FAET Reference Guide Firearms and Ammunition Excise Tax
FAET 26 U.S.C. CHAPTER 32; 27 C.F.R. PART 53
Table of Contents
II. Basis of Tax
A. Tax Rates
B. Factors to Determine the Existence of FAET Liability
C. Definition of Taxable Articles
D. Components of Taxable Articles
E. Parts and Accessories
F. Definitions of Non-Taxable Component Parts, Non-Taxable (Spare) Parts and
III. Definitions of Manufacturer and Importer
A. Definition of Importer
B. Definition of Manufacturer
C. Firearms Kits
D. Gunsmithing vs. Manufacturing
E. Ammunition Reloaders
F. Other Entities Liable for FAET
IV. Attachment of Tax
A. General Rule
B. Credit Sales
C. Consignment Sales
E. Installment Sale
F. Taxable Use vs. Non-Taxable Use
G. Gift Transactions and Barter
V. Computation of Taxable Sale Price
A. Inclusions to Taxable Sale Price
B. Exclusions From Taxable Sale Price
C. Price Adjustments
D. Formulas for Determining Taxable Sale Price and Excise Tax
VI. Constructive Sale Price
B. Sales to Retailers or at Retail
C. CSP Rule for Sales at Retail (General Rule)
D. Sales Not at Arms Length and at Less Than Fair Market Value
E. Affiliated Wholesaler Rules.
F. Other CSP Rules
VII. Tax-Exempt and Tax-Free Sales
A. Tax-Exempt Sales
B. Tax-Free Sales
C. General Information Related to Tax-Free Sales
D. Tax-Free Registration Requirement
VIII. Tax Returns and Deposits
A. Tax Returns
B. Tax Deposits
C. Electronic Fund Transfer (EFT)
IX. Claims for Credit or Refund
C. Statute of Limitations
D. Conditions to Allowance Rules
E. Types of Claims for Credit or Refund
X. General Assessment Authority
A. 26 USC Section 6020(b)
B. Common Types of Collection Activities
C. Limitations on Assessment and Collection
D. Payment Agreements
A. Civil Penalties
B. Criminal Penalties
XII. Audit Authority
A. 26 USC Section 7602(a)(1)
B. Right of Entry and Examination
D. Time and Place for Examination of Records
E. Oral Testimony
- FAET is one of the manufacturers excise taxes imposed under Chapter 32 of the Internal Revenue Code (IRC).
- The tax is imposed on the manufacture, production, importation and sale of firearms, shells or cartridges. See 26 USC Section 4181(a); 27 CFR Section 53.61(a).
- FAET was first imposed in 1919.
- The Pitmann-Robertson Act of 1937 mandated that all revenue from FAET and related excise taxes be earmarked for hunting related activities. The United States Fish and Wildlife Commission places revenue that is collected in a trust fund that is administered on behalf of the states.
- The Internal Revenue Service (IRS) administered FAET until 1/1/91. The Bureau of Alcohol, Tobacco and Firearms (ATF) administered the tax from 1/1/91 until 1/23/03. As part of the Homeland Security Law of 2002, administration of the tax was transferred to the Alcohol and Tobacco Tax and Trade Bureau (TTB) on 1/23/03.
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II. BASIS OF TAX
A. Tax Rates. The tax rates are 10% of the sale price of pistols and revolvers; 11% of the sale price of firearms other than pistols and revolvers, shells and cartridges. See 26 USC Section 4181(a); 27 CFR Section 53.61(a).
B. Factors to Determine the Existence of FAET Liability.
- Occurrence of act of manufacture or importation.
- Identification of manufacturer or importer who performed such act.
- Taxable article was manufactured or imported.
- Taxable article sold or put to a taxable use.
C. Definition of Taxable Articles.
- Firearm. Any portable weapon, such as rifles, carbines, machine guns, shotguns, or fowling pieces from which a shot, bullet or projectile may be discharged by an explosive. See 27 CFR 53.11.
(Note — Black powder firearms are taxable firearms).
- Pistols. Any small projectile firearm which has a short one-hand stock or butt to an angle to the line of the bore and a short barrel or barrels, and which is designed, made, and intended to be aimed and fired from one hand. See 27 CFR Section 53.11.
- Revolvers. Any small projectile firearm of the pistol type, having a breech-loading chambered cylinder so arranged that the cocking of the hammer or movement of the trigger rotates it and brings the next cartridge in line with the barrel for firing. See 27 CFR Section 53.11.
- Shells and cartridges. Any article consisting of a projectile, explosive, primer, and container that is designed, assembled, and ready for use without further manufacture in firearms, pistols and revolvers. See 27 CFR Section 53.11.
(Note — The definition of shells and cartridges also deals with the tax liability of ammunition reloaders that is discussed in Section III, E.)
D. Components of Taxable Articles.
- Modern firearms firing fixed ammunition.
- Antique firearms not able to use fixed ammunition.
- Shells and cartridges.
- Bullet or projectile
- Shell, casing or cartridge
(Note — A taxable article exists if the article has these component parts. However, a taxable article may have other component parts, as well as spare parts and accessories).
- Firearms Kits. A manufacturer, importer or producer is liable for FAET for all taxable articles that are complete as to all component parts even if the taxable article is sold in kit form (i.e. knockdown condition). See 27 CFR Section 53.61(b)
E. Parts and Accessories. Taxpayers are not liable for FAET on the manufacture, importation and sale of spare parts and accessories for taxable articles when sold separately or together with a complete firearm. See 27 CFR Section 53.61(b).
