[Federal Register Volume 61, Number 169 (Thursday, August 29, 1996)]
[Proposed Rules]
[Pages 45377-45378]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22044]


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DEPARTMENT OF THE TREASURY

Bureau of Alcohol, Tobacco and Firearms

27 CFR Part 53

[Notice No. 836]
RIN 1512-AB49


Firearms and Ammunition Excise Taxes, Parts and Accessories

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: This notice proposes to amend regulations in 27 CFR Part 53, 
relating to the manufacturers excise tax on firearms and ammunition. 
Pursuant to 26 U.S.C. 4181, a tax is imposed on the sale by the 
manufacturer, importer or producer of pistols, revolvers, firearms 
(other than pistols and revolvers) shells, and cartridges. The tax is 
10 percent of the sale price for pistols and revolvers, 11 percent of 
the sale price for firearms (other than pistols and revolvers) and 11 
percent of the sale price for shells and cartridges. Current 
regulations provide that no tax is imposed by section 4181 of the 
Internal Revenue Code on the sale of parts or accessories of firearms, 
pistols, revolvers, shells, and cartridges when sold separately or when 
sold with a complete firearm. This notice proposes regulations to 
clarify which parts and accessories must be included in the sale price 
when calculating the tax on firearms.

DATES: Written comments must be received on or before November 27, 
1996.

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

FOR FURTHER INFORMATION CONTACT: Tamara Light, Regulations Branch, 650 
Massachusetts Avenue, NW, Washington, DC 20226, (202) 927-8210.

SUPPLEMENTARY INFORMATION:

Background

    The Bureau of Alcohol, Tobacco and Firearms (ATF) is responsible 
for collecting the firearms and ammunition excise tax imposed by 
section 4181. The Pittman-Robertson Wildlife Restoration Act, 16 U.S.C. 
Sec. 669 et seq., requires that an amount equal to all of the revenue 
collected under section 4181 be covered into the Federal aid to 
wildlife restoration fund. The fund is apportioned to the States for 
hunter safety programs, maintenance of public target ranges, and 
wildlife and wetlands conservation. It is important that the correct 
amount of Federal excise tax imposed by section 4181 be collected in 
order to fund these programs.
    The current regulation provides that no tax is imposed by section 
4181 of the Internal Revenue Code on the sale of parts or accessories 
of firearms, pistols, revolvers, shells, and cartridges when sold 
separately or when sold with a complete firearm. This regulation was at 
issue in Auto-Ordnance Corp. versus United States, 822 F.2d 1566 (Fed. 
Cir. 1987). In this case a manufacturer of firearms sued to recover 
excise taxes paid on sights and compensator units sold with rifles it 
manufactured. The manufacturer claimed that these parts were nontaxable 
accessories which should not be included in the taxable sale price of 
the rifles. The Internal Revenue Service (IRS), the agency responsible 
for administering the tax on firearms at that time, contended that the 
sights and compensator units were component parts of the rifles which 
must be included in the taxable sale price.
    The court noted that the position of the IRS that all component 
parts of a ``commercially complete'' firearm must be included in the 
sale price was a concept that was not found in the regulations. Since 
the regulations did not specify which parts are component parts of a 
firearm nor define the term ``accessories,'' the court found that it 
was appropriate to look beyond the language of the regulation. The 
court discussed several dictionary definitions of the term 
``accessories'' as well as tariff and customs classification cases. The 
court then held that the sights and compensator units were nontaxable 
accessories, since they were readily removable and of secondary or 
subordinate importance to the function of the firearm.
    After taking over the administration of the firearms and ammunition 
excise tax from the IRS in 1991, ATF has issued numerous rulings on 
parts and accessories. ATF has found it increasingly difficult to apply 
the regulation on parts and accessories as interpreted by the court in 
Auto-Ordnance. For example, the ``secondary or subordinate importance'' 
test is difficult to apply to parts which are essential for the safe 
operation of the firearm. Arguably, such parts are essential to the 
function of the firearm and should be included in the taxable sale 
price. However, if such parts are not needed to fire the firearm, it is 
possible that a Federal court, applying the rationale of Auto-Ordnance, 
would hold that such parts are nontaxable accessories.
    ATF proposes to amend the regulations relating to parts and 
accessories to provide definitions for ``component parts'' which must 
be included in the taxable sale price and ``nontaxable parts'' and 
``nontaxable accessories'' which are excluded from the taxable sale 
price. The purpose of these definitions is to reinstate the long-
standing ``commercial completeness'' test of the IRS in a manner which 
will withstand judicial scrutiny. The effect of the proposals will be 
to replace the readily removable/essential to the function test of the 
Auto-Ordnance case with a more objective, predictable standard to use 
in determining whether items sold with a firearm are includible in the 
tax basis.
    It is possible that the proposed regulations will result in 
increased tax liability for some taxpayers. However, the more precise 
definitions should help taxpayers accurately calculate the taxable sale 
price of their firearms and avoid underpayments, penalties, and 
interest.

