[Federal Register Volume 63, Number 190 (Thursday, October 1, 1998)]
[Rules and Regulations]
[Pages 52601-52603]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26133]
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DEPARTMENT OF THE TREASURY
Bureau of Alcohol, Tobacco and Firearms
27 CFR Part 53
[T.D. ATF-404; Ref: Notice No. 836]
RIN 1512-AB49
Firearms and Ammunition Excise Taxes, Parts and Accessories (97R-
1457P)
AGENCY: Bureau of Alcohol, Tobacco and Firearms (ATF), Department of
the Treasury.
ACTION: Final rule, Treasury decision.
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SUMMARY: This final rule amends regulations relating to the
manufacturers excise tax on firearms and ammunition. Under 26 U.S.C.
4181, a tax is imposed on the sale by the manufacturer, importer or
producer of firearms, shells, and cartridges. The tax is 10 percent of
the sale price for pistols and revolvers, 11 percent for firearms
(other than pistols and revolvers), and 11 percent for shells and
cartridges. Current regulations provide that no tax is imposed by
section 4181 on the sale of parts or accessories of firearms, pistols,
revolvers, shells, and cartridges when sold separately or when sold
with a complete firearm. This final rule amends the regulations to
clarify which parts and accessories must be included in the sale price
when calculating the tax on firearms.
DATES: Effective November 30, 1998.
FOR FURTHER INFORMATION CONTACT: Marsha D. Baker, Regulations Division,
Bureau of Alcohol, Tobacco and Firearms, 650 Massachusetts Avenue,
N.W., Washington, D.C. 20226 (202-927-8476).
SUPPLEMENTARY INFORMATION:
Background
The Bureau of Alcohol, Tobacco and Firearms (ATF) is responsible
for collecting the firearms and ammunition excise tax imposed by
section 4181. The Pittman-Robertson Wildlife Restoration Act, 16 U.S.C.
669 et seq., requires that an amount equal to all of the revenue
collected under section 4181 be deposited into the Federal Aid to
Wildlife Restoration Fund. This Fund is apportioned to the States for
hunter safety programs, maintenance of public target ranges, and
wildlife and wetlands conservation.
The current regulation provides that no tax is imposed by section
on the sale of parts or accessories of firearms, pistols, revolvers,
shells, and cartridges when sold separately or when sold with a
complete firearm. This regulation was at issue in Auto-Ordnance Corp.
v. United States, 822 F.2d 1566 (Fed. Cir. 1987). In this case a
manufacturer of firearms sued to recover excise taxes paid on sights
and compensator units sold with rifles it manufactured. The
manufacturer claimed that these parts were nontaxable accessories that
should not be included in the taxable sale price of the rifles. The
Internal Revenue Service (IRS), the agency responsible for
administering the tax on firearms at that time, contended that the
sights and compensator units were component parts of the rifles that
must be included in the taxable sale price.
The court noted that the position of the IRS that all component
parts of a ``commercially complete'' firearm must be included in the
sale price was a concept that was not found in the regulations. Since
the regulations did not specify which parts are component parts of a
firearm nor define the term ``accessories,'' the court found that it
was appropriate to look beyond the language of the regulation. The
court discussed several dictionary definitions of the term
``accessories'' as well as tariff and customs classification cases. The
court held that the sights and compensator units were nontaxable
accessories since they were readily removable and of secondary or
subordinate importance to the function of the firearm.
Since taking over the administration of the firearms and ammunition
excise tax from the IRS in 1991, ATF has issued numerous rulings on
parts and accessories. ATF has found it increasingly difficult to apply
the regulation on parts and accessories as interpreted by the court in
Auto-Ordnance. For example, the ``secondary or subordinate importance''
test is difficult to apply to parts that are essential for the safe
operation of the firearm. Arguably, such parts are essential to the
function of the firearm and should be included in the taxable sale
price. However, if such parts are not needed to fire the firearm, it is
possible that a Federal court, applying the rationale of Auto-Ordnance,
would hold that such parts are nontaxable accessories.
Notice of Proposed Rulemaking
On August 29, 1996, ATF published in the Federal Register a notice
of proposed rulemaking (Notice No. 836, 61 FR 45377) proposing to
provide definitions for ``component parts'' that must be included in
the taxable sale price and ``nontaxable parts'' and ``nontaxable
accessories'' that are excluded from the taxable sale price. The notice
stated that the purpose of the proposed definitions is to reinstate the
longstanding ``commercial completeness'' test of the IRS in a manner
that will withstand judicial scrutiny. The notice stated that the
effect of the definitions would be to replace the readily removable/
essential to the function test of the Auto-Ordnance case with a more
objective, predictable standard to use in determining whether items
sold with a firearm are includible in the tax basis.
Analysis of Comments
ATF received nine (9) written comments during the comment period in
response to Notice No. 836. These comments were submitted by three (3)
members of the public, four (4) Federal firearm licensees, and two (2)
firearms industry organizations. All nine respondents opposed the
proposed regulations.
