In Vol. 20, No. 7 of Small Arms Review, we published an article on firearms and ammunition excise tax summarizing the articles subject to tax, definitions of “manufacturer” and “importer,” and exemptions from tax. This article builds on the information in Part I and will address how to determine the taxable sale price for firearms and ammunition subject to tax, exclusions from the sale price, and tax-free sales.
I. Statutory and Regulatory Background
Section 4181, Title 26, U.S.C., imposes a tax on the sale by the manufacturer, producer, or importer of pistols, revolvers, firearms, shells, and cartridges. The tax is 10 percent of the sale price for pistols and revolvers and 11 percent of the sale price for all other firearms and shells and cartridges. The Internal Revenue Code (IRC) also imposes excise tax on the lease of a taxable article by a manufacturer or importer (26 U.S.C. 4217) and use of a taxable article by a manufacturer or importer (26 U.S.C. 4218).
II. Filing of Returns and Payment of Tax
When a manufacturer or importer sells a taxable article, tax liability is incurred, and the taxpayer must file a quarterly return with the Tax and Trade Bureau (TTB), Department of the Treasury. Returns must be filed on TTB Form 5300.26, Firearms and Ammunition Excise Tax Return. No return is required for tax periods in which no tax liability is incurred. Payment of tax may be accomplished by sending a check or money order with the return or through electronic funds transfer (EFT). Information on payment via EFT is available on TTB’s website, www.ttb.gov.
III. Tax on Use
In addition to imposing a tax on the sale of firearms and ammunition, the IRC imposes tax on the use of taxable articles by manufacturers and importers. A good example of a taxable use of firearms would be a manufacturer who arms its plant security guards with firearms that it manufactures. ATF issued a ruling in 1994 (ATF Rul. 94-6, available on TTB’s website) holding that a manufacturer who loans firearms to its own employees as demonstration models incurs tax on the use of the firearms. The ruling also held that a manufacturer’s loan of firearms to writers for technical evaluation results in tax liability on the use of the firearms.
Regulations provide that tax liability incurred on the use of taxable articles is computed on the price at which similar articles are sold in the ordinary course of trade by manufacturers. The taxable sale price is computed on the manufacturer’s lowest established wholesale price for such articles in effect at the time of the taxable use. If the manufacturer does not regularly sell the articles at wholesale, the manufacturer must request a constructive sale price determination from TTB. Later in this article we address the information necessary to request a constructive sale price determination.
IV. What is the Taxable Sale Price?
The IRC provides guidance on how to determine the taxable sale price on which the 10 or 11 percent excise tax is based. Section 4216(a) of the IRC states that the “price” shall include any charge for coverings and containers and any charge “incident to placing the article in condition packed ready for shipment.” Section 4216(a) also specifically allows taxpayers to exclude firearms and ammunition excise tax from the taxable price and any transportation, delivery, insurance, and installation charges.
Implementing regulations providing further guidance on charges which must be included in the sale price and those that may be excluded. The following list, based on 27 C.F.R. § 53.91, provides examples of inclusions and exclusions from the taxable sale price:
Charges to be included in the taxable sale price:
- Charges for demonstration or display of the article or sales promotion programs;
- Separate charges for tools and dies used in the manufacture of a taxable article;
- Charges for warranty, if a purchaser is required to pay such charge to obtain the article; and
- Charges for coverings, containers, and packing material, whether or not the charges are identified on the invoice or are
- billed separately.
Charges that may be excluded from the taxable sale price:
- Federal excise tax may be excluded from the taxable sale price. Where no separate charge is made as tax, TTB presumes that the price includes the proper tax, and the proper percentage of the price will be allocated to the tax. TTB regulations (27 C.F.R. 53.92(a)) provides taxpayers with formulas on how to back the tax out of the taxable sale price;
- Transportation, delivery, insurance, or installation charges. Only those charges incurred after shipment to a particular customer begins may be excluded. Costs incurred for the convenience of a taxpayer, such as shipping articles from a port to a warehouse, may not be excluded;
- Certain charges for local advertising (very limited–see regulations in 27 C.F.R. 53.100);
- Charges for extra identical component parts and accessories (i.e., items not designed to be attached to a firearm during use and not, in the ordinary course of trade, provided with firearms at time of sale); and
- The cost of nontaxable articles sold in combination with taxable articles;
- The above inclusions and exclusions from the taxable sale price are covered in detail in TTB’s implementing regulations. Taxpayers with questions about how to calculate the sale price should contact TTB or qualified counsel for guidance.
V. Constructive Sale Price
Rule and regulations governing the taxable sale price are based on the assumption that most manufacturers and importers sell firearms and ammunition through wholesale distributors. In order to ensure fairness and consistency among taxpayers, the IRC has special rules for manufacturers and importers who sell articles at retail, on consignment, or to an affiliated corporation. There is also a “special rule” for sales of articles to retail dealers, but it is limited in scope.
Sales of Firearms at Retail, on Consignment, and Not through Arm’s Length Transactions and at Less than Fair Market Price
Taxpayers who sell firearms or ammunition at retail, on consignment, or who sell otherwise than through an arm’s-length transaction at less than fair market price must use a constructive sale price as the basis for calculating tax liability. “Sale at retail” is defined in the regulations as sale of an article to a purchaser who intends to use or lease the article rather than sell it. “Consignment sale” is defined as an article sold by a person who has the right to sell it and does sell it, but the seller never takes title to the article from the manufacturer. Sales are considered to be made under conditions other than at arm’s-length if one of the parties is controlled by the other or there is common control, whether or not such control is actually exercised to influence the sale price. A sale will also be considered other than arm’s-length if it is made pursuant to “special arrangements” between a manufacturer and purchaser.
