Firearms and Ammunition Excise Taxes, Parts and Accessories

DEPARTMENT OF THE TREASURY

Bureau of Alcohol, Tobacco and Firearms

27 CFR Part 53

[Notice No. 836]

RIN 1512-AB49

Firearms and Ammunition Excise Taxes, Parts and Accessories

AGENCY: Bureau of Alcohol, Tobacco and Firearms (ATF), Department of

the Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This notice proposes to amend regulations in 27 CFR Part 53,

relating to the manufacturers excise tax on firearms and ammunition.

Pursuant to 26 U.S.C. 4181, a tax is imposed on the sale by the

manufacturer, importer or producer 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, 11 percent of

the sale price for firearms (other than pistols and revolvers) and 11

percent of the sale price for shells and cartridges. Current

regulations provide that no tax is imposed by section 4181 of the

Internal Revenue 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. This notice proposes regulations to

clarify which parts and accessories must be included in the sale price

when calculating the tax on firearms.

DATES: Written comments must be received on or before November 27,

1996.

ADDRESSES: ATF, P.O. Box 50221, Washington, DC 20091-0221.

FOR FURTHER INFORMATION CONTACT: Tamara Light, Regulations Branch, 650

Massachusetts Avenue, NW, Washington, DC 20226, (202) 927-8210.

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.

Sec. 669 et seq., requires that an amount equal to all of the revenue

collected under section 4181 be covered into the Federal aid to

wildlife restoration fund. The fund is apportioned to the States for

hunter safety programs, maintenance of public target ranges, and

wildlife and wetlands conservation. It is important that the correct

amount of Federal excise tax imposed by section 4181 be collected in

order to fund these programs.

The current regulation provides that no tax is imposed by section

4181 of the Internal Revenue 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. This regulation was at

issue in Auto-Ordnance Corp. versus 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 which 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 which

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 then 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.

After 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 which 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.

ATF proposes to amend the regulations relating to parts and

accessories to provide definitions for ``component parts'' which must

be included in the taxable sale price and ``nontaxable parts'' and

``nontaxable accessories'' which are excluded from the taxable sale

price. The purpose of these definitions is to reinstate the long-

standing ``commercial completeness'' test of the IRS in a manner which

will withstand judicial scrutiny. The effect of the proposals will 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.

It is possible that the proposed regulations will result in

increased tax liability for some taxpayers. However, the more precise

definitions should help taxpayers accurately calculate the taxable sale

price of their firearms and avoid underpayments, penalties, and

interest.

Regulatory Flexibility Act

The provisions of the Regulatory Flexibility Act relating to an

initial and final regulatory flexibility analysis (5 U.S.C. 603, 604)

are not applicable to this notice of proposed rulemaking, because the

proposed rule, if promulgated as a final rule, will not have a

significant economic impact on a substantial number of small entities,

or impose or otherwise cause, an increase in the reporting,

recordkeeping or other compliance burdens on a

[[Page 45378]]

substantial number of small entities. Accordingly, it is hereby

certified under the provisions of Section 3 of the Regulatory

Flexibility Act (5 U.S.C. 605(b)) that this proposed rule, if

promulgated as a final rule, will not have a significant economic

impact on a substantial number of small entities. The factual basis for

such certification is that this notice of proposed rulemaking does not

impose any new reporting or recordkeeping requirements. This notice

merely clarifies existing regulations. A copy of this notice of

proposed rulemaking is being sent to the Small Business Administration

for comment pursuant to 26 U.S.C. 7805(f).

Executive Order 12866

It has been determined that this proposed regulation is not a

significant regulatory action as defined by Executive Order 12866.

Accordingly, this proposal is not subject to the analysis required by

this Executive Order.

Paperwork Reduction Act

The provisions of the Paperwork Reduction Act of 1980. Public Law

96-511, 44 U.S.C. chapter 35, and its implementing regulations, 5 CFR

part 1320, do not apply to this notice of proposed rulemaking because

there are no new reporting or recordkeeping requirements.

Public Participation--Written Comments

ATF requests comments from all interested persons. Comments

received on or before the closing date will be carefully considered.

Comments received after that date will be given the same consideration

if it is practicable to do so, but assurance of consideration cannot be

given except as to comments received on or before the closing date. ATF

will not recognize any material as confidential. Comments may be

disclosed to the public. Any material which the commenter considers to

be confidential or inappropriate for disclosure to the public should

not be included in the comment. The name of the person submitting the

comment is not exempt from disclosure. During the comment period, any

person may request an opportunity to present oral testimony at a public

hearing. However, the Director reserves the right, in light of all

circumstances, to determine if a public hearing is necessary.

Disclosure

Copies of this notice and the written comments will be available

for public inspection during normal business hours at: ATF Public

Reading Room, Room 6480, 650 Massachusetts Avenue, NW, Washington, DC.

List of Subjects in 27 CFR Part 53

Administrative practice and procedure, Arms and munitions,

Authority delegations, Exports, Imports, Penalties, Reporting and

recordkeeping requirements.

Authority and Issuance

Accordingly, 27 CFR Part 53, entitled ``Manufacturers Excise

Taxes--Firearms and Ammunition'' is proposed to be amended as follows:

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, 7502.

Par 2. 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 sales of such articles which, although

in a knockdown condition, are complete as to all component parts. All

component parts for firearms are includible in the tax basis.

(2) Component Parts. Component parts are items which 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.

(3) Nontaxable Parts. Parts sold with firearms which duplicate

component parts are not includible in the tax basis.

(4) Nontaxable Accessories. Items which are not designed to be

attached to a firearm during use or which are not, in the ordinary

course of trade, provided with the firearm at the time of sale by the

manufacturer or importer are not includible in the tax basis.

(5) Separate sales. Tax is imposed on component parts whether or

not charges for such parts are billed separately. If taxable articles

are sold by the manufacturer, producer, or importer thereof, 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, at the same

time, or on a different date.

(6) Examples. (i) In general. The following examples are provided

as guidelines and are not meant to be all inclusive.

(ii) Component parts: Include items such as a frame or receiver,

breech mechanism, trigger mechanism, a barrel, a buttstock, a

forestock, a handguard, grips, buttplate, fore end cap, trigger guard,

a sight or set of sights (iron or optical), a sight mount or set of

sight mounts, a choke, a flash hider, a muzzle brake, a magazine, a set

of sling swivels, 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. Parts in a partially completed

state which can be readily adapted for use. Any part or parts provided

with the firearm which would affect the tax status of the firearm, such

as an attachable shoulder stock.

(iii) Nontaxable parts: Items such as extra barrels, extra sights,

optical sights and mounts (in addition to iron sights), spare

magazines, spare cylinder, extra choke tubes, spare pins.

(iv) Nontaxable accessories: Items such as cleaning equipment,

slings, slip on recoil pad (in addition to standard buttplate), tools,

gun cases for storage or transportation, separate items such as knives,

belt buckles, medallions. Optional items purchased by the customer at

the time of retail sale which do not change the tax classification of

the firearm, such as telescopic sights and mounts, recoil pad, slings,

sling swivels, chokes, 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 29, 1996.

John W. Magaw,

Director.

Approved: June 12, 1996.

John P. Simpson,

Deputy Assistant Secretary (Regulatory, Tariff and Trade Enforcement).

[FR Doc. 96-22044 Filed 8-28-96; 8:45 am]

BILLING CODE 4810-31-U