(Note — As will be discussed, the value of component parts are to be included in computing the taxable sale price of the taxable article, whereas, the value of the non-taxable (i.e. spare) part or accessory does not have to be included in calculating the taxable sale price).
F. Definitions of Non-Taxable Component Parts, Non-Taxable (Spare) Parts and Non-Taxable Accessories.
- Taxable component part. 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. See 27 CFR Section 53.61(b)(2)(See regulation for examples).
- Non-taxable (spare) part. Parts sold with firearms that duplicate component parts that are not includible in the price for which the article is sold. See 27 CFR Section 53.61(b)(3) (See regulation for examples).
- Non-taxable accessories. Items not designed to be attached to a firearm during use or are not, in the ordinary course of trade, provided with the firearm at the time of the sale by the manufacturer or importer. See 27 CFR Section 53.61(b)(4) (See regulation for examples).
(Note: The definitions that are contained in 27 CFR Sections 53.61(b)(2)-(4) were part of an amendment to Section 53.61(b) that was effective on 11/30/98. Prior to that date a non-taxable part or accessory was defined as any part or accessory that is of secondary or subordinate importance to the function of the firearm. See Auto-Ordinance Corp. v. United States, 822 F. 2d 1566 (Fed. Cir. 1987) and Rev. Rul. 64-201. This rule is still effective for all tax periods and portion of tax periods prior to 11/30/98.)
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III. DEFINITIONS OF MANUFACTURER AND IMPORTER.
Definition of Importer. Any person who brings a taxable article into the United States from a source outside of the United States, or who withdraws such an article from a customs bonded warehouse for sale or use in the United States. See 27 CFR Section 53.11.
- Nominal Importer vs. Beneficial Owner. A nominal importer is someone who arranges for the importation of a taxable article into the United States (e.g., customs broker or a Federally licensed firearms importer). A beneficial owner is someone who causes the importation of a taxable article into the United States. The beneficial owner is always the taxpayer for FAET purposes. See 27 CFR Section 53.11. (Note-The beneficial owner is liable for tax only if he/she sells or puts the taxable article to a taxable use).
- Incidental (one-time/occasional) importation. There is no tax liability on a firearm that is incidentally imported into the United States. An incidental importation occurs under the following circumstances:
- A person purchases a firearm outside the United States and uses the firearm while there, and later imports it as he returns to the United States.
- An individual temporarily imports a firearm/ammunition for use in a specific event or activity.
- A firearm that is imported into the United States and was purchased but not used outside of the United States is not incidentally imported. Accordingly, the importer is liable for FAET upon the sale or taxable use of the firearm in the United States.
- See Rev. Rulings 65-317 and 72-715 for additional information relative to incidental importation.
B. Definition of Manufacturer. Includes any person who produces a taxable article from scrap, salvage, or junk material, or from new or raw material, by processing, manipulating, or changing the form of an article or by combining or assembling two or more articles. See 27 CFR Section 53.11. (Section 53.11 definition of manufacturer also includes importer and producer).
- Fabricator vs. Manufacturer. A fabricator is someone who manufactures or produces a taxable article for another person (e.g. a contractor). Under certain circumstances the person who receives the taxable article from the fabricator will be the manufacturer for FAET purposes. For example, the person hiring the fabricator could be liable for FAET as the manufacturer if he furnished material to the fabricator, retains patent rights and title to the finished product and controls the production and distribution of the taxable article. See 27 CFR Section 53.11
C. Firearms Kits. A manufacturer who sells taxable articles in kit form (knockdown condition) is liable for FAET so long as the kit is complete as to all component parts (i.e. the kit has all the parts that are required for a complete firearm). See 27 CFR 53.61(a).
D. Gunsmithing vs. Manufacturing. A gunsmith who only does repair or replacement work on an existing firearm will not be a manufacturer for FAET purposes, unless:
- The gunsmith has title to the firearm and his work materially changes the firearm so that a different taxable article results. See Rev. Rulings 58-586, 64-202 and 69-325.
- The customer is the manufacturer for FAET purposes in situations where the gunsmith performs modifications on a firearm at the customer’s direction. The customer would be liable for FAET upon his sale or taxable use of the firearm.
E. Ammunition Reloaders. The reloading of used casings or shells is an act of manufacture that subjects the reloader to FAET liability upon the sale or taxable use of the shell or cartridge. However, the reloader is not subject to FAET if he reloads casings or shells provided by a customer and returns the identical reloaded casings and shells back to the customer (i.e. same brass in/same brass out).See 27 CFR Section 53.11, definition of shell or cartridge. (Note-in this situation the customer may be subject to FAET if he sells or puts the reloaded shells or casings to a taxable use).
F. Other Entities Liable For FAET.
- Surviving spouse, child, executors or administrators, or other legal representatives of a deceased manufacturer, importer or producer. See 27 CFR Section 53.121(a)(1).
- Receiver or trustee in bankruptcy. See 27 CFR Section 53.121(a)(2).
- An assignee for the benefit of creditors of a manufacturer, importer or producer. See 27 CFR Section 53.121(a)(3).
- New partnerships. See 27 CFR Section 53.121(a)(4).
- Anyone who acquires title to a taxable article as the result of default of the manufacturer, importer or producer pursuant to an agreement under the terms of which the articles were pledged as collateral. See 27 CFR Section 53.121(a)(5).
- A person who succeeds to the business of a manufacturer, importer or producer. See 27 CFR Section 53.121(a)(6).
- A carrier or insurance company acquiring title to damaged articles in adjustment of a claim for damages. See 27 CFR Section 53.121(b).
(Note — In all instances these are entities who have "stepped into the shoes" of a taxpayer).
