Manufacturing NFA Firearms Under Government Contract: Exemptions Under Federal Law
By Teresa G. Ficaretta, Esq. and Johanna Reeves, Esq.
This article appeared in Small Arms Review in March 2015. Legally Armed: V19N2
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.
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.
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.
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.