Sales at Retail – 75 Percent Rule
A ruling issued by the Internal Revenue Service issued in 1980 held that the constructive sale price for computing excise tax imposed on retail sales of firearms, ammunition, and other taxable articles for manufacturers who do not sell like articles to wholesale distributors is 75 percent of the actual selling price after taking into account the adjustments provided by 26 U.S.C. § 4216(a), unless it can be shown on an industry-wide basis that a lower percentage should apply. Rev. Rul. 80-273, 1980-2 C.B. 315. Taxpayers who are satisfied that 75 percent of the sale price is appropriate may rely on this ruling in calculating their excise tax liability for sales of firearms and ammunition at retail. The ruling makes it clear that once the constructive sale price is determined, no further adjustments (inclusions and exclusions as discussed above) to the sale price may be taken. Taxpayers who believe a lower percentage is appropriate may request a constructive sale price determination from TTB.
Sales Between Affiliated Corporations
The regulations include guidance on determining the constructive sale price for sales of taxable articles between affiliated corporations. 27 C.F.R. § 53.97. The regulations establish various methods for calculating the constructive sale price depending on to whom the manufacturer sells the taxable articles and whether the purchaser is a member of an affiliated group. These rules are complicated and should be reviewed carefully by manufacturers and importers who sell firearms and ammunition to related selling companies.
Constructive Sale Price for Sales to Retail Dealers
Regulations provide a “special rule” for manufacturers and who sell firearms to retail dealers. The regulations provide that if the manufacturer regularly sells articles to one or more wholesale distributors in arm’s length transactions, then the manufacturer may use a constructive sale price for its sales of the same article to retail dealers. The constructive sale price for sales to retail dealers is the lower of its actual sale price or the highest price it sells the articles to wholesale distributors. 27 C.F.R. § 53.96. Manufacturers whose sales practices fit within this regulation may use the constructive sale price for payment of excise tax on sales of firearms to retail dealers without any permission or determination from TTB.
This “special rule” raises the question of manufacturers who sell to retail dealers but have no regular sales to wholesale distributors. The unfortunate answer is that there is no constructive sale price available to manufacturers in this situation. Manufacturers who have no wholesale sales must use the actual price they charge retail dealers to calculate the amount of excise tax they must pay.
Requesting a Constructive Sale Price Determination
Taxpayers who wish to request a constructive sale price determination should send it in writing to TTB’s National Revenue Center in Cincinnati, Ohio. The easiest way to submit the request is via e-mail: email@example.com. A request for a constructive sale price determination should include the following information:
- Types of firearms offered for sale or used in the taxpayer’s business;
- Where taxpayer obtains materials and/or parts for firearms;
- Whether the taxpayer holds patents or trademarks for the firearms;
- How customers order or purchase the firearms or ammunition from the taxpayer OR how the firearms or ammunition are used in the taxpayer’s business;
- Whether customers are purchasing the firearms for personal use or for other purposes;
- Whether the taxpayer regularly sells the firearms to wholesale distributors in arms-length transactions; and
- Cost and price information for each model of firearm sold or used including the taxpayer’s cost for parts and materials, taxpayer’s cost for labor, the price charged to consumers (for sales at retail), and the wholesale cost of each firearm. If the taxpayer does not regularly sell the firearms to wholesale distributors, the taxpayer should include the wholesale cost for each model of firearms used by competitors.
VI. Tax-Free Sales
The IRC includes provisions for tax-free sales of firearms and ammunition for the following purposes:
- For use in further manufacture;
- To a purchaser who will resell the article for use in further manufacture;
- For export;
- For sale to the US Department of Defense and military including the Coast Guard;
- To a purchaser who will resell the article for export;
- For use as supplies on vessels or aircraft;
- To state and local governments (Police/LE sales also) for their exclusive use (NOT Federal agencies); and
- For nonprofit educational organizations
- A ruling issued by the IRS in 1976 (Rev. Rul. 76-119) held that a manufacturer’s use of shells and cartridges it manufactured and then used in testing firearms of its own manufacture is use in further manufacture of another taxable article that is exempt from tax. The ruling also held that the sale of shells and cartridges to a purchaser for use in testing firearms of the purchaser’s manufacturer is eligible for tax-free sale under the IRC.
There are hoops that manufacturers and importers must jump through before they are eligible to sell articles tax-free for the above purposes. First, the manufacturer, importer, first purchaser, and second purchaser (if there is one) must register with TTB on TTB Form 5300.28, Application for Registration for Tax-Free Transactions Under 26 U.S.C. 4221. The form must be filed with TTB’s National Revenue Center. All parties will receive a Certificate of Registry and will then be eligible for tax-free sales or purchases. One significant exception to the registration requirement is that State and local governments purchasing articles directly from a manufacturer are not required to register. Manufacturers selling directly to such government agencies must obtain either an exemption certificate or a purchase order that includes all the information required by the regulations.
TTB regulations governing tax-free sales require taxpayers to retain evidence relating to tax-free sales. Such evidence includes, for example, proof of resale for further manufacture; proof of export; exemption certificates; and purchase orders from State or local government agencies.
Part I and Part II of our articles on firearms and ammunition excise tax provide a basic overview of the issues relating to this provision of the IRC. We hope this information is helpful to manufacturers and importers in navigating this very complex area of the law. More information about the tax is available on TTB’s website, by contacting TTB at firstname.lastname@example.org, or by calling TTB’s National Revenue Center at 1-877-882-3277.