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IV. ATTACHMENT OF TAX
A. General Rule. Generally, FAET attaches when title to the taxable article passes from the manufacturer, producer or importer to the purchaser. See 27 CFR Section 53.2(a). The tax only attaches once to the sale or business use of firearms, shells or cartridges.
- Passage of Title. Examination of the terms and conditions of sale (e.g. review of terms of sales contract) is necessary to determine when title passes. If the sale contract is silent on this issue then we must examine the law of the jurisdiction where the sale was made to determine when title passed to the purchaser. See 27 CFR Section 53.2(b).
- Title will pass either FOB Destination or FOB Shipping Point when a contract carrier is involved.
B. Credit Sales. In these situations, FAET will be assessed when title passes and not when the purchase price is actually collected. See 27 CFR Section 53.2(c).
- If the purchaser does not pay the purchase price the manufacturer, importer or producer is still responsible for paying the tax when title passes. A BAD DEBT DOES NOT EXPUNGE TAX LIABILITY. See 27 CFR Section 54.98(c).
C. Consignment Sales. If the manufacturer, producer or importer consigns taxable articles to a licensed dealer for sale, and retains ownership of the articles until the actual sale, then the tax attaches upon the dealer’s sale of the articles. See 27 CFR Section 53.2(d). However, if the relationship between the manufacturer, importer or producer and the dealer is one of principal/agent and not consignor/consignee, and title to the articles does not pass from the manufacturer to the dealer, the tax attaches upon the dealer’s sale of the articles. See 27 CFR Section 53.2(d).
D. Lease. The lease of a taxable article is considered a sale for purposes of FAET liability. See 26 USC Section 4217(a); 27 CFR Section 53.103. The tax attaches on each payment made with respect to the lease and is payable on each lease payment as long as the article is leased by the manufacturer, importer or producer. The amount of tax to be paid is a percentage of each lease payment. See 26 USC Section 4217(b); 27 CFR Section 53.98(a) (for explanation as to how to calculate percentage). If the leased article is subsequently sold, the tax attaches to the full sale price. See 27 CFR Section 53.98(a).
E. Installment Sale. In situations involving installment sales contracts (or similar type agreements), with title reserved in the seller, the tax attaches to each payment made by the purchaser. The amount of the tax to be paid is a percentage of each payment based on the rate of tax in effect on the date the lease payment is due. See 26 USC Section 4216(c); 27 CFR Sections 53.2 and 53.98. The tax attaches to each payment on the installment sales contract (or similar agreement). See 27 CFR Section 53.98(b) (for explanation as to how to calculate percentage).
F. Taxable Use vs. Non-Taxable Use. FAET attaches when a manufacturer, importer or producer exclusively uses a taxable article (i.e. business use). See 26 USC Section 4218; 27 CFR Sections 53.2(f), 53.112(a). No tax attaches when a taxable article is incidentally put to a personal use. See 27 CFR Section 53.112(b). (Note-A corporation or partnership cannot incidentally put a taxable article to a personal use).
- Business Uses. Some examples of business uses: sales samples or articles used for demonstration purposes; at industry shows, quality testing; use by writers preparing an article on firearm; equipping manufacturer’s or importer’s security force.
- See Rev. Rulings 60-290, 63-256, ATF Ruling 94-6, and ATF Announcement 94-08.
- Ammunition domestically manufactured by a taxpayer for use in testing firearms domestically manufactured by that taxpayer or another taxpayer would not be subject to FAET. Further, there is no tax liability if a manufacturer of shells and cartridges sells them to a purchaser for use in testing the firearms sold to that purchaser. See Rev. Ruling 76-119.
G. Gift Transactions and Barter. The tax attaches to any transaction where the manufacturer, importer or producer receives some type of consideration (i.e. tangible benefit). This does not have to be cash. See 27 CFR Section 53.11 (definition of sale). An example of this type of transaction is a barter transaction. The tax does not generally attach to charitable transactions unless a tangible benefit is received.
H. Theft. The theft of a taxable article is not a taxable sale or use. See Rev. Ruling 67-58.
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V. COMPUTATION OF TAXABLE SALE PRICE
A. Inclusions to Taxable Sale Price. The following are charges that must be included in calculating the taxable sale price of a taxable article.
- Any charge required by the manufacturer, importer or producer as a condition of the sale. See 27 CFR Section 53.91(a).
- Tools and dies. If the manufacturer has title to the tools and dies used to manufacture the taxable articles, only the portion of the charge attributable to the taxable articles manufactured for the purchaser is included in the taxable sale price. If title to the tools and dies is transferred to the purchaser, and there is no usefulness left in the tools and dies, then the full charge for the tools and dies is included in the taxable sale price. However, if some usefulness remains in the tools and dies, only that part of the charge for tools and dies equal to the depreciation incurred (computed under the production output method) is included in the taxable sale price. See 27 CFR Section 53.91(b); Rev. Ruling 59-163.
- Charges for warranty, guarantee, or promise for replacement. Any charge for a warranty that the manufacturer includes in the price to the purchaser is included in the taxable sale price. However, if the warranty is purchased at the purchaser’s option, it is not included in the taxable sale price. See 27 CFR Section 53.91(c).
