Firearms and Ammunition Excise Taxes, Parts and Accessories (97R- 1457P)

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