[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]



[DOCID:fr01oc98-13]







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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