) does not exclude it from being a taxable firearm. (Also, don’t think that you can just sell, for example, an AR-15 without a bolt and then, three weeks later, send the customer the bolt, to avoid the tax – REMEMBER, there is a difference between tax avoidance (which is lawful) and tax evasion (which is unlawful)).
Unlike under the GCA, antique firearms ARE firearms and ARE taxable under the FAET and include matchlock, flintlock and perscussion cap firearms. Moreover, unlike the GCA, silencers/suppressors are NOT included under the FAET.
Oh and for the real kicker? Pursuant to ATF Ruling 94-6, a manufacturers own use of a firearm it manufactured for purposes of a demonstration results in a taxable occurrence. Moreover, if a manufacturer lends a firearm to a evaluator for review, such constitutes a taxable occurrence.
Shells and cartridges is defined in the regulations as:
Any article consisting of a projectile, explosive, and contained that is designed, assembled, and ready for use in firearms, pistols or revolvers.
Like with firearms, all components of the ammunition must be present. Hence, blank ammunition with no projectile is exempt. HOWEVER, the sale of un-assembled ammunition kits (e.g. all components present), less than lethal ammunition, marker ammunition with plastic projectiles…etc are all taxable.
Like with firearms, if a manufacturer uses its own ammunition for a demonstration or its own business purposes, it must pay the applicable tax.
Who’s a Manufacturer?
Of course, we also have to define what constitutes a manufacturer, since I already told you that it was not consistent with the GCA or AECA/ITAR. Under the FAET, a manufacturer is defined as:
Any person who produces a taxable article from scrap, salvage, or junk material, or from new or raw materials by processing, manipulating, or changing the form of an article or by combining or assembling 2 or more articles.
Hence, it is not just the manufacture of a new firearm from raw materials that results in the manufacture of a firearm; but rather, it also includes the change in the form of the firearm (or ammunition). Under Revenue Ruling 69-325, it was held that the converting of military rifles into “sport-type” rifles by removing the wooden stock, cutting off the end of the barrel and installing a new front site constituted a change in form of the firearm and resulted in the manufacture of a firearm, for purposes of the FAET.
In this vein, TTB on its publication Gunsmith Information declares that merely “[c]utting off part of the barrel of a firearm is, of itself, an act of manufacture.” (see page 2 of the publication).
However, there can be a distinction between a fabricator and a manufacturer (resulting in a drastic tax liability difference), depending on who owns the materials at the time the firearm or ammunition is to be manufactured. In some occasions, the customer, if he/she provides all the materials, can actually constitute the manufacturer of the firearm/ammunition under the FAET.
Who’s an Importer?
Of course, this article wouldn’t be complete without defining an importer, since they too come under the FAET. An importer is defined as:
Any person who brings a taxable article into the U.S. from a source outside the U.S.
Generally, the FAET focuses on who arranges for the article to be imported as a principal, not the agent.
Exemptions and Exceptions?
All the exemptions and exceptions under FAET are too numerous for this article but some of the more important and applicable ones are:
- Purchase by specifically enumerated military departments using appropriated funds (be cautious, not all military departments are enumerated);
- Sales to state or local governments (including Indian Tribal Governments and the United Nations);
- Sales to non-profit educational organizations (see 26 U.S.C. § 170(b)(1)(A)(ii) for a definition)
- Firearms subject to the National Firearms Act, where the tax is paid (be cautious SOTs, as your SOT fee is not the payment of the tax for a particular firearm. Accordingly, in some occasions, it may make more sense to pay the manufacturing tax ($200.00) on the manufacture of an NFA firearm rather than pay the 11% tax);
- Manufacturers of less than an aggregate of 50 pistols. revolvers, or firearms during a calendar year (this does NOT apply to manufacture of shells or cartridges); and
- Personal use is exempted, per 27 C.F.R. 53.112(b).
The Good Aspect to FAET?
The only good thing about FAET is that all tax revenue goes into a trust fund, which can only be used for wildlife restoration and hunter safety training.
If you’re still confused about the FAET’s application to your situation or need to submit a request for determination to the TTB, we are here to help. Give us a call at 888-313-0416 or send us an email at Info@PrinceLaw.com.