Federal Firearms Excise Tax - A Possible Tax Trap For Gunowners?

[Bartholomew Roberts]

OK, under 26 U.S.C. s 4181, the manufacturers of a firearm is required to pay a federal firearms and ammunition excise tax (FAET) of 10% or 11% on the first sale of the item. Recently, this has been an issue for gun smiths because ATF takes the position that custom work on a firearm is the same as manufacturing a new firearm for the purposes of the excise tax (see ATF FAET FAQ). As a result, in 2005 Congress passed a provision exempting manufacturers of less than 50 firearms from paying the tax (See 26 U.S.C. 4182.

One effect of these regulations is that non-FFL individuals who build firearms on a stripped receiver (CMP M1 Garand Receivers, AR15 stripped lowers, stripped AK receivers, etc.) are "manufacturing" a firearm under the terms of the law since no FAET is paid on the items. This is perfectly legal as long as the items are for personal use. (see ATF FAET FAQ).

One legal question that pops up though, is what happens if the person who built it for personal use later changes their mind and decides they want to sell the rifle? According to a few FFLs at AR15.com, ATF is taking the position that the FAET does need to be paid; but they do not accept tax payments from non-FFLs and they claim the less than 50 firearms exemption applies only to licensed manufacturers (FFLs).

If this is true, then any rifle built on a stripped lower is in the same position as a rifle manufactured from an 80% lower. The lower receiver can never be legally transferred because you must pay the FAET to legally transfer it but ATF does not accept FAET from non-FFLs.

Looking at the annotated U.S. code, I've found exactly one case on the definition of "Manufacturer" concerning the FAET. The case is International Armament Corp. v. United States, 598 F. Supp 1028 (D.C. Va. 1984). It is a district court case from Virginia and may not have much value as precedent.

In the case, Interarms had contracted with a company (who assigned that contract to Ranger) to build Walther pistols under license. Ranger actually did all of the manufacturing and paid the excise taxes before reselling the pistols exclusively to Interarms for distribution to FFLs. The IRS tried to hit Interarms for the excise tax as well and got shot down by the court who ruled that Interarms was not required to pay the excise tax.

Not much useful to this conversation except this part at 1030-1031:

(i) The term “manufacturer” includes any person who produces a taxable article from scrap, salvage, or junk material, or from new or raw material, by processing, manipulating, or changing the form of an article or by combining or assembling two or more articles ....

(ii) Under certain circumstances, as where a person manufactures or produces a taxable article for another person who furnishes materials under an agreement whereby the person who furnished the materials retains title thereto and to the finished article, the person for whom the taxable article is manufactured or produced, and not the person *1031 who actually manufactures or produces it, will be considered the manufacturer.

Under Treas.Reg. § 48.0-2(a)(4)(ii) two tests emerge for designation of a “manufacturer,” namely, (1) “a person manufactures or produces a taxable article for another person who furnishes materials under an agreement ” and (2) “the person who furnished the materials retains title thereto and to the finished article.” (emphasis added).

FN1. The excise tax on firearms is intended to apply to the first sale by the manufacturer. Under the “first sale” rule laid out by the United States Supreme Court in Indian Motocycle Co. v. United States, 283 U.S. 570, 574, 51 S.Ct. 601, 602, 75 L.Ed. 1277 (1931), “[the excise tax] is not laid on all sales, but only on first or initial sales-those by the manufacturer, producer or importer.”

Also at 1033:

cf. Rev.Rul. 84-116, 1984-31 I.R.B. 8 (In an analogous context, a gunsmith's customer was considered the manufacturer of a rifle because the customer supplied the parts used by the gunsmith in the fabrication of the rifle.)

=============================

All of this concerns me because of two things:

1. It would potentially make millions of gun owners who sold firearms based on stripped receivers that they purchased through an FFL subject to criminal tax evasion charges.

2. The statute for the small manufacturer exemption (26 U.S.C. 4182) says absolutely nothing about limiting the exemption only to licensed manufacturers.

As near as I can tell, ATF has never prosecuted any private non-FFL "manufacturer" for failing to pay the excise tax; but I am concerned if ATF is telling local FFLs that their interpretation is different than the law Congress passed on this subject.

It looks like initially, we need to get a written letter from ATF concerning whether this is in fact how they interpret the law. If so, then this strikes me as one of those issues that might be worth bringing up with your local Congressman. If ATF is interpreting 26 U.S.C. 4182 differently from how it is written, and doing it in a way that potentially creates millions of tax criminals, they need to be slapped down by Congress.