- Charges for coverings, containers, packing or special delivery. These are charges for coverings or containers used in shipping an article to a purchaser pursuant to a bona fide sale. Charges are to be included in the taxable sale price if they are identified on the same invoice or billed separately. The full amount of these charges is to be included in the sale price even if the manufacturer agrees to repay all or part of the charges. It does not matter if these charges are made at the time of the sale or if they are for more, less or the actual value of the container or covering. Charges for normal or special packing are to be included but charges for display cases do not have to be included. These charges are to be included in the taxable sale price whether the service was initiated by the manufacturer, requested by the purchaser, or if they are performed by a third party at the request of the manufacturer. The fair market value of the materials used in shipment is included in the taxable sale price when the purchaser provides the packing material. See 27 CFR 53.91(d)
B. Exclusions From Taxable Sale Price. These are charges that do not have to be included in calculating the taxable sale price of a taxable article.
- FAET. Any portion of the FAET already paid by the manufacturer, importer or producer is excludable from the taxable sale price. See 27 CFR Section 53.92(a)(1).
- If FAET is not billed as a separate item (i.e. tax excluded sale) there is a presumption that the tax is included in the sale price. See Rev. Ruling 65-41.
- Transportation, delivery, insurance, or installation costs. All costs incurred in connection with the delivery of an article to a purchaser pursuant to a bona fide sale are excludable from the taxable sale price. All expenses actually incurred are excludable even if the manufacturer, importer or producer does not make a separate charge to the customer. Such expenses are excludable regardless of whether the manufacturer, importer or producer performs these functions in-house or a third party performs them. This includes allowances given to the purchaser for these expenses. If a separate charge is made, only the portion of the expenses that represent the actual expense incurred can be excluded from the taxable sale price. If the separate charge is less than the actual expense, the difference is presumed to be included in the billed price and both the difference and the separate charge are excluded from the taxable sale price. However, expenses incurred by the manufacturer in placing the taxable article packed and ready for shipment on the loading dock, as well as shipping articles from a factory or port of entry to a warehouse or other facility during the normal course of business for their benefit and convenience are not excludable. When taxable and non-taxable articles are sold in combination, only the expenses that are incurred as to the taxable article are excludable. See 27 CFR Section 53.92(b)(1); and Rev. Rulings 60-6, 68-509, 68-673.
- Insurance charges: Insurance charges incurred by a manufacturer, importer or producer to insure taxable articles against loss or damage occurring during transportation or delivery of the articles to the customer pursuant to a bona fide sale are excludable. However, charges for product liability insurance, unemployment, health, or life insurance for employees are not excludable. See ATF Industry Circular 93-7.
- Local Advertising Expenses. Local advertising expenses are excludable if all conditions are met. If all conditions are not met then the expenses are not excludable. See 26 USC Section 4216(e); 27 CFR Section 53.100-102 for conditions.
- Cost of credit. Any charge that is reasonably related to the costs of carrying the deferred portion of the sale price can be excluded under the following conditions:
- The charge must be based on the unpaid balance of the selling price and the length of time agreed upon for payment of the balance due.
- The customer must receive a credit or adjustment of the charge proportionate to any accelerated payment.
- The amount of the charge must be shown as a separate item on the sales invoice or some other document pertaining to the transaction so that the customer is aware of his privilege of prepaying his account so that he may take advantage of paying a lesser charge.
- There must not be present any factors which would negate the bona fide nature of the sale.
See 27 CFR Section 53.91(a); Rev. Rulings 57-437 and 69-318.
- Examples—interest on the deferred portion of the sales price, expenses of bookkeeping necessary to keep the record of such sales, and expenses of correspondence and other communication in connection with collection.
C. Price Adjustments.
- Return or repossession of a taxable article. If the return or repossession is prior to submission of the tax return, the amount of tax is deducted from the tax due. However, if it is done after submission of the tax return then the tax amount may be credited on the next tax return. See 27 CFR Section 53.174(a).
- Replacements under warranty (express or implied).
- There is no tax on the replacement article if it is provided to the purchaser for no charge. However, if there is a charge for the replacement article, the manufacturer is liable for FAET only as to the additional amount that is charged to the customer. See 27 CFR 53.93(b).
- There is no FAET liability when the manufacturer repairs and resells the returned article. See Rev. Ruling 59-394. However, if all or part of the purchase price is refunded to the purchaser, then the manufacturer is liable for FAET on any second sale of the original article. See 27 CFR Section 53.174(b)(3). If there is only a partial refund, there is tax liability on any subsequent resale only to the extent that the new sale price exceeds the adjusted sale price of the first sale. See 27 CFR Section 53.174(b)(3).
- Trade-ins/exchanges. A trade-in or exchange occurs when an article is replaced for no charge and there is no express or implied warranty.
- The tax liability on the replacement article is the amount allowed for the defective article plus any additional charge to the purchaser. If the replacement article is provided without any charge, the tax liability is based on the cost of replacement (i.e. sale price of replacement).See 27 CFR Section 53.93(a).
- If the replacement article is furnished without charge and no part of the purchase price is refunded to the customer, any subsequent resale of the original (returned) article would not be subject to the tax. If only a part of the purchase price is refunded to the customer, any subsequent resale of the original (returned) article would be subject to the tax to the extent that the new sale proceeds exceed the adjusted sale price for the first sale. See 27 CFR Section 53.174(b)(1)(ii).
- Discount, rebate or special allowance. Discounts and adjustments must have been actually taken by the purchaser before any adjustment to the tax base can be permitted (i.e. they cannot be anticipated). The readjustment can be taken only if the discount or allowance is taken by the purchaser prior to the end of the tax quarter. Discounts and adjustments apply to both the tax and the tax-excluded sale price. See 27 CFR Section 53.93(c).
- Bonus or Free Goods. In situations where taxable articles are provided free of charge to customers because their purchases exceed a stated quantity, the manufacturer has, in effect, reduced the regular sale price per article charged for the entire lot. Accordingly, there is no tax on the "free" gun. See 27 CFR Section 53.174(e); Rev. Ruling 68-659.
