[Federal Register: October 1, 1998 (Volume 63, Number 190)]

[Rules and Regulations]               

[Page 52601-52603]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]




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-


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

the Treasury.

ACTION: Final rule, Treasury decision.


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).  CORRECTION: phone number should be 202-927-8177.



    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 


    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 


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.


    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:


    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,


    Approved: August 3, 1998.

Dennis M. O'Connell,

Acting Deputy Assistant Secretary (Regulatory, Tariff and Trade 


[FR Doc. 98-26133 Filed 9-30-98; 8:45 am]

This was last updated on January 15, 1999