 

[whm1974]

The reciever(or frame) is the firearm itself, so the excise tax should have already been paid by the manufacter. And if later you didn't want it anymore or need to sell, it would be just like selling a used gun.

Now here is the sticker. Under Federal law you can make your own firearms, either from 80% finished blanks or completely making the frame yourself. You don't to have pay the tax. However from what I understand you can never ever sell the firearm even if it's years after you made it.

Now what your heirs can with it after you croak, don't know.

-Bill

 

[Bartholomew Roberts]

The reciever(or frame) is the firearm itself, so the excise tax should have already been paid by the manufacter. And if later you didn't want it anymore or need to sell, it would be just like selling a used gun.

Except that FAET is not paid on a stripped receiver since a frame is not considered a firearm for tax purposes.

However from what I understand you can never ever sell the firearm even if it's years after you made it.

Which appears to be the same kind of reading that ATF is trying to apply to stripped receivers being built into rifles.

 

[Henry Bowman]

Except that FAET is not paid on a stripped receiver since a frame is not considered a firearm for tax purposes.

Are you sure? What is your cite for that?

 

[waterhouse]

Are you sure? What is your cite for that?

I don't have a cite right now, but I know that when I place an order from STI for complete pistols there is FAET listed right on the receipt but when I order stripped lowers from Noveske there is a message stating that FAET has not been paid on the stripped lowers and needs to be paid if the receiver is assembled into a gun.

ETA: Found it:

C. Definition of Taxable Articles.

* Firearm. Any portable weapon, such as rifles, carbines, machine guns, shotguns, or fowling pieces from which a shot, bullet or projectile may be discharged by an explosive. See 27 CFR 53.11.

and

D. Components of Taxable Articles.

* Modern firearms firing fixed ammunition.
o Action
o Stock
o Barrel

(Note — A taxable article exists if the article has these component parts.

taken from http://www.ttb.gov/firearms/reference_guide.shtml

 

[everallm]

It's not a gun owner trap, simply Uncle Sugar wanting to continue to make sure they are not getting their blood from any commercial enterprise.

If you buy an unfinished receiver, this is not a completed weapon part as defined by FAET therefore not tax can be levied.

If an individual builds, completes and then sells the completed weapon, it is regarded as a commercial enterprise and is liable for the levy. So long as the 50 per year threshold has been met.

This levy is only applied once, when the components that identify a weapon are first sold.

I believe the same goes for completed ammunition versus reloading components.

It's the same if say you bought several old clunkers, stripped the parts, rebuilt them as a completely new custom car and sold it as a commericial enterprise.

As with any tax law, it basically stands the principle of law on it head and you are presumed guilty and have to prove innocence. So if you do small numbers of work, keep records.......

 

[Bartholomew Roberts]

Are you sure? What is your cite for that?

I know I have never paid on on AR15 lowers. The cite is 27 CFR 53.61 (5)(ii) which names as nontaxable component parts: a frame or receiver, breech mechanism, trigger mechanism, barrel, buttstock, forestock, handguard, grips, etc. The frame/receiver/breech mechanism seems to be the key part.

However looking at the FAQ, it looks like ATF requires gunsmiths to pay a FAET when they do custom work on a firearm that has already had an FAET paid. If that is the case, then I can easily see them applying the same logic to building up a stripped lower. (see ATF FAET FAQ).

So long as the 50 per year threshold has been met...

That is one of the issues. One of the FFLs is claiming that he has been told that the less than 50 exemption is only for licensed manufacturers (i.e. FFLs) and that ATF won't even accept payment of a tax from a non-FFL. The actual exemtpion language says nothing about a licensed manufacturer though and the definition under title 26 makes no distinction between licensed or unlicensed manufacturers (although title 18 does make that distinction and uses the term "licensed manufacturer" where it intends to distinguish between the two).

Based on the rule of lenity, I don't think ATF would have much of a case if they did try to bring one; but given the chance that a less friendly executive may be in the White House next year regardless of who wins, I think we should clear up this issue now.

 

[ilcylic]

If the ATF wants to abrogate their duties to collect certain taxes, the onus isn't with me to restrict my behaviour thereby.