- If the manufacturer offers a cash rebate (in lieu of a free gun), then an overpayment of tax has occurred and the manufacturer may take a credit or refund as allowed under 27 CFR Section 53.174(e).
D. Formulas for Determining Taxable Sale Price and Excise Tax.
(See 27 CFR Section 53.92 for formulas to determine the taxable sale price and excise tax in tax-excluded and tax-included sale situations, as well as combination (taxable and non-taxable articles sold together) sale situations).
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VI. CONSTRUCTIVE SALE PRICE
A. Overview. Taxable sale price is based upon the taxable article’s wholesale price. When the taxable article is not sold to a wholesale distributor in an arms-length transaction, a constructive sale price (CSP) can be used as a substitute tax base. The sale situation will dictate whether the taxpayer can elect or is required to use a CSP.
B. Sales to Retailers or at Retail.
- Wholesale distributor. A person engaged in the business of selling articles to persons engaged in the business of reselling such articles. See 27 CFR Section 53.94(c)(1).
- Sales to retailers or to a retail dealer. S ales to individuals who are engaged in the business of selling articles at retail. See 27 C.F.R. Section 53.94(c)(2).
- Sales at retail. Sales of a taxable article to a purchaser who intends to use or lease the article rather than resell it. See 27 C.F.R. Sections 53.94(c)(1).
- CSP Rule for Sales at Retail (General Rule): The taxpayer can elect to use the lower of its:
- Actual sale price; or
- Highest published tax-included price to wholesalers at the time of the taxable sale.
- See 26 USC Section 4216(b)(1); 27 CFR Section 53.94
- Revenue Ruling 80-273 : If the manufacturer does not make any sales at wholesale, then it can use 75% of its actual sale price as its taxable sale price.
- CSP Rule for sales to retailers (Special Rule). To elect the CSP under this rule the taxpayer must:
- Make regular sales of a taxable article to retailers; and
- Regularly sell taxable articles to one or more wholesale distributors in arms length transactions.
- If the above two conditions are met the taxpayer can elect to use the lower of its:
- Actual sale price; or
- Highest published tax-included price to wholesalers at the time of the taxable sale.
- If these conditions are not met the taxpayer must use its actual sale price as its taxable sale price. See 26 USC Section 4216(b)(2); 27 CFR Sections 53.94(c)(1)-(3),.96.
(Note — The General Rule can never be used for sales to retailers or retail dealers. Only the Special Rule can be used for sales to retailers or to retail dealers. However, the Special Rule can be used for at retail sales (and must be used in lieu of General Rule if all conditions of Special Rule are met).
C. Sales Not at Arms Length and at Less Than Fair Market Value.
- Sales not at arms length can occur in two situations:
- Sale is made within a taxpayer’s affiliated or controlled group (i.e. sold within related corporations).See 26 U.S.C. Section 1504(a) and 1563(a) (27 CFR Section 53.95(d)(1));or
- Existence of a special contractual relationship See 27 CFR 53.95(d)(2).
- CSP Rules For Sales Not At Arms Length And At Less Than Fair Market Value.
- See 26 USC Section 4216(b)(1)(C); 27 CFR 53.95(d)(1)-(2) and revenue rulings below.
- Rev. Ruling 62-68. The taxpayer can elect to use an alternative CSP that is 95% of its lowest established wholesale price to non-related companies.
- Rev. Ruling 82-211. To use the "95% Rule," the taxpayer must file an election, in writing, with TTB. If a written election is not filed with TTB, the taxpayer must compute a CSP based upon its actual sale price to unrelated wholesale distributors.
- Rev. Ruling 71-240. Any sale price that is less than 95% of the selling company’s lowest established price to unrelated wholesale distributors is considered to be less than fair market value.
D. Affiliated Wholesaler Rules.
- 26 USC Section 4216(b)(3); 27 CFR Section 53.97. The taxpayer must use a CSP if the taxpayer makes sales to wholesalers who are part of an affiliated or controlled group. If an affiliated wholesaler sells to one or more non-affiliated retailers, but not to non-affiliated wholesale distributors, the taxpayer must compute its taxable sale price based upon 90% of the lowest price that the affiliated wholesale distributor regularly sells such articles in arms-length transactions to non-affiliated retailers.
- Revenue Ruling 82-211. A written election must be filed with TTB to use this rule. If the manufacturer does not elect to use the 90% rule, its taxable sale price is the actual sale price for the first sale to non-related corporations.
- If an affiliated wholesale distributor sells to a related retailer, the rule under 26 USC Section 4216(b)(4) must be used. Please contact TTB with questions as to this rule.
- Other CSP Rules. A CSP may be used in situations involving consignment sales, taxable articles used in further manufacture, installment sale contracts, chattel mortgages, or leases. Please contact TTB for further information.
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VII. TAX-EXEMPT AND TAX-FREE SALES
A. Tax-Exempt Sales.
- National Firearms Act (NFA) Firearms. There is no FAET liability on the sale of an NFA firearm if the NFA transfer tax imposed under 26 USC Section 5811 has been paid. See 26 USC Section 4182(a).
- Sales to Defense Department and Coast Guard. Sales to the Defense Department and the Coast Guard are exempt from FAET under the following conditions:
- Purchases are made with funds appropriated to the Coast Guard or a military department of the Department of Defense (i.e. United States Army, United States Navy, United States Air Force and United States Marines).
