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August 29, 2018

Do You Need to Worry About Excise Tax?

By Josh Fiorini

Depending on the area in which you operate or the nature of your business, there are dozens of different taxes you are paying or accruing every day you are in operation, including sales tax, income tax, payroll liabilities and property taxes. Another item to add to this list for those in the firearms business is Firearms and Ammunition Excise Tax or “FAET.”

FAET is specific to the firearms industry and is designed primarily to be levied on the manufacturer or importer of a firearm or ammunition. However, with so many retailers in the business of gunsmithing and international trade these days, knowing the basics of FAET is worth it for anyone in the industry as you may be incurring liabilities without knowing it, or wish to plan potential business activities accordingly.

A Little History

The FAET was passed by Congress in 1919. The funds collected by it are intended to be passed on to support conservation and shooting sports activities such as the national parks, wildlife conservation efforts and related education initiatives (i.e., Pittman-Robinson funds). For many years, this tax was administered and collected by ATF. That changed following the consolidation of ATF under the Justice Department in 2003 with the passage of The Patriot Act, and now an agency within the Treasury Department called the Alcohol and Tobacco Tax and Trade Bureau (TTB) collects and enforces the FAET.

Despite the FAET’s longevity, few people even know it exists and even fewer truly understand how to comply with its provisions. The easiest way to think about the FAET is that it operates similarly to a federal sales tax on firearms and ammunition. It is viewed as a “trust fund tax,” with the government taking the view that the business liable for paying the tax is holding funds, appropriately collected from the buyer, for the government. However, this tax is not collected (or accrued) at the time of sale to the end user, but rather at the time of the article’s first sale in U.S. commerce, and it is payable by that initial seller. For example, U.S.-based Good Guns Company imports the Whiz-Bang rifle from Austria’s Lederhosen Riflewerks and sells the Whiz-Bang to a distributor, wholesaler, direct to a retailer or even direct to the consumer, so it’s the Good Guns Company that collects and pays the tax.

This structure means that FAET is a daily issue for all manufacturers and importers of firearms and ammunition. Each time they sell a firearms or ammunition article that is either newly manufactured or newly imported into the U.S. they accrue a FAET liability of 10 to 11 percent of the proceeds of those sales. This is no small amount, and a large bill can accrue very quickly if one is operating without knowledge of this liability.

Flying Duck

If You’ve Never Heard of it, You’re Not Alone

Why might you not have heard of this? Well, there’s a good explanation for that, and it has to do with deductions.

Deductions can be taken on your FAET returns, and those can be significant. They include the tax itself, of course, as well as the value of any non-firearms/ammunition components in the sale — cases, locks, manuals, packing materials, etc. — and freight costs. If documented and executed properly, all these deductions (which reduce the rate of tax, not the number on which the tax is calculated) can combine to reduce your FAET liability by as much as 20 to 30 percent (versus calculating it on the gross sales alone), which is extremely valuable. However, the ability to claim these deductions disappears if the taxpaying entity does not charge a “tax-included price.” Therefore, if a manufacturer or importer were to itemize this tax on its invoices, like a restaurant or a retail store would do with sales tax, it loses its ability to claim these deductions, thus effectively taking on a de facto price increase of 2 to 3 percent versus its competition. Therefore, businesses nearly always choose to charge a tax-included price, and you do not often (if ever) see this tax on invoices — and that’s the circumstance that leads to the lack of awareness of the tax.

Are You On the Hook?

What does this mean to you as a retailer? Well, if you simply resell items purchased within the U.S., you don’t have to worry about FAET. However, if you perform gunsmithing or custom manufacturing, or if you import firearms or ammunition, you do need to worry about FAET. If you are the manufacturer or importer of record on a firearm or quantity of ammunition, this tax will accrue to you. And if you fall in the latter category, seek expert help immediately, as the FAET is a niche tax. Most general-practice CPAs are not aware of it nor understand its complexities. Further, it is an exceedingly complicated tax to calculate correctly, and maximizing your deductions may require legwork such as measuring the weight of components and tracking the cost of individual components (including and especially the non-taxable articles such as cases and locks).

Those performing custom fabrication work (builds on third-party receivers, for example) and heavy gunsmithing will need to be particularly careful with regard to potential FAET liability. TTB uses a somewhat subjective definition of where the line of “manufacturing” is drawn, and it is determined on a largely case by case basis. Just because the receiver itself was taxed when it was sold to you does not necessarily mean that the article you manufacture from it is non-taxable (though it may be). Answering this question has to do with determining whether you are charging for a product (likely taxable) that you are selling, or a service (likely not taxable), and who owned and retained title to the majority of the components of the product during its manufacturer, either you (likely taxable) or the customer (likely not taxable).

Knowledge is power, and now you know about the FAET. If based on the above, you feel it may apply to you, I highly recommend seeking expert counsel from a firearms law attorney or a specialized FAET consultant to make sure you are conducting yourself and setting your prices correctly. Operating unaware of this tax or failing to calculate your liabilities properly can quickly become a very costly mistake. Do what you can to avoid it.

DISCLAIMER: NSSF does not provide tax advice and nothing appearing in this article should be construed to be an offer of tax advice. The foregoing is intended simply as a discussion of tax-related topics solely for educational purposes. The NSSF hereby specifically and expressly disclaims any liability with regard to any use of the above information and strongly recommends consulting with a CPA or other tax professional on your individual circumstances for tax advice.

About the Author
Josh Fiorini has a wealth of experience in manufacturing, business management, and finance both within and without the firearms industry. He was the CEO of PTR Industries, Inc., for seven years and spent the first decade of his career in finance holding positions as an equity analyst and portfolio manager before starting his own hedge fund which led him to the firearms industry. This experience, along with a deep background in manufacturing, banking and private equity, has made him a sought after contributor on numerous boards, discussion groups, media outlets, corporations and community organizations. Currently, Fiorini invests his time with non-profit initiatives and acts as a contributor and management consultant to various firms in the firearms industry. His activities have been reported in such publications as The Wall Street Journal, The New York Times and USA Today.

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Tags: Alcohol and Tobacco Tax and Trade Bureau ammunition ATF FAET Firearms Firearms and Ammunition Excise Tax firearms receivers income tax payroll tax Pittman-Robertson sales tax U.S. Treasury Department

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