"We're refusing to let you pay $X tax as a method of preventing you from doing $Y" is one of the biggest *censored* tactics the ATF uses, IMO.

(Yes, I'm painfully aware of the fact that this is the mechanism whereby the '86 MG ban is implemented. No, I have no intention of ever violating it, even if I do think it's complete *censored*. I'm not stupid. Yes, I know many of you disagree.)

 

[XD_fan]

There is no provision for a non-FFL holder to pay the excise tax. Its has to be paid by the manufacturer at the time of manufacture.

 

[Henry Bowman]

Thanks for the cites. I believe you now.

So, if I buy a stripped AR lower and build it up, I'm A-OK. But if I later sell it, maybe not. What if I buy a forged stripped lower and a few years later decide I'd rather have a milled one. So I buy a new one and sell the first one to a friend. Now where are we? Was that sale OK? Can he build it up, or is that a problem?


Seems to me the easy remedy is to charge the tax on a stripped lower if it is sold to a non-manufacturer. If you are a manufacturer who buys stripped lowers from an outside source, you only pay the tax on the full firearm when you sell it. Much like the way sales tax works.

 

[Bartholomew Roberts]

Seems to me the easy remedy is to charge the tax on a stripped lower if it is sold to a non-manufacturer.

Except check out the FAQ section on gunsmiths - not only do they sometimes assign a FAET tax liability for custom work on a firearm that has already had a FAET paid on it - they even assign the liability to the customer instead of the gunsmith in certain cases. So I am not sure that paying on a stripped lower would save you, though since the FAET is only supposed to be a tax on the FIRST sale, you would think it would.

I think the argument that the Small Manufacturer exemption applies to non-FFLs as well as FFLs offers better protection. In that case, it wouldn't be an issue unless you built AND resold 50 or more stripped lower/custom firearms per year. In that case it would be difficult not to argue that you weren't in the business of selling firearms. Also based on the definition of manufacturer (both under Title 18 and Title 26), the exemption seems to apply whether you are a licensed manufacturer or not.

I'm trying to get ATF to put something in writing regarding their policy on this issue. When they deign to answer my questions at all, I'll let you know how much progress I am making on that front.

 

[Henry Bowman]

As I learned from my tax professor in law school: "At the root of all law -- except tax law -- is logic and common sense." I doubt he had looked much at firearms laws, tax related or otherwise.

 

[strat81]

1. It would potentially make millions of gun owners who sold firearms based on stripped receivers that they purchased through an FFL subject to criminal tax evasion charges.

While this is possibly true, how likely is it? We have a 10% excise tax that's being levied on an $800 AR? Even on a $3k AR, that's $300. While I've never dealt with the ATF in their capacity as tax men, I have dealt with the IRS with such matters when I worked in public accounting.

$300 gets you a few letters in the mail, along with some penalty and interest charges. Fail to pay and they'll garnish future refunds, paychecks, and eventually even bank accounts. If the ATF really wanted to strap on their jack boots and arrest half of Arfcom's members, there'd be some VERY busy US Attorneys and some very crowded federal penitentiaries. $300 isn't getting Agent Schmuckatelli out of bed in the morning, let alone arresting you and having you rot in a cell.

 

[Bartholomew Roberts]

While this is possibly true, how likely is it?

I don't think it is likely from a practical perspective and it looks like it would be a tough case for ATF to win as well; but if ATF is taking that interpretation now under this administration, I would be concerned about selective interpretation of the rule in the future. You don't have to prosecute a lot of people to use it effectively - just the ones who are standing in your way.

For that matter, I don't recall ATF ever prosecuting someone solely for owning a postban rifle in a preban configuration and it was openly ignored where I live. Despite that though, there were still thousands of gun owners paying premiums for "complete rifles" or affidavits proving the gun was in preban condition prior to 1994, just because ATF took that position.

It seems to me like it would be better to clarify this issue now; because after 2008, it seems possible that ATF might be encouraged to take a harder line on these kinds of gray areas.

 

[whm1974]

For that matter, I don't recall ATF ever prosecuting someone solely for owning a postban rifle in a preban configuration and it was openly ignored where I live.

I heard about two people myself getting busted for this. One was a FFL who had a 10/22 with too many features, and I don't recall who the other guy was.

Keep in mind about laws not being enforced. You maybe wanted bad enough that they will hunt for anything to charge you with. So it's not a good idea to amitte that you did anything illegal in a public place.

-Bill