- Manufacturer, importer or producer must maintain supporting documentation (e.g. a government purchase order or contract signed by an authorized official).
- Manufacturer, importer or producer must make the sale directly to the Defense Department or Coast Guard.
- See 26 USC Section 4182(b); 27 CFR 53.62(b).
- 50-Gun Exemption. Effective October 1, 2005, any pistol, revolver, or firearm is exempt from the tax if it was manufactured, produced or imported by a person who manufactures, produces or imports less than an aggregate of 50 such articles during a calendar year. See 26 U.S.C. Section 4216(c)
- Whether a manufacturer, importer or producer qualifies for this exemption is determined by the number of firearms manufactured, produced or imported in any calendar year (January 1 – December 31).
- A controlled group of corporations will be treated as one taxpayer for purposes of this exemption.
- This exemption does not apply to any firearm, pistol or revolver that was manufactured, produced or imported prior to October 1, 2005.
- Personal Use. FAET does not attach in cases where a manufacturer, importer or producer incidentally manufactures, produces or imports a taxable article for personal use. See 27 CFR Section 53.112(b).
- Ammunition reloaders. A reloader of ammunition is not a manufacturer if he reloads casings and shells submitted by a customer and returns the exact casings or shells to the customer. See 27 CFR Section 53.11 (definition of shells and cartridges).
B. Tax-Free Sales.
- Sales for Further Manufacture. Sales by a manufacturer, importer or producer to a purchaser for their use in further manufacture. These include sales to a purchaser who will then sell the article to another purchaser for use by the second purchaser in further manufacture. See 26 USC Section 4221(a); CFR 53.131.
- Sales for Export. Sales by a manufacturer, importer or producer for export. These include sales to a purchaser who will then resell the article to another purchaser for export. See 26 USC Section 4221(a); 27 CFR Section 53.132.
- Sales for Use as Supplies for Vessels or Aircraft. Manufacturer, importer or producer must sell the article directly to a purchaser who will use it as supplies for vessels or aircraft. See 26 USC Section 4221(a); 27 CFR Section 53.134.
- Sales to State or Local Governments. Manufacturer, importer or producer must sell the article directly to the state or local government for their exclusive use. See 26 USC Section 4221(a); 27 CFR Section 53.135.
- Sales to Non-Profit Educational Organizations. Manufacturer, importer or producer must sell the article directly to the non-profit educational organization. See 26 USC Section 4221(a); 27 CFR Section 53.136.
(Note — To qualify as tax-free sales manufacturers, importers and producers must meet all statutory and regulatory requirements as outlined in Subsections C and D below. This includes the registration requirements discussed below.)
C. General Information Related to Tax-Free Sales.
- All tax-free sales require that the manufacturer, importer or producer inform the purchaser that the firearms and ammunition are being sold tax-free and that the purchaser is obtaining these articles for a tax-free purpose under an exemption certificate or its equivalent. The tax-free sale must come before any other sale or use by the manufacturer, importer or producer. See 27 CFR Sections 52.131-.136 (pertinent subsections dealing with exemption certificate requirement).
- In cases where the article is sold to a purchaser who, in turn, sells the article for use in further manufacture and for export, the sale will qualify as a tax-free sale only if the manufacturer, importer or producer receives proof that the article has been exported. The manufacturer, importer or producer must receive this proof within 6 months after the article is sold tax-free.
- Manufacturers, importers and producers must retain records to support all tax-free sales. See 53.24, 53.132(c), 53.133(d), 53.134(d), 53.135(c) and 53.136(c).
D. Tax-Free Registration Requirement.
- All manufacturers, importers and producers, as well as first (and in some cases second) purchasers must have an approved TTB Form 5300.28, Application for Tax-Free Transactions under 26 USC Section 4221, prior to making any tax-free sales under 26 USC Section 4221. This approved registration form must be on file at the TTB National Revenue Center (NRC). See 26 USC Section 4222; 27 CFR Section 53.140.
- Applications for tax-free registration can be denied. Approved tax-free registrations can be revoked or suspended. See 26 USC Section 4222(c).
- If an approved registration needs to be changed the registrant must return the original tax-free registration to TTB NRC. Such changes include change in tax-free sale category; change in corporate name, trade name or principal place of business; and change in business ownership or control.
- Exceptions to registration requirement.
- Sales to State and Local Governments. State and local governments (or their political subdivisions) can elect, but are not required, to be registered. If the State or local government (or its political subdivision) is not registered then the manufacturer, producer or importer must obtain an executed exemption certificate (TTB I 5600.35) or a purchase order from the state or local government. See 26 USC Section 4222(b)(1); 27 CFR 53.141(a).
- Sales or re-sales to foreign purchasers for export. Purchasers whose principal place of business are outside the United States can elect, but are not required, to be registered. The manufacturer must obtain from the foreign purchaser for export either a written order or contract of sale showing that the manufacturer is to ship the article to a foreign destination; or, a statement from the purchaser confirming that the product will be exported (in cases where delivery is to be made within the United States). Manufacturers must obtain either of these statements at the time the article passes to the purchaser or at the time of shipment (whichever is earlier). See 27 CFR Section 53.141(b).
- Sales for Supplies for Vessels or Aircraft. Anyone who purchases firearms or ammunition as supplies for vessels or aircraft does not have to be registered. However, the manufacturer must obtain a properly executed exemption certificate from the purchaser. See 26 USC Section 4222(b)(5); 27 CFR Section 53.141(d).
(Note -- A manufacturer, importer or producer cannot sell an article tax-free if the sale does not meet all of the requirements under 26 USC Sections 4221, 4222 and 27 CFR Sections 53.131-.136,.140-.143. However, they may be able to file a claim for credit or refund as discussed below.).
