By Teresa G. Ficaretta, Esq. & Johanna Reeves, Esq.

Legal News From The Nation’s Capital

Manufacturing NFA Firearms Under Government Contract: Exemptions Under Federal Law

U.S. government agencies often enter into contracts with federal firearms licensees (FFLs) to manufacture for the customer’s official government use, machine guns, destructive devices, and other certain firearms subject to the National Firearms Act (NFA Firearms). This article will address first the exemptions available to such manufacturers under the Gun Control Act of 1968 (GCA), the NFA, and the federal explosives laws, and the requirements for qualifying for such exemptions. The article will then discuss what happens when the federal government customer rejects the products manufactured and the manufacturer wishes to sell them commercially.

GCA Exemptions

As many readers are already aware, the GCA imposes licensing, marking, record keeping, and interstate movement requirements on all “firearms,” which include NFA Firearms. Section 925(a)(1) of the GCA provides for a general exemption from the statute’s transportation, shipment, receipt, possession and import provisions for all firearms manufactured for and distributed to federal, state, or local government agencies. However, the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) generally interprets Section 925(a)(1) as applying only to activities government agencies undertake themselves and not to the activities of private government contractors. Further, ATF generally will not waive marking requirements under 27 C.F.R. 478.92, but it may approve a variance to manufacturers under a government contract for alternate methods of marking if they will not interfere with administration of the GCA, including firearms tracing.

NFA Exemptions

In addition to the GCA requirements and restrictions, NFA Firearms are controlled through a tax and registration scheme. First, all persons who wish to engage in the business of manufacturing or importing NFA Firearms must be “qualified” to do so. Qualification requires the appropriate FFL and annual payment of a Special (Occupational) Tax (SOT). Second, all NFA Firearms manufactured or imported must be timely registered with ATF on a Form 2 Notice. Non-FFL individuals who wish to make an NFA Firearm (except machine guns) must apply for prior ATF approval on a Form 1 and pay a $200 tax for each NFA Firearm made. SOTs are exempt from the making tax. Finally, every NFA Firearm requires ATF approval before it can be transferred to another party. The NFA also imposes marking requirements on firearms similar to those in the GCA.

The NFA exempts persons who conduct business exclusively with the federal government from the SOT and other provisions of the NFA. However, this exemption is not automatic and applicants must first prove to ATF that the business is exclusively with or on behalf of the federal government. In addition, ATF also has the discretion to relieve any person manufacturing firearms for or on behalf of the federal government from complying with any provision of ATF’s regulations. However, such relief must be sought from ATF in writing.

Federal Explosives Laws

The Federal explosives laws in 18 U.S.C. Chapter 40 impose licensing, storage, record keeping, and distribution requirements on persons who manufacture, import, deal in, or receive explosive materials. The term “explosive materials” is defined to mean explosives, blasting agents, and detonators. ATF’s List of Explosive Materials is published annually in the Federal Register and can be found on ATF’s website at www.atf.gov.

All persons who engage in the business of manufacturing, importing, or dealing in explosive materials must obtain a license from ATF; make and retain records of their manufacture, importation, purchase, distribution, or receipt of explosive materials; and store explosives in accordance with the regulations. The statute provides exemptions from most of the provisions of Chapter 40 for explosive materials manufactured under the regulation of the military department of the United States or their distribution to or storage or possession by the military or other Federal agency. 18 U.S.C. 845(a)(6). Another provision exempts the transportation, shipment, receipt, or importation of explosive materials for delivery to any agency of the United States or to any State or political subdivision thereof. 18 U.S.C. § 845(a)(3).

ATF regulations implementing the Federal explosives laws require identification markings for explosive materials intended for sale or distribution. Markings must include the name of the manufacturer and the date and shift of manufacture. The required marks of identification must be placed on each cartridge, bag, or other immediate container of explosives materials or outside containers used for the packaging thereof. Regulations provide for marking variances in the same manner as in GCA regulations.

Most of the requirements in ATF’s explosives regulations do not apply to “the manufacture under the regulation of the U.S. military department of explosive materials for or their distribution to or possession by, military services or other Federal agencies.” ATF interprets this provision as applying to contractors. Accordingly, manufacture of explosives under contract with the Department of Defense is exempt from the record keeping, marking, distribution, and storage requirements of the Federal explosives laws. ATF takes the position that manufacture of explosives under contract with Federal agencies other than DOD is exempt from the provisions of Chapter 40, with the exception of marking and record keeping requirements. ATF’s permission to utilize these statutory exemptions is not required.

