By Teresa G. Ficaretta, Esq. & Johanna Reeves, Esq.
Gunsmiths Assembling Firearms for Customers May Incur Liability for Excise Tax
Gunsmiths offering firearms for sale in unassembled form must ensure they understand the tax consequences of selling the parts and assembling the firearms on behalf of purchasers.
In the past, most firearms sold to consumers by federal firearms licensees (FFLs) have been fully assembled firearms ready to take to the range or on a hunting trip. A growing phenomenon is for retail dealers to offer firearms for sale in unassembled form so consumers may mix and match components to make custom firearms. Some dealers offer the parts for sale on their website and offer an optional service for assembling the firearms on behalf of the purchaser. Other dealers stock the parts in their brick-and-mortar stores and allow consumers to purchase the parts and request assembly. This practice allows retailers to tie up less capital in stock and provide consumers with custom firearms without the delay required for a special order.
The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) allows gunsmiths to assemble firearms from parts owned by customers without obtaining a manufacturer’s license. This is the case even if the gunsmith sells the parts to the customer and then assembles a firearm to the specifications requested by the customer. ATF requires a manufacturer’s license under the Gun Control Act only if the gunsmith assembles firearms from parts and subsequently sells the assembled firearm to a consumer.
Gunsmiths who assemble firearms from parts furnished by a customer may incur liability for manufacturers’ excise tax when they sell the parts to their customers and then assemble the parts into a complete firearm. This article will address the tax issues applicable to gunsmiths who carry on these activities.
STATUTORY AND REGULATORY BACKGROUND
Section 4181, Title 26, United States Code (U.S.C.), imposes upon the sale by the manufacturer or importer of pistols, revolvers, firearms (other than pistols and revolvers), shells and cartridges. 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.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) regulations define “firearms” in 27 C.F.R. §53.11 as follows:
Firearms: 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.
TTB regulations define “Manufacturer” as follows:
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 the article or by combining or assembling two or more articles. The term also includes a “producer” and an “importer.” 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 who actually manufactures or produces it, will be considered the manufacturer.
A manufacturer who sells a taxable article in a knockdown condition is liable for the tax as a manufacturer. Whether the person who buys such component parts or accessories and assembles a taxable article from them will be liable for tax as a manufacturer of a taxable article will depend on the relative amount of labor, material, and overhead required to assemble the completed article and on whether the article is assembled for business or personal use.
The regulations provide that persons who manufacture a firearm for personal use or causes a taxable article to be manufactured for personal use do not incur excise tax liability.
Taxpayers who incur liability for firearms and ammunition excise tax must file quarterly returns on TTB Form 5300.26 and pay tax with the return. Quarterly return periods are listed on the return and on TTB’s website, www.ttb.gov. TTB conducts audits of taxpayers and potential taxpayers. If TTB concludes that a gunsmith should have been filing returns and paying tax on sales of firearms assembled on behalf of consumers, TTB may enter a tax assessment for the amount of tax liability incurred. Penalties and interest may also be assessed for the failure to file a return or pay tax.
One significant exemption from tax is the 50-gun exemption. Section 4182(c), Title 26, U.S.C., provides an exemption from tax for any pistol, revolver or firearm that is manufactured, produced or imported by a person who manufactures, produces and imports less than an aggregate of 50 of such articles during the calendar year. Small custom gunsmiths who assemble or produce fewer than 50 firearms per year are exempted from tax liability and are not required to file returns or any other documentation with TTB.
TTB has information applicable to gunsmiths on their website at www.ttb.gov/applications/pdf/gunsmith-letter-revised.pdf (last visited Jul. 5, 2017). The gunsmith information indicates that two events must occur for tax liability to be incurred. First, there must be an act of manufacture. Second, the person who is responsible for the manufacture must sell the firearm or use it for business (as opposed to personal) use. TTB provides the following guidance on situations where a customer supplies parts or a complete firearm to a gunsmith for assembly or alteration:
In a situation where a customer supplies a firearm to a gunsmith for modification, the customer is usually considered to be the manufacturer for FAET purposes. The customer is considered to be the manufacturer because he directs what type of modification is to be done to the firearm, and he retains title to the firearm while it is being modified. Even though the gunsmith performs the physical modifications to the firearm, he would not usually be considered the manufacturer for FAET purposes in this situation.