[[Page 52602]]
One commenter felt that ATF lacks the authority to impose a tax and
should restrict itself to enforcement matters. The authority to
administer the excise tax provisions of 26 U.S.C. 4181 was transferred
from the IRS to ATF on January 1, 1991, by Treasury Order No. 120-03
(55 FR 47422, November 13, 1990). The order gave ATF the authority to
issue regulations with respect to the administration, collection and
enforcement of firearms and ammunition excise taxes.
One commenter requested that ATF modify the payment schedule for
excise taxpayers to a quarterly basis. Current regulations require
bimonthly deposits for most taxpayers. The commenter stated that some
manufacturers provide economic incentives to dealers by providing an
extended payment schedule of three, six, or nine months for those
accepting products early in the year. This process may cause some
manufacturers to borrow money with which to pay excise tax. The
commenter suggested that quarterly payments reflecting seasonal
fluctuations in consumer demands would assist in alleviating this
problem.
The deposit system for payment of the taxes imposed by section 4181
was not one of the issues raised for public comment by Notice No. 836.
Moreover, a change in the current system would require a statutory
amendment. Accordingly, ATF is not adopting this comment.
Five (5) commenters opposed the proposed regulations on the basis
that they would overturn the Auto-Ordnance decision and result in more
tax being paid by taxpayers and consumers. The commenters believe that
by reinstating the commercial completeness test of the IRS, ATF is
trying to circumvent the court's finding in Auto-Ordnance. The
commenters are opposed to replacing the readily removable/essential to
the function test with the commercial completeness test, because they
consider the court to have already repudiated the application of a
commercial completeness test.
The Auto-Ordnance case makes it clear that the Federal Circuit
rejected the IRS ``commercial completeness'' test only because that
test was not clear in the regulations. The court did not hold that the
IRS position was an impermissible interpretation of the statute.
Accordingly, ATF does not believe the Auto-Ordnance case precludes ATF
from establishing a for parts and accessories different from that used
by the court.
Four (4) commenters expressed opposition to proposed section
53.61(b)(5), which provides that when taxable firearms are sold by a
manufacturer or importer without component parts, the separate sale of
the component parts to the same vendee will be considered, in the
absence of evidence to the contrary, to have been made in connection
with the sale of the basic article even though the component parts are
shipped separately.
These four respondents stated that the implementation of this
provision will result in confusing and complex recordkeeping
requirements. They stated that recordkeeping requirements would become
more difficult and complex for the manufacturers since customer
requests for mounts and other accessories on a separate invoice to the
dealer would become taxable. The commenters noted that a manufacturer
who ships a firearm without sights but provides the retailer with the
opportunity to add them at a later date does so for market-driven
reasons rather than for evading the small amount of tax on the sights.
ATF's intent in proposing the separate sales provision of
''53.61(b)(5) was to include in the regulations the longstanding
position that tax cannot be evaded through separate shipment and sale
of component parts. However, ATF did not intend to impose a continuing
obligation on firearms importers and manufacturers to keep records of
their sales of parts to vendors and attempt to match them up with
previous sales of firearms. Accordingly, ATF is adopting this comment
and deleting proposed ''53.61(b)(5) from the final regulations.
In addition, ATF is amending wording in proposed ''53.61(b)(6)(ii)
to remove the term ``parts in a partially completed state.'' ATF
believes this language is unnecessary.
Eight (8) commenters expressed opposition to the proposed
regulation because they believed it may be more costly for the
manufacturers by increasing their taxes and driving up retail prices.
There was also concern that this would force taxpayers to borrow money
to meet tax payments in advance of receipt of trade receivables. The
commenters stated that this would lead to a negative impact on sales,
reduction of the market, and reduction of revenues. They stated that
such a change in the regulations would increase costs incurred by the
regulated industry.
ATF does not believe that the implementation of this regulation
will place an undue financial burden on excise taxpayers or have a
significant impact on sales, the market, or revenues. This regulation
will, however, make it easier for the taxpayer to understand the excise
taxes for parts and accessories. A better understanding of the
distinction between taxable and nontaxable items will lead to fewer
mistakes in computing tax. In addition, the clarified definitions of
parts and accessories will make it easier for the government to
administer the regulation.
Two (2) commenters stated that the burden of supporting the Aid to
Wildlife Restoration Fund should be placed upon those who benefit from
the Fund, such as hunters, campers, and hikers as well as businesses
whose activities (i.e., pollution, timber cutting, etc.) are
detrimental to wildlife. Since the taxes paid into the Fund are imposed
by statute on manufacturers and importers of firearms and ammunition,
legislation would be necessary to require contribution to the Fund by
other persons. This final rule also adds a definition of the term
``knockdown condition'' to the regulations in Sec. 53.11. Since the new
definition of ``parts and accessories'' uses this term, the definition
of ``knockdown condition'' is added for clarity.
Regulatory Flexibility Act
It is hereby certified under the provisions of the Regulatory
Flexibility Act, 5 U.S.C. 605(b), that this final rule will not have a
significant economic impact on a substantial number of small entities.