Practical Application of the Exemptions

Persons manufacturing NFA firearms under contract with the Department of Defense or other federal agency are not exempt from the licensing, marking, record keeping and other requirements of the GCA or NFA. This is because according to ATF, contractors do not stand in the shoes of the government and must therefore comply with all requirements of the law. If a government contract specifies markings that do not comply with the regulatory marking requirements, the manufacturer must submit a request for marking variance to ATF. ATF’s current processing time for marking variances is 3 months, so it is important to factor this into the production schedule.

The NFA regulatory exemption in 27 C.F.R. 479.33, which we discussed above, authorizes manufacturers to be excused from most of the provisions of the statute, including payment of the SOT, registration, and transfer applications when the NFA Firearms are manufactured exclusively for the United States. Remember, however, that the exemption is not automatic and requires submission of a letter application to ATF. Manufacturers who wish to utilize this exemption should apply several months in advance of production to give ATF time to process the request. If a marking variance is needed, a separate marking variance request should be submitted to ATF’s Firearms and Ammunition Technology Division. Remember, however, that it is unlikely ATF will completely waive the marking requirements of the law, as this renders the firearms untraceable in the event they are diverted from lawful commerce. But ATF will generally grant reasonable requests to depart from the minimum size requirements, location of markings, and content of the markings when required by a specific government contract.

Unlike the NFA, the federal explosives laws do not require advance approval for exemption from the requirements, but the applicable exemptions will depend on the federal agency for whom the explosives are made. This breaks down as follows: (1) the regulatory marking, storage, and record keeping requirements will not apply as long as the product is manufactured for and distributed to the Department of Defense; (2) for explosives manufactured under contract with a federal agency other than DOD, the manufacturer must still adhere to the marking and record keeping requirements, but be exempt from the other requirements. A manufacturer who is producing product for both a federal government customer and for the commercial market should take care to segregate the product lines to avoid comingling and accidental violation of ATF’s regulations.

Failed Performance Testing and Commercial Sale

Most Federal government contracts specify performance testing standards that products must meet before the government will accept delivery from the vendor. What happens to products that fail the performance tests, and is it possible to sell them commercially? The answer to this question is complex and depends on a number of factors within ATF’s control.

As stated above, all requirements of the GCA continue to apply to government contractors, so selling products commercially will not change those legal requirements. Under the federal explosives laws, once products are no longer manufactured for and distributed to the Department of Defense or another federal agency, the exemptions in the statute cease to apply. Explosive materials, including those contained in grenades, mines, bombs, and other destructive devices, must be stored in accordance with regulations in 27 C.F.R. Part 555, Subpart K. Records relating to such explosive materials must be created and maintained in accordance with 27 C.F.R. Part 555, Subpart G, and products must be marked in accordance with 27 C.F.R. 555.109.

The most difficult issues raised by a change in use arise under the NFA. If a manufacturer obtained from ATF an exemption from registration under 27 C.F.R. 479.33, the firearms originally produced for the government customer will not be registered. The firearms may also not be marked in accordance with the GCA or NFA. However, pursuant to the GCA, firearms may not be commercially distributed until marked appropriately and, in the case of NFA Firearms, registered under the NFA.

Regulations require that manufacturers register all NFA Firearms on a Form 2 no later than close of business following the day of manufacture. If a manufacturer submits a Form 2 with a date of manufacture that is weeks, months, or years earlier, it is likely the NFA Branch will either deny or not process the form because it will be apparent the manufacturer violated the regulations by not timely registering the firearms. If a manufacturer submits a Form 2 indicating a date of manufacture that is false, the manufacturer will be making a knowing false statement in violation of 26 U.S.C. 5861(l). Such violations are felonies and subject the firearms to seizure and forfeiture.

Manufacturers in this situation have two options for complying with the law. The first is to submit a variance request to ATF’s NFA Branch requesting approval to submit a late Form 2 for the firearms in question. If ATF approves a variance for late registration, the firearms must then be marked appropriately. If ATF will not approve a variance request for late filing of the Form 2, destruction of the firearms to avoid violating the law may be the only available option.