An exception to the above example is when the gunsmith is selling the firearm to the customer, and related to that sale, the gunsmith performs alterations that constitute manufacture. The clearest example is where the gunsmith offers to customize a firearm to the customer’s specifications prior to sale. In such a case, the sale of the altered firearm results in tax liability. The tax liability cannot be avoided by merely breaking the transaction into two parts; i.e., selling the firearm and subsequently performing the manufacture.
If the manufacture is related to the sale of a firearm, the gunsmith is liable for tax, whether he performs the act of manufacture before or after the sale. In the latter instance, the TTB will blend the sale and the subsequent manufacture into one transaction. The substance of the transaction will control, not the form.
Where the gunsmith is not selling the firearm to the customer, or in circumstances where the sale and subsequent alterations are truly separate transactions, the customer is deemed to be the manufacturer. In these situations, tax liability, if any, would fall on the customer.
ANALYSIS
First, we assume that gunsmiths selling parts to consumers and then assembling them as complete firearms are not the manufacturers of the parts. This is important, because a manufacturer of parts selling a complete firearm in “knockdown” condition will incur tax liability on the sale. The regulatory definition of “manufacturer” makes this clear. Thus, a manufacturer who sells, to any person, a firearm kit that is complete as to all component parts must pay excise tax unless the sale is otherwise exempt. The remainder of our analysis will focus on gunsmiths who acquire firearms parts from a variety of vendors, offer them for sale to consumers, and then assemble the firearms in the configuration requested by the purchaser.
As indicated in the TTB gunsmith information package, tax will be incurred if assembly of the firearm is done in connection with the sale of the parts. The clearest example of assembly being done in connection with the sale would be where the gunsmith sells the parts to the consumer and bills the consumer for the cost of the parts and the cost of the labor for assembling the firearm. If the assembly takes place before the parts are delivered to the consumer, it is fairly clear that excise tax liability will be incurred by the gunsmith.
A different determination may be reached if a gunsmith sells parts to a consumer, the parts are invoiced and delivered to the consumer, and the consumer leaves the premises of the gunsmith with the parts. If the consumer then returns at a later date and requests the gunsmith to assemble the parts as a complete firearm, it might be possible to conclude the assembly was not done in connection with the sale. TTB’s analysis may depend on whether the two transactions are separately invoiced and on the amount of time between the sale of the parts and the assembly. Gunsmiths who conduct their business in this manner may wish to contact TTB for guidance.
CONCLUSION
Gunsmiths offering firearms for sale in unassembled form must ensure they understand the tax consequences of selling the parts and assembling the firearms on behalf of purchasers. If the assembly of a firearm is done in connection with the sale of the parts, excise tax liability may be incurred. Failure to file quarterly returns and pay tax may result in tax assessment, penalties and interest. Discussions with qualified counsel and/or obtaining written guidance from TTB may avoid these consequences.
We caution readers that tax determinations are complex and fact-dependent. This article addresses limited scenarios and the likely outcome based on our review of the law, regulations and experience in representing taxpayers before TTB. A single change in the facts may affect the conclusions TTB reaches about tax liability.
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The information contained in this article is for general informational and educational purposes only and is not intended to be construed or used as legal advice or as legal opinion. You should not rely or act on any information contained in this article without first seeking the advice of an attorney. Receipt of this article does not establish an attorney-client relationship.
ABOUT THE AUTHORS
Johanna Reeves is the founding partner of the law firm Reeves & Dola, LLP in Washington, DC (www.reevesdola.com). For more than 10 years she has dedicated her practice to advising and representing U.S. companies on compliance matters arising under the federal firearms laws and U.S. export controls. Since 2011, Johanna also has served as Executive Director for the FireArms Import/Export Roundtable (F.A.I.R.) Trade Group (http://fairtradegroup.org). In 2016, Johanna was appointed by the U.S. Department of State, Bureau of Political-Military Affairs to serve on the 2016-18 Defense Trade Advisory Group (DTAG).
Teresa Ficaretta is an expert on ATF regulations under the Gun Control Act, the National Firearms Act, the Arms Export Control Act and Federal explosives laws. Before joining Reeves & Dola in 2013, Teresa served as legal counsel to ATF for 26 years, followed by two years as Deputy Assistant Director in Enforcement Programs and Services. Teresa was elected partner to Reeves & Dola in January 2016.
Johanna and Teresa can be reached at 202-683-4200 or at info@reevesdola.com.
| This article first appeared in Small Arms Review V21N8 (October 2017) |