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VIII. TAX RETURNS AND DEPOSITS
A. Tax Returns. The current tax return is the TTB Form 5300.26, Firearms and Ammunition Excise Tax Return. Generally, taxpayers are required to file a tax return on a quarterly basis:
- First quarter. Jan. 1-Mar. 31.
- Second quarter. Apr. 1-June 30.
- Third quarter. July 1-Sept. 30.
- Fourth quarter. Oct. 1-Dec.31.
- Tax returns are due on or before the last day of the first calendar month following the end of the quarter for which the tax is owed. (e.g. the tax return for the first quarter of a year (Jan.1-Mar. 31) must be filed no later than April 30.)
- There are exceptions to these filing dates in the regulations.
- A taxpayer can also file monthly returns, semi-monthly returns, annual returns and final returns. There is also a special rule for one time or occasional filers.
- The tax return regulations can be found in 27 CFR Section 53.151-.157. Please contact TTB with questions.
B. Tax Deposits. The Firearms Excise Tax Improvement Act of 2010 was signed into law on August 16, 2010. This law amends the Internal Revenue Code of 1986 so that firearms and ammunition excise tax (FAET) payments that were otherwise required to be made by semimonthly deposit will be due and payable on the date of filing of the quarterly FAET tax returns.
Taxpayers must only make deposits through tax period 08/01/2010 – 08/15/2010, due 08/24/2010. Read more about the Firearms Excise Tax Improvement Act of 2010. Please contact TTB with questions.
C. Electronic Fund Transfer (EFT). After September 30, 1992, a taxpayer can elect (but is not required) to pay FAET through EFT. Taxpayers must contact TTB prior to commencing EFT payments.
- The EFT regulation can be found in 27 CFR Section 53.158. Please contact TTB with questions.
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IX. CLAIMS FOR CREDIT OR REFUND.
A. Authority. TTB has the authority to approve claims for credit or refund that result from the overpayment of tax. See 27 CFR 70.122-.124.
B. FAET. A taxpayer can either take a credit or request a refund on the FAET tax return (TTB F. 5300.26) or file a claim on TTB F. 5620.8. See 27 CFR Section 53.171.
C. Statute of Limitations. A credit must be taken or a refund requested for an overpayment from the later of:
- Three years from the filing date of the return; or
- Two years from the date the tax is paid.
- If no tax return was filed the credit or refund must be filed within two years of when the tax was paid.
- See 26 USC Sections 6511 and 6513.
D. Conditions to Allowance Rules. These are rules to insure that the party bearing the burden of the tax (i.e.consumer) is also receiving the benefit of any credit or refund. These rules can be found in 26 USC Section 6416(a)(1) and apply to some of the types of claims for credit or refund that are discussed below. In situations where these rules apply, TTB will deny any claim for credit or refund where the conditions to allowance rules are not met.
- General Condition to Allowance Rule. No credit or refund of any overpayment of FAET shall be allowed or made unless the person who paid the tax establishes, under regulations prescribed by the Secretary, that he:
- Has not included the tax in the price of the article with respect to which it was imposed and has not collected the amount of the tax from the person who purchased such article; or
- Has repaid the amount of the tax to the ultimate purchaser of the article; or
- In the case of certain overpayments the taxpayer; has repaid or agreed to repay the amount of the tax to the ultimate vendor; or has obtained the written consent of such ultimate vendor of the allowance of the credit or the making of the refund (the overpayments that fall under this particular part of the rule are the following tax-free sale situations where the tax was paid—exportations, state or local government, non-profit education organizations, and use as supplies for vessels or aircraft);or
- Filed, with TTB, the written consent of the ultimate purchaser to the allowance of the credit or refund without having to repay it.
- See 26 USC Section 6416(a).
E. Types of Claims for Credit or Refund.
- Where no tax liability exists or the tax was paid in error. See 26 USC Section 6402.
- Condition to Allowance Rules apply with the exception of math errors where the taxpayer inadvertently fills in the wrong dollar amount on the return or makes out the check for the wrong amount.
- Certain types of tax-free sales or re-sales where the tax was paid.
- Arises in situations where the taxable article is exported, sold as supplies for vessels or aircraft, sold to state or local governments for their exclusive use, or sold to nonprofit educational organizations for their exclusive use.
- Condition to Allowance Rules applies to these types of claims.
- See 26 USC Section 6416(b)(2)(A)-(D);27 CFR Section 53.179(b)(for evidence needed to support these claims).
- Tax-Paid Articles Used For Further Manufacture.
- Condition to Allowance Rules do not apply.
- See 26 USC Section 6416(b)(3);27 CFR Section 53.182(a) (for evidence needed to support claims).
- Return of Tax-Paid Installment Accounts.
- Condition to Allowance Rules do not apply.
- See 26 USC Section 6416(b)(5);27 CFR Section 53.183(c) (for evidence needed to support claims).
- Price Readjustment Claims.
- Condition to Allowance Rules do not apply.
- See 26 USC Section 6416(b)(1) and 27 CFR Section 53.176 (for evidence needed to support claims).
- Claims filed by exporters.
- Condition to Allowance Rules do not apply.
- See 26 USC Section 6416(c) and 27 CFR Section 53.184(b) (for evidence needed to support claims).
- Special Condition to Allowance Rule. This applies to a limited situation where the following conditions exist:
- The manufacturer, importer or producer sells the taxable article to an ultimate purchaser and pays the tax;
- TTB has subsequently determined that the article is not taxable; and
- The ultimate purchaser still has the article in their inventory and is holding it for sale.