Planning for Possible Commercial Sale

Manufacturers may wish to plan for possible commercial distribution of unregistered NFA firearms that fail product testing standards by requesting variance approval for late registration prior to their manufacture. Such a variance request would be submitted pursuant to 27 C.F.R. 479.26. The request would seek approval to submit Forms 2 for products manufactured for a federal agency on a tardy basis, within a specified timeframe (e.g., close of the next business day) after they have failed product testing standards specified in the government contract. If ATF approves such a request, submission of the Forms 2 later than close of the business day following the date of manufacture would not violate the law or regulations.

The other way to prepare for possible commercial sale is to register and mark all firearms manufactured under the government contract. If the government contract specifies limited markings (and a variance has been granted for such markings by ATF), manufacturers may need to add markings to the firearms to comply with the regulatory marking requirements for commercially distributed firearms. Registering and marking all firearms in advance will also slow down the process of transferring firearms to a government customer, as a transfer application must be submitted to and approved by ATF. However, this option should be considered to create an alternate market for firearms that fail government product testing standards.

Conclusion

Licensed manufacturers entering into contracts with federal agencies for the manufacture and distribution of NFA firearms should be aware of the statutory exemptions under the federal firearms and explosives laws. Unregistered NFA firearms and firearms that are not marked in accordance with the law may present challenges in the event the manufacturer wishes to sell the firearms commercially.

The information in this article is for informational purposes only and is not intended to be construed or used as legal advice.

By Teresa G. Ficaretta, Esq. & Johanna Reeves, Esq.

Legal News from the Nation’s Capital

ATF Ruling 2014-1 Impacts Manufacture and Import of Machine guns

On September 4, 2014, the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) released Ruling 2014-1, addressing the transfer and possession of machine guns by qualified manufacturers and importers. The ruling reviews the restrictions of Section 922(o) of the Gun Control Act (GCA) (Title 18 United States Code, § 922(o)), and sets forth rules for qualified manufacturers and importers to lawfully transfer machine guns for further manufacturing or for repair. The complete text of the ruling can be found on ATF’s website at http://www.atf.gov/sites/default/files/assets/Library/Rulings/Firearms/atf_ruling_2014_-_manufacturing-inventory_of_machine guns_for_le_and_military_2.pdf.

Background

Section 922(o) of the GCA makes it unlawful for any person to transfer or possess a machine gun. The only exemption to this prohibition is a transfer to or by, or possession by or under the authority of a Federal, State, or local government agency. ATF regulations implementing Section 922(o) provide that qualified manufacturers may manufacture machine guns for sale or distribution to a Federal, State, or local government agency so long as they are registered in the National Firearms Registration and Transfer Record, and their transfer is restricted to the distribution for official use of Federal, State, or local government agencies. The regulations also authorize the manufacture of machine guns for purposes of exportation in compliance with regulations of the Department of State issued under the Arms Export Control Act.

ATF has consistently interpreted Section 922(o) to allow qualified manufacturers to stockpile machine guns they manufacture for sale to Federal, State, and local government agencies or for export. These positions are outlined in ATF’s National Firearms Act Handbook (the “NFA Handbook”), E-Publication 5320.8, Section 7.5, also available on ATF’s website.

Prior to issuance of Rul. 2014-1, ATF allowed qualified manufacturers and importers to transfer machine guns to other qualified licensees for purposes of further manufacture, repair, alteration, or integration into another defense article. In fact, Section 7.6.1 of the NFA Handbook states that qualified NFA manufacturers may contract with other qualified manufacturers to produce machine guns for sale to Federal, State, or local government agencies or for dealer sales samples. This section of the NFA Handbook goes on to state that a variance is required for these types of transfers, as the regulations in 27 C.F.R. 479.105 limit the number of machine guns that may be transferred. Accordingly, section 7.6.1 indicates that both manufacturers who participate in the production of the machine guns must obtain a variance authorizing the transfer from one manufacturer to the other pursuant to 27 C.F.R. 479.26.

