Manufacturers, Importers of Firearms and Ammo:
Excise Tax Applies to Business Use of Articles
It has come to our attention that a number of manufacturers and importers of firearms and ammunition are unaware of excise tax liability imposed on their business use of firearms and ammunition. This Alert will summarize the requirements of the law and regulations that impose excise tax on use of an article by the manufacturer or importer thereof.
LAW AND REGULATIONS
The Internal Revenue Code imposes a tax on the sale by the manufacturer or importer of pistols, revolvers, firearms (other than pistols and revolvers), shells and cartridges (26 U.S.C. § 4181). The tax is 10 percent of the sale price for pistols and revolvers and 11 percent of the sale price for firearms (other than pistols and revolvers), shells and cartridges. Section 4218 of the Code also imposes tax on the use by the manufacturer or importer in the same manner as if the article were sold by such manufacturer or importer.
Implementing regulations of the Alcohol and Tobacco Tax & Trade Bureau ("TTB") make it clear that the tax on use applies only to use by a person, in the operation of any business in which he is engaged, of a taxable article which has been manufactured, produced, or imported by him or his agent (27 C.F.R. § 53.111). The implementing regulations also provide that tax liability incurred on the use of an article is computed on the price at which such or similar articles are sold in the ordinary course of trade by manufacturers, producers, or importers thereof and in the absence of special arrangements (27 C.F.R. § 53.115(a)). Generally, the tax on use is computed on the lowest established price for which the manufacturer or importer regularly sells such articles at wholesale in arm's length transactions (27 C.F.R. § 53.115(b)). If the manufacturer or importer does not make regular wholesale sales, then TTB must determine a constructive sale price.
ATF RUL. 94-6
Readers may be aware that the Internal Revenue Service administered firearms and ammunition excise tax up until 1991, when the responsibility was transferred to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). ATF was responsible for the tax until 2003, when the agency was transferred to the Department of Justice. From 2003 to present, TTB has been responsible for collecting firearms and ammunition excise tax.
In 1994, ATF issued a ruling on the excise tax imposed on a manufacturer's or importer's use of firearms and ammunition. ATF Rul. 94-6, available on the TTB website, addressed a manufacturer who made firearms and loaned them to its employees for display or demonstration to prospective customers or for the purpose of familiarizing themselves with the firearms. The manufacturer also loaned firearms to writers for trade publications for technical evaluation. At the end of the loan period, the manufacturer offered the firearms for sale to employees or the writers, generally at a reduced price because they were used. ATF ruled that the loan of the firearms to employees or technical writers was an integral part of the manufacturer's business because it benefitted the manufacturer through increased advertising and sales. Accordingly, ATF held that the manufacturer was liable for tax on the use of the firearms when they were loaned to the employees or the writers. The ruling noted that the fact the firearms were later sold at a reduced sale price would not reduce the liability for tax on the manufacturer's use.
THE BOTTOM LINE -
SALES SAMPLES & OTHER LOANS ARE TAXABLE
Manufacturers and importers of firearms and ammunition who provide such articles to their employees or contract sales agents for display and demonstration purposes incur excise tax liability when the firearms and ammunition are first placed into use (i.e., given to the employees or contract sales agents). Taxpayers who provide such articles to technical writers for evaluation, testing, and familiarization incur excise tax liability when the articles are loaned to the writers. Tax is computed on the lowest established wholesale price for which the same or similar articles are sold in the ordinary course of trade. If the manufacturer or importer does not make regular wholesale sales, TTB must determine a constructive sale price.
Manufacturers and importers who believe they have unpaid tax liability for firearms or ammunition used in their businesses as sales samples or other loans should contact qualified legal counsel to obtain information on the appropriate next steps. Delinquent tax liability should be resolved as quickly as possible to avoid or minimize penalties and interest.
The above alert is for informational purposes only and is not intended to be construed or used as legal advice. Receipt of this alert does not establish, in and of itself, an attorney-client relationship.
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