This rule merely clarifies existing regulations. A copy of the proposed
rule was submitted to the Chief Counsel for Advocacy of the Small
Business Administration in accordance with 26 U.S.C. 7805(f). No
comments were received.
Executive Order 12866
It has been determined that this regulation is not a significant
regulatory action as defined by Executive Order 12866. Accordingly, the
final rule is not subject to the analysis required by this Executive
Order.
Paperwork Reduction Act
The provisions of the Paperwork Reduction Act of 1995, Public Law
104-13, 44 U.S.C. chapter 35, and its implementing regulations, 5 CFR
part 1320, do not apply to this final rule because there are no new
reporting or recordkeeping requirements.
Disclosure
Copies of the notice of proposed rulemaking, the written comments,
and this final rule will be available for public inspection during
normal business hours at: ATF Public Reading Room, Room 6480, 650
Massachusetts Avenue, NW, Washington, D.C. 20226.
[[Page 52603]]
Drafting Information
The author of this document is Marsha D. Baker, Regulations
Division, Bureau of Alcohol, Tobacco and Firearms.
List of Subjects in 27 CFR Part 53
Administrative practice and procedure, Arms and munitions,
Authority delegations, Export, Imports, Penalties, Reporting and
recordkeeping requirements.
Authority and Issuance
Accordingly, 27 CFR Part 53, Manufacturers Excise Taxes--Firearms
and Ammunition, is amended as follows:
PART 53--MANUFACTURERS EXCISE TAXES--FIREARMS AND AMMUNITION
Paragraph 1. The authority citation for 27 CFR part 53 continues to
read as follows:
Authority: 26 U.S.C. 4181, 4182, 4216-4219, 4221-4223, 4225,
6001, 6011, 6020, 6021, 6061, 6071, 6081, 6091, 6101-6104, 6109,
6151, 6155, 6161, 6301-6303, 6311, 6402, 6404, 6416, and 7502.
Par. 2. Section 53.11 is amended by adding a new definition for the
term ``knockdown condition'' to read as follows:
Sec. 53.11 Meaning of terms
* * * * *
Knockdown condition. A taxable article that is unassembled but
complete as to all component parts.
* * * * *
Par. 3. Section 53.61(b) is revised to read as follows:
Sec. 53.61 Imposition and rates of tax.
* * * * *
(b) Parts or accessories. (1) In general. No tax is imposed by
section 4181 of the Code on the sale of parts or accessories of
firearms, pistols, revolvers, shells, and cartridges when sold
separately or when sold with a complete firearm for use as spare parts
or accessories. The tax does attach, however, to sales of completed
firearms, pistols, revolvers, shells, and cartridges, and to sale of
such articles that, although in knockdown condition, are complete as to
all component parts.
(2) Component parts. Component parts are items that would
ordinarily be attached to a firearm during use and, in the ordinary
course of trade, are packaged with the firearm at the time of sale by
the manufacturer or importer. All component parts for firearms are
includible in the price for which the article is sold.
(3) Nontaxable parts. Parts sold with firearms that duplicate
component parts that are not includible in the price for which the
article is sold.
(4) Nontaxable accessories. Items that are not designed to be
attached to a firearm during use or that are not, in the ordinary
course of trade, provided with the firearm at the time of the sale by
the manufacturer or importer are not includible in the price for which
the article is sold.
(5) Examples. (i) In general. The following examples are provided
as guidelines and are not meant to be all inclusive.
(ii) Component parts. Component parts include items such as a frame
or receiver, breech mechanism, trigger mechanism, barrel, buttstock,
forestock, handguard, grips, buttplate, fore end cap, trigger guard,
sight or set of sights (iron or optical), sight mount or set of sight
mounts, a choke, a flash hider, a muzzle brake, a magazine, a set of
sling swivels, and/or an attachable ramrod for muzzle loading firearms
when provided by the manufacturer or importer for use with the firearm
in the ordinary course of commercial trade. Component parts also
include any part provided with the firearm that would affect the tax
status of the firearm, such as an attachable shoulder stock.
(iii) Nontaxable parts. Nontaxable parts include items such as
extra barrels, extra sights, optical sights and mounts (in addition to
iron sights), spare magazines, spare cylinders, extra choke tubes, and
spare pins.
(iv) Nontaxable accessories. Nontaxable accessories include items
such as cleaning equipment, slings, slip on recoil pads (in addition to
standard buttplate), tools, gun cases for storage or transportation,
separate items such as knives, belt buckles, or medallions. Nontaxable
accessories also include optional items purchased by the customer at
the time of retail sale that do not change the tax classification of
the firearm, such as telescopic sights and mounts, recoil pads, slings,
sling swivels, chokes, and flash hiders/muzzle brakes of a type not
provided by the manufacturer or importer of the firearm in the ordinary
course of commercial trade.
* * * * *
Signed: May 28, 1998.
John W. Magaw,
Director.
Approved: August 3, 1998.
Dennis M. O'Connell,
Acting Deputy Assistant Secretary (Regulatory, Tariff and Trade
Enforcement).
[FR Doc. 98-26133 Filed 9-30-98; 8:45 am]
BILLING CODE 4810-31-P