Historically, a number of manufacturers have received variances from ATF authorizing the transfer of unlimited quantities of machine guns between licensed manufacturers during the manufacturing process pursuant to the provisions outlined in the NFA Handbook. However, beginning in 2012, ATF officials made statements at industry trade shows concerning the legality of such transfers under Section 922(o). At the Sporting, Hunting, and Outdoor Trade Show (SHOT Show) held in Las Vegas, Nevada, in January, 2012, ATF officials announced the agency’s position that allowing licensed manufacturers to transfer machine guns to a second qualified manufacturer for additional manufacturing processes is inconsistent with the plain meaning of Section 922(o). These officials announced that the agency would be providing written clarification at some point in the future. ATF Rul. 2014-1 appears to be this clarification.

Holdings of ATF Rul. 2014-1

The ruling has three separate holdings, outlined below:

1. Stockpiling of machine guns for future sale. The first holding states that licensed manufacturers who are properly qualified under the National Firearms Act (NFA) may manufacture and stockpile machine guns for future sale to Federal, State, or local government agencies without first obtaining a specific contract or order from such government agency, provided the machine guns are properly registered under the NFA and are only distributed for the official use of such government agencies.

2. Delivery of machine guns to a second manufacturer-maintaining constructive possession. The ruling states that qualified manufacturers may deliver machine guns (including frames or receivers) to another qualified manufacturer but may not transfer such firearms to the second manufacturer without violating Section 922(o). However, the ruling states that the delivery to a second manufacturer will not violate Section 922(o) if the first manufacturer maintains continuous dominion or control over the machine guns.

3. Transfers of machine guns between manufacturers when the second manufacturer has a government contract or “official written request” from a government agency. The last holding in ATF Rul. 2014-1 states that a manufacturer may transfer machine guns it has manufactured to another qualified manufacturer if the first manufacturer has a government contract or official written request that meets the following requirements:

• The document is from a Federal, State, or local government agency and is on official letterhead; The document states that the first manufacturer is an agent of the government agency authorizing the transfer of the machine guns to the second manufacturer;
• The document is signed and dated by an authorized government official and includes the official’s title and position;
• The document states that the firearms to be transferred are machine guns as defined by Federal law. The document states that the machine guns to be transferred are particularly suitable for official use by the requesting Federal, State, or local government agency; and
• The document includes a statement that the Federal, State, or local government agency requests and authorizes the manufacturer to transfer the machine guns to and/or from other licensed manufacturers for assembly, repair, development, testing, other manufacturing processes, or storage, as the case may be, for that government agency.

The ruling states that manufacturers who wish to transfer machine guns under the third holding, as outlined above, must attach a copy of the government contract or other official written request to the transfer application submitted to ATF’s NFA Branch.

CAUTION! ATF Rul. 2014-1 Modifies ATF Rul. 2004-2

The last paragraph of ATF Rul. 2014-1 states that ATF Rul. 2004-2 is “clarified” with respect to the documentation required under the GCA for qualified importers to transfer an imported machine gun to another qualified licensee for inspection, testing, calibration, repair, reconditioning, further manufacture, or incorporation into another defense article. This “clarification” will significantly affect the ability of U.S. companies to service the repair needs of their foreign customers.

In Rul. 2004-2, ATF used its variance authority under the GCA and NFA to establish a procedure for qualified importers to bring exported machine guns and other NFA firearms into the U.S. temporarily for purposes of inspection, testing, calibration, repair, or incorporation into another defense article. The ruling recognized the fact that many manufacturers have a legitimate need to import machine guns they exported to foreign law enforcement agencies for purposes of repairs under warranty, recalibration, or incorporation into another defense article, and that such importations are necessary for national defense. The ruling further indicated ATF was aware most of these temporary importations take place pursuant to the Department of State’s International Traffic in Arms Regulations at 22 C.F.R. Part 120-130. However, ATF expressed concern in the ruling that importers utilizing such regulations were not complying with the registration provisions of the NFA, which help ensure the security and accountability of the firearms while within the U.S. Accordingly, ATF Rul. 2004-2 required importers temporarily importing NFA firearms under State Department requirements to also register the firearms on ATF Form 2.