Regulatory Flexibility Act

    The provisions of the Regulatory Flexibility Act relating to an 
initial and final regulatory flexibility analysis (5 U.S.C. 603, 604) 
are not applicable to this notice of proposed rulemaking, because the 
proposed rule, if promulgated as a final rule, will not have a 
significant economic impact on a substantial number of small entities, 
or impose or otherwise cause, an increase in the reporting, 
recordkeeping or other compliance burdens on a

[[Page 45378]]

substantial number of small entities. Accordingly, it is hereby 
certified under the provisions of Section 3 of the Regulatory 
Flexibility Act (5 U.S.C. 605(b)) that this proposed rule, if 
promulgated as a final rule, will not have a significant economic 
impact on a substantial number of small entities. The factual basis for 
such certification is that this notice of proposed rulemaking does not 
impose any new reporting or recordkeeping requirements. This notice 
merely clarifies existing regulations. A copy of this notice of 
proposed rulemaking is being sent to the Small Business Administration 
for comment pursuant to 26 U.S.C. 7805(f).

Executive Order 12866

    It has been determined that this proposed regulation is not a 
significant regulatory action as defined by Executive Order 12866. 
Accordingly, this proposal is not subject to the analysis required by 
this Executive Order.

Paperwork Reduction Act

    The provisions of the Paperwork Reduction Act of 1980. Public Law 
96-511, 44 U.S.C. chapter 35, and its implementing regulations, 5 CFR 
part 1320, do not apply to this notice of proposed rulemaking because 
there are no new reporting or recordkeeping requirements.

Public Participation--Written Comments

    ATF requests comments from all interested persons. Comments 
received on or before the closing date will be carefully considered. 
Comments received after that date will be given the same consideration 
if it is practicable to do so, but assurance of consideration cannot be 
given except as to comments received on or before the closing date. ATF 
will not recognize any material as confidential. Comments may be 
disclosed to the public. Any material which the commenter considers to 
be confidential or inappropriate for disclosure to the public should 
not be included in the comment. The name of the person submitting the 
comment is not exempt from disclosure. During the comment period, any 
person may request an opportunity to present oral testimony at a public 
hearing. However, the Director reserves the right, in light of all 
circumstances, to determine if a public hearing is necessary.

Disclosure

    Copies of this notice and the written comments will be available 
for public inspection during normal business hours at: ATF Public 
Reading Room, Room 6480, 650 Massachusetts Avenue, NW, Washington, DC.

List of Subjects in 27 CFR Part 53

    Administrative practice and procedure, Arms and munitions, 
Authority delegations, Exports, Imports, Penalties, Reporting and 
recordkeeping requirements.