- This rule can be found in 26 USC Section 6416(b)(3). It is limited to a very specific set of facts. Please contact TTB with questions.
- Filing claims or taking credits when the 50 gun exemption applies.
- The taxpayer paid the tax,
- Taxpayer subsequently fell under the 50 Gun Exemption based on the number of firearms manufactured, produced and imported during the calendar year (January 1 – December 31).
- See amended code at 26 U.S.C. 4182(c) and 27 CFR 53.62(c). Read more.
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X. GENERAL ASSESSMENT AUTHORITY
A. 26 USC Section 6020(b). If a taxpayer has not filed tax returns for any given tax period TTB will make every effort to obtain signed tax returns for the quarters in question. If the taxpayer refuses to sign tax returns TTB has the authority to execute tax returns on a taxpayer’s behalf under 26 USC Section 6020(b).
B. Common Types of Collection Actions.
The following are the common types of assessment action that TTB can initiate.
- Notice of Proposed Assessment.
- First Notice and Demand
- Third and Final Notice of Demand of Taxes Due—Notice of Intent to Levy
- These are the most common types of collection actions that can be taken by TTB. There are a number of other types of collection actions that can be taken under the Internal Revenue Code (IRC).
C. Limitations on Assessment and Collection.
- Return is filed. If a return is filed, TTB must assess any unpaid tax liability within 3 years after the return was filed. See 26 USC Section 6501(a).
- This statute of limitations can be extended to six years in the case of any taxpayer who understates their liability by more than 25% of the amount that is due. See 26 USC Section 6501(e)(3).
- The tax can be assessed at any time (i.e. no statute of limitations) in situations where no return is filed, or where a fraudulent return is filed. Also, there is no statute of limitations in cases where there was a willful intent to evade the tax. See 26 USC Section 6501(c)(1)-(3).
- The execution of a return by the Secretary under 26 USC Section 6020(b), shall not start the running of the period of limitations on assessment and collection. See 26 USC Section 6501(b)(3).
- Collection After Assessment. Where the assessment of any tax imposed has been made within the statute of limitations, TTB can collect such tax by levy or by proceeding in court, but only if the levy is made or the proceeding begun:
- Within 10 years after the assessment of the tax; or
- Prior to the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer before the expiration of such 10-year period.
- See 26 USC Section 6502(a).
D. Payment Agreements. TTB can enter into either an extension agreements or installment payment agreements.
- Please contact TTB with your questions.
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(Note — In addition to interest, the following are penalties can be assessed in the appropriate situation where taxes have not been paid or have been underpaid.)
A. Civil Penalties
- Failure to Deposit , 26 USC Section 6656.
- Failure to File/Failure to Pay , 26 USC Section 6651(a)(1) & (2).
- Civil Fraud Penalties , 26 USC Sections 6651(f) & 6663(a).
- Negligence Penalty , 26 USC Section 6662(b).
- Bad Check Penalty , 26 USC Section 6657.
- Accuracy Penalties , 26 USC Section 6662(b)(1).
- Aiding and Abetting Penalty , 26 USC Section 6701.
B. Criminal Penalties
- Criminal Fraud Penalties , 26 USC Section 7201 & 7203
- Preparers Criminal Penalty , 26 USC Section 7206
- Willful Delivery or Disclosure of Fraudulent Information , 26 USC Section 7207
- Misrepresentation of Tax , 26 USC Section 7211.
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XII. AUDIT AUTHORITY
A. 26 USC Section 7602(a)(1). TTB has the authority to examine any books, papers, records, or other data which may be relevant or material to the following inquiries:
- Purpose of ascertaining the correctness of any return;
- Making a return where none has been made;
- Determining the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax; or
- Collecting any such liability.
- This includes reviewing records that the taxpayer maintains under another Federal statute (i.e. Gun Control Act, National Firearms Act) for the purposes outlined in Section 7602(a)(1)).
B. Right of Entry and Examination. TTB Officers, in the performance of their duties, may enter in the daytime any building or place where any articles or objects subject to the tax are made, produced or kept, so far as it may be necessary for the purpose of examining articles or objects. TTB Officers may also enter, at night, any such building or place, while open, for similar purpose. See 26 USC Section 7606; 27 CFR Section 70.31(a).
- Denial or interference of any inspection by the proprietor, or by agents or employees of the proprietor, is a violation of 26 USC Section 7342, and is punishable by a $500 forfeit for each refusal of entry.
C. Summons. TTB has the authority to summon the following persons to appear before TTB, at a time and place named in the summons, and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry:
- Persons liable for tax or required to perform the act.
- Any officer or employee of such person liable for tax.
- Any person having possession, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act (i.e. third-party record keeper).
- See 26 USC Section 7602; 27 CFR Sections 70.22(b)-.30.
D. Time and Place for Examination of Records. The time and place for examination of records must be such time and place as may be fixed by the appropriate TTB Officer and is reasonable under the circumstances. See 26 USC Section 7605(a); 27 CFR Section 70.30(a) and.32.
E. Oral Testimony. TTB Officer can take the testimony of the person concerned, under oath, as may be relevant or material to such inquiry. See 26 USC Section 7602(a)(3)
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PLEASE DIRECT ALL QUESTIONS TO TTB, NATIONAL REVENUE CENTER, FAET UNIT.
Address: 550 Main St, Ste 8002 , Cincinnati, Ohio 45202-5215
E-Mail: TTB firstname.lastname@example.org
Phone Number: (513) 684-3817.
FAX Number: (513) 684-2252.