ATF Rul. 2004-2 also addressed transfers of machine guns following their temporary importation. The ruling stated that conveyance of temporarily imported NFA firearms does not amount to a “transfer” as that term is used in the NFA. Accordingly, the ruling stated that no transfer application must be submitted to ATF to lawfully accomplish such conveyances. The ruling did not specifically address the requirements of Section 922(o). However, the ruling clearly authorized the conveyance of imported machine guns to a properly qualified manufacturer for repair, remanufacture, or any of the other purposes outlined in the ruling.

It is important to highlight that the “clarification” of ATF Rul. 2004-2 by ATF Rul. 2014-1 effectively OVERRULES the transfer/conveyance language in the 2004 ruling. According to the 2014 ruling, ATF considers a qualified importer’s delivery of an imported machine gun to another FFL to be a transfer that violates Section 922(o), absent a government contract or other document specifically authorizing the transfer of the imported machine gun to a manufacturer. Because the machine guns will be the property of foreign governments, obtaining a written authorization from a Federal, State, or local government agency may be difficult. Accordingly, it will be challenging for importers to utilize the procedure authorized in ATF Rul. 2014-1 to lawfully transfer temporarily imported machine guns to another manufacturer.

CAUTION! Prior Inconsistent Rulings Modified

ATF Rul. 2014-1 also modifies any prior letter rulings or marking variances that are inconsistent with the positions outlined in the ruling. Consequently, businesses that operate under privately issued variances that authorize machine gun transfers between qualified manufacturers may no longer rely upon such variances.

Impact of ATF Rul. 2014-1 on Federal Firearms Licensees

The practical impact of ATF Rul. 2014-1 on the operations of Federal firearms licensees is summarized below.

1. Manufacture and stockpiling of machine guns. Qualified manufacturers may continue to manufacture and stockpile machine guns for future sale to Federal, State, and local government agencies.

2. Transfers of machine guns to a second manufacturer. ATF marking variances or private letter rulings specifically authorizing the transfer of machine guns from one qualified manufacturer to another qualified manufacturer are no longer valid. Licensees who utilize the services of another qualified manufacturer to manufacture machine guns must have an employee accompany the registered machine guns to the premises of the second manufacturer and maintain continuous dominion and control over the machine guns while the manufacturing operations are conducted. Alternatively, the first manufacturer may obtain a government contract or other document specifically authorizing the transfer to the second manufacturer. Such a document must meet all requirements of ATF Rul. 2014-1 as set forth above and must be submitted to the ATF National Firearms Act Branch with the Form 3 transfer application.

In the case of machine guns manufactured for export, transfers to another qualified manufacturer must meet all the requirements outlined above. It may be difficult to obtain a contract or other written authorization from a Federal, State, or local government agency specifically authorizing the transfer to a second manufacturer when the machine guns are being made for export to a foreign customer. The only alternative to this requirement is for the first manufacturer to maintain continuous dominion and control over the machine guns while they are on the premises of the second manufacturer.

3. Transfers of machine guns temporarily imported under Department of State requirements. Importers who are properly qualified under the GCA and NFA may continue to temporarily import machine guns exported to foreign governments for purposes of repair, recalibration, and incorporation into another defense article. These temporary imports must comply with ITAR regulations in 22 C.F.R. Parts 120-130 and be registered on ATF Form 2 within 15 days of release from Customs custody. However, these machine guns may not be transferred to another qualified manufacturer absent a contract with a Federal, State, or local government agency specifically authorizing the transfer to the qualified manufacturer OR a written authorization that meets all the requirements set forth in ATF Rul. 2014-1. As with transfers of machine guns manufactured for export to foreign customers, it may be difficult to obtain such an authorization from a domestic government agency when the machine guns are owned by a foreign customer. Alternatively, manufacturers or importers who have a need for another qualified manufacturer to perform repair or manufacturing operations on temporarily imported machine guns must maintain continuous dominion and control over the weapons while on the premises of the qualified manufacturer to avoid both licensees violating Section 922(o).

4. Impact of ATF Rul. 2014-1 on Repair of Machine Guns. ATF’s National Firearms Act Handbook, section 9.5.1, “Repair of Firearms,” states that ATF does not consider the temporary conveyance of an NFA firearm to an FFL for repair to be a “transfer” under the NFA. Accordingly, this section states that a transfer application is not required to convey the firearm for repair or to return the repaired firearm to its owner/possessor. The issuance of ATF Rul. 2014-1 raises questions as to the continued application of this position as to machine guns subject to control under Section 922(o). ATF advises that the ruling changes ATF’s position on repairs of machine guns in certain situations. These situations are outlined below.