Authority and Issuance

    Accordingly, 27 CFR Part 53, entitled ``Manufacturers Excise 
Taxes--Firearms and Ammunition'' is proposed to be amended as follows:
    Paragraph 1. The authority citation for 27 CFR Part 53 continues to 
read as follows:

    Authority: 26 U.S.C. 4181, 4182, 4216-4219, 4221-4223, 4225, 
6001, 6011, 6020, 6021, 6061, 6071, 6081, 6091, 6101-6104, 6109, 
6151, 6155, 6161, 6301-6303, 6311, 6402, 6404, 6416, 7502.

    Par 2. Section 53.61(b) is revised to read as follows:


Sec. 53.61  Imposition and rates of tax.

* * * * *
    (b) Parts or accessories.
    (1) In general. No tax is imposed by section 4181 of the Code on 
the sale of parts or accessories of firearms, pistols, revolvers, 
shells, and cartridges when sold separately or when sold with a 
complete firearm for use as spare parts or accessories. The tax does 
attach, however to sales of completed firearms, pistols, revolvers, 
shells, and cartridges, and to sales of such articles which, although 
in a knockdown condition, are complete as to all component parts. All 
component parts for firearms are includible in the tax basis.
    (2) Component Parts. Component parts are items which would 
ordinarily be attached to a firearm during use and, in the ordinary 
course of trade, are packaged with the firearm at the time of sale by 
the manufacturer or importer.
    (3) Nontaxable Parts. Parts sold with firearms which duplicate 
component parts are not includible in the tax basis.
    (4) Nontaxable Accessories. Items which are not designed to be 
attached to a firearm during use or which are not, in the ordinary 
course of trade, provided with the firearm at the time of sale by the 
manufacturer or importer are not includible in the tax basis.
    (5) Separate sales. Tax is imposed on component parts whether or 
not charges for such parts are billed separately. If taxable articles 
are sold by the manufacturer, producer, or importer thereof, without 
component parts, the separate sale of the component parts to the same 
vendee will be considered, in the absence of evidence to the contrary, 
to have been made in connection with the sale of the basic article, 
even though the component parts are shipped separately, at the same 
time, or on a different date.
    (6) Examples. (i) In general. The following examples are provided 
as guidelines and are not meant to be all inclusive.
    (ii) Component parts: Include items such as a frame or receiver, 
breech mechanism, trigger mechanism, a barrel, a buttstock, a 
forestock, a handguard, grips, buttplate, fore end cap, trigger guard, 
a sight or set of sights (iron or optical), a sight mount or set of 
sight mounts, a choke, a flash hider, a muzzle brake, a magazine, a set 
of sling swivels, an attachable ramrod for muzzle loading firearms when 
provided by the manufacturer or importer for use with the firearm in 
the ordinary course of commercial trade. Parts in a partially completed 
state which can be readily adapted for use. Any part or parts provided 
with the firearm which would affect the tax status of the firearm, such 
as an attachable shoulder stock.
    (iii) Nontaxable parts: Items such as extra barrels, extra sights, 
optical sights and mounts (in addition to iron sights), spare 
magazines, spare cylinder, extra choke tubes, spare pins.
    (iv) Nontaxable accessories: Items such as cleaning equipment, 
slings, slip on recoil pad (in addition to standard buttplate), tools, 
gun cases for storage or transportation, separate items such as knives, 
belt buckles, medallions. Optional items purchased by the customer at 
the time of retail sale which do not change the tax classification of 
the firearm, such as telescopic sights and mounts, recoil pad, slings, 
sling swivels, chokes, flash hiders/muzzle brakes of a type not 
provided by the manufacturer or importer of the firearm in the ordinary 
course of commercial trade.
* * * * *
    Signed: May 29, 1996.
John W. Magaw,
Director.

    Approved: June 12, 1996.
John P. Simpson,
Deputy Assistant Secretary (Regulatory, Tariff and Trade Enforcement).
[FR Doc. 96-22044 Filed 8-28-96; 8:45 am]
BILLING CODE 4810-31-U