Bartholomew Roberts
Member
OK, under 26 U.S.C. s 4181, the manufacturers of a firearm is required to pay a federal firearms and ammunition excise tax (FAET) of 10% or 11% on the first sale of the item. Recently, this has been an issue for gun smiths because ATF takes the position that custom work on a firearm is the same as manufacturing a new firearm for the purposes of the excise tax (see ATF FAET FAQ). As a result, in 2005 Congress passed a provision exempting manufacturers of less than 50 firearms from paying the tax (See 26 U.S.C. 4182.
One effect of these regulations is that non-FFL individuals who build firearms on a stripped receiver (CMP M1 Garand Receivers, AR15 stripped lowers, stripped AK receivers, etc.) are "manufacturing" a firearm under the terms of the law since no FAET is paid on the items. This is perfectly legal as long as the items are for personal use. (see ATF FAET FAQ).
One legal question that pops up though, is what happens if the person who built it for personal use later changes their mind and decides they want to sell the rifle? According to a few FFLs at AR15.com, ATF is taking the position that the FAET does need to be paid; but they do not accept tax payments from non-FFLs and they claim the less than 50 firearms exemption applies only to licensed manufacturers (FFLs).
If this is true, then any rifle built on a stripped lower is in the same position as a rifle manufactured from an 80% lower. The lower receiver can never be legally transferred because you must pay the FAET to legally transfer it but ATF does not accept FAET from non-FFLs.
Looking at the annotated U.S. code, I've found exactly one case on the definition of "Manufacturer" concerning the FAET. The case is International Armament Corp. v. United States, 598 F. Supp 1028 (D.C. Va. 1984). It is a district court case from Virginia and may not have much value as precedent.
In the case, Interarms had contracted with a company (who assigned that contract to Ranger) to build Walther pistols under license. Ranger actually did all of the manufacturing and paid the excise taxes before reselling the pistols exclusively to Interarms for distribution to FFLs. The IRS tried to hit Interarms for the excise tax as well and got shot down by the court who ruled that Interarms was not required to pay the excise tax.
Not much useful to this conversation except this part at 1030-1031:
Also at 1033:
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All of this concerns me because of two things:
1. It would potentially make millions of gun owners who sold firearms based on stripped receivers that they purchased through an FFL subject to criminal tax evasion charges.
2. The statute for the small manufacturer exemption (26 U.S.C. 4182) says absolutely nothing about limiting the exemption only to licensed manufacturers.
As near as I can tell, ATF has never prosecuted any private non-FFL "manufacturer" for failing to pay the excise tax; but I am concerned if ATF is telling local FFLs that their interpretation is different than the law Congress passed on this subject.
It looks like initially, we need to get a written letter from ATF concerning whether this is in fact how they interpret the law. If so, then this strikes me as one of those issues that might be worth bringing up with your local Congressman. If ATF is interpreting 26 U.S.C. 4182 differently from how it is written, and doing it in a way that potentially creates millions of tax criminals, they need to be slapped down by Congress.
One effect of these regulations is that non-FFL individuals who build firearms on a stripped receiver (CMP M1 Garand Receivers, AR15 stripped lowers, stripped AK receivers, etc.) are "manufacturing" a firearm under the terms of the law since no FAET is paid on the items. This is perfectly legal as long as the items are for personal use. (see ATF FAET FAQ).
One legal question that pops up though, is what happens if the person who built it for personal use later changes their mind and decides they want to sell the rifle? According to a few FFLs at AR15.com, ATF is taking the position that the FAET does need to be paid; but they do not accept tax payments from non-FFLs and they claim the less than 50 firearms exemption applies only to licensed manufacturers (FFLs).
If this is true, then any rifle built on a stripped lower is in the same position as a rifle manufactured from an 80% lower. The lower receiver can never be legally transferred because you must pay the FAET to legally transfer it but ATF does not accept FAET from non-FFLs.
Looking at the annotated U.S. code, I've found exactly one case on the definition of "Manufacturer" concerning the FAET. The case is International Armament Corp. v. United States, 598 F. Supp 1028 (D.C. Va. 1984). It is a district court case from Virginia and may not have much value as precedent.
In the case, Interarms had contracted with a company (who assigned that contract to Ranger) to build Walther pistols under license. Ranger actually did all of the manufacturing and paid the excise taxes before reselling the pistols exclusively to Interarms for distribution to FFLs. The IRS tried to hit Interarms for the excise tax as well and got shot down by the court who ruled that Interarms was not required to pay the excise tax.
Not much useful to this conversation except this part at 1030-1031:
(i) The term “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 ....
(ii) Under certain circumstances, as where a person manufactures or produces a taxable article for another person who furnishes materials under an agreement whereby the person who furnished the materials retains title thereto and to the finished article, the person for whom the taxable article is manufactured or produced, and not the person *1031 who actually manufactures or produces it, will be considered the manufacturer.
Under Treas.Reg. § 48.0-2(a)(4)(ii) two tests emerge for designation of a “manufacturer,” namely, (1) “a person manufactures or produces a taxable article for another person who furnishes materials under an agreement ” and (2) “the person who furnished the materials retains title thereto and to the finished article.” (emphasis added).
FN1. The excise tax on firearms is intended to apply to the first sale by the manufacturer. Under the “first sale” rule laid out by the United States Supreme Court in Indian Motocycle Co. v. United States, 283 U.S. 570, 574, 51 S.Ct. 601, 602, 75 L.Ed. 1277 (1931), “[the excise tax] is not laid on all sales, but only on first or initial sales-those by the manufacturer, producer or importer.”
Also at 1033:
cf. Rev.Rul. 84-116, 1984-31 I.R.B. 8 (In an analogous context, a gunsmith's customer was considered the manufacturer of a rifle because the customer supplied the parts used by the gunsmith in the fabrication of the rifle.)
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All of this concerns me because of two things:
1. It would potentially make millions of gun owners who sold firearms based on stripped receivers that they purchased through an FFL subject to criminal tax evasion charges.
2. The statute for the small manufacturer exemption (26 U.S.C. 4182) says absolutely nothing about limiting the exemption only to licensed manufacturers.
As near as I can tell, ATF has never prosecuted any private non-FFL "manufacturer" for failing to pay the excise tax; but I am concerned if ATF is telling local FFLs that their interpretation is different than the law Congress passed on this subject.
It looks like initially, we need to get a written letter from ATF concerning whether this is in fact how they interpret the law. If so, then this strikes me as one of those issues that might be worth bringing up with your local Congressman. If ATF is interpreting 26 U.S.C. 4182 differently from how it is written, and doing it in a way that potentially creates millions of tax criminals, they need to be slapped down by Congress.