Temporary Imports. As stated above, machine guns temporarily imported under State Department regulations may not be delivered to another FFL for repair absent a written authorization from a Federal, State, or local government agency expressly authorizing the transfer to the second FFL. ATF views such deliveries as a “transfer” as that term is used in Section 922(o) and the NFA, and they must be accomplished with a Form 3 transfer application with the written authorization attached. Given the difficulties in obtaining such an authorization, the best option for facilitating repair of temporarily imported machine guns will be for an employee of the importer to retain continuous dominion and control over the weapons while on the premises of the repairing FFL to avoid violating the law.

Manufacturers Discontinuing Business. The ruling will affect the repair of machine guns acquired by a qualified FFL pursuant to the provisions of 27 C.F.R. 479.105(f). This section of the regulations requires a qualified manufacturer, importer, or dealer, prior to discontinuing licensed business, to transfer, in accordance with the NFA, machine guns to a Federal, State, or local government agency or to another qualified manufacturer or importer. Alternatively, the FFL going out of business may transfer the registered machine guns (in limited quantities) to a qualified dealer as sales samples pursuant to 27 C.F.R. 479.105(d). Machine guns acquired by a qualified FFL pursuant to section 479.105(f) will not be transferred pursuant to a contract or letter from a Federal, State, or local government agency authorizing possession by the acquiring FFL. Accordingly, the delivery of such machine guns to another licensee for repair would be a transfer that would violate Section 922(o). The only option for facilitating repair in this situation will be for the registrant to maintain continuous custody and control over the machine guns during the repair process.

Machine guns Acquired as Sales Samples. Machine guns may be lawfully acquired as dealer sales samples pursuant to regulations in 27 C.F.R. 479.105(d). This regulation requires FFLs to obtain a letter from a Federal, State, or local government agency expressing a need for a particular model or interest in seeing a demonstration of a particular weapon (a “law letter”). ATF advises that the law letter authorizes the FFL-registrant to deliver the machine gun to another qualified FFL for repair and that such delivery is a “conveyance” rather than a “transfer.” As noted in the NFA Handbook, section 9.5.1, a transfer application is not required to convey a machine gun for repair or to return the repaired machine gun to the registrant. However, in order to avoid any appearance that a transfer has taken place, ATF recommends that a Form 5 application be submitted for approval prior to conveying the machine gun for repair. It is also recommended that the FFL making repairs obtain an approved Form 5 to return a repaired machine gun. If Form 5’s are not used, the parties should maintain documentation showing that the conveyance was for the purpose of repair. For dealer sales samples requiring repair, ATF Rul. 2014-1 did not change this procedure.

Delivery of Machine Guns for Repair by One FFL to a Second FFL. Assuming the delivery of machine guns to a qualified manufacturer for repair is lawful, the next question is whether the manufacturer may lawfully deliver the machine guns to a second manufacturer. It may be necessary, for example, for the first manufacturer to obtain the services of a second manufacturer for purposes of refinishing or heat treating the machine gun. ATF advises that such deliveries amount to “transfers” and are lawful only if there is a specific contract or other written authorization from a Federal, State, or local government agency that authorize the delivery to the secondary manufacturer. Such transfers must be accomplished on ATF Form 3 with the written authorization attached. For repair of dealer sales samples, ATF advises that a delivery/conveyance to the first qualified FFL for repair is permissible, but the FFL may not convey the machine guns to a second qualified FFL without violating Section 922(o). ATF further advises that machine guns in the hands of law enforcement agencies that require repair may continue to be conveyed to a qualified FFL for repair without a transfer occurring, but delivery to a second FFL would amount to a “transfer” that also requires a transfer application supported by a specific written authorization.

Conclusion

ATF Rul. 2014-1 significantly changes the way importers and manufacturers of machine guns should conduct business, both as to machine guns distributed domestically and those that are exported. As violations of the GCA and NFA may result in significant civil and criminal penalties, licensees should take care to avoid unintentional violations of the law.

(The information in this article is for informational purposes only and is not intended to be construed or used as legal advice).