[Federal Register Volume 63, Number 190 (Thursday, October 1, 1998)]
[Rules and Regulations]
[Pages 52601-52603]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26133]


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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