ATF Definition of Firearm Under Question

TSA Regulations and Violations Associated with Firearms

FAET:  Tax Planning and Minimization Do Work

Four Ways Businesses Can Reduce FAET Obligations

 

 

ATF Definition of Firearm Under Question

posted 10/24/19

MLG often advises clients regarding ATF’s classification of products and product components. This is an important process, because, in order to conduct business in full compliance with the Gun Control Act and National Firearms Act, regulated companies need to know things like: (11) what component is the frame or receiver? (2) at what stage is my product a suppressor? (3) is my product a short-barreled rifle?

In the last 12-18 months, we have noticed two major changes in the process of engaging ATF on product classifications. First, ATF’s classifications have gotten more creative (and, as part and parcel, less predictable). Second, a process that used to take anywhere from two to six months is now taking 12 months or longer. Both of these issues present major challenges to regulated companies.

Recently, a federal District Court in California in the case of United States vs. Roh (“Roh”) issued an order that addresses ATF’s power to “creatively” interpret and administer federal firearms laws. Keep in mind that this is not an appellate decision that creates binding precedent. However, the issues addressed, and the Court’s reasoning in responding to ATF’s legal arguments in Roh are a proverbial “elephant in the room” when it comes to ATF’s classification of products. In fact, as we understand it, the case has essentially been settled, in large part because of the court’s order.

The underlying facts: Joseph Roh owned and operated a company that offered customers the unique opportunity to acquire an unserialized AR15 style rifle. The customer would arrive at Mr. Roh’s place of business and be instructed to press a green button on a CNC machine, which would then take an 80% unserialized lower receiver and machine it into a completed lower receiver for an AR-15 style firearm. The premise was that Mr. Roh was not in the business of manufacturing firearms. However, ATF disagreed and charged him with illegally manufacturing firearms without a license.

The Gun Control Act defines a firearm in relevant part as “(A) any weapon (including a starter gun) which will or is designed to or may readily be converted to expel a projectile by the action of an explosive; (B) the frame or receiver of any such weapon” 18 U.S.C. 921(a)(3). ATF regulations then define a firearm frame or receiver as “[t]hat part of a firearm which provides housing for the hammer, bolt or breechblock, and firing mechanism, and which is usually threaded at its forward portion to receive the barrel.” Importantly – as is the case with most AR-15-style firearms – the lower receivers that Mr. Roh manufactured did not contain a bolt or breechblock, and were not threaded to receive the barrel.

In holding that ATF’s classification of Mr. Roh’s lower receivers is flawed, the court noted the following:

The government’s theory of conviction rests on proposition [sic] that the AFT [sic] had “classified” finished receivers as firearms, notwithstanding the conflict with the definition published by the ATF in its regulations. Examination of government expert Daniel Hoffman revealed that there is no “objective classification scheme or system in place.” . . . ATF personnel simply make a determination in response to individual inquiries. . . . Usually, there is no consulation with ATF counsel. . . . More significant for present purposes is that there is no way for the public to learn the particulars of the classification system. . . . The only way a person can learn of the AFT [sic] classification is to make direct contact with the AFT [sic].

Based on that reasoning (and more), the Court concluded as follows:

The Court finds that Roh’s activities with respect to the production of finished receivers were not within the scope of the statute or the ATF regulatory definition. Therefore, Roh did not violate the law by manufacturing receivers. The Court further finds that with respect to manufacturing the receivers, the statute and regulation are unconstitutionally vague as applied here. No reasonable person would understand that a part constitutes a receiver where it lacks the components specified in the regulation.

If you would like to read more about this story the links to various articles are below.

He sold illegal AR-15s. Feds agreed to let him go free to avoid hurting gun control efforts.

The ATF’s Definition of an AR-15 Lower as a ‘Firearm’ Is In Serious Trouble

BATFE Drops 80% Receiver Case in California; Fears Precedent


 

TSA Regulations and Violations Associated with Firearms

posted 3/29/19

In 2018, the Transportation Security Administration (“TSA”) discovered more than 4,000 firearms in carry-on luggage at airport security checkpoints throughout the United States.[1] That is a 17% increase since 2017 and an average of more than 11 firearms per day.[2] With the increasing popularity of concealed carry, we expect the number of violations (and Federal efforts to combat them) to continue to rise. For every violation that an individual receives from the TSA, there is a related criminal prosecution and TSA civil proceeding. That means that if you receive a notice of a violation from the TSA, you may face both civil and criminal consequences.

Firearms
You may transport an unloaded firearm in a checked bag.[3] Transporting a firearm in a carry-on bag is prohibited.[4] If you decide to transport a firearm in a checked back, the firearm must be in a hard-sided container and the firearm must be unloaded.[5] The hard-sided container must be locked and only the passenger can retain the key or combination.[6]

Also, you must declare the firearm to your airline when checking your bag at the ticket counter.[7] Be sure to declare the firearm each time you check your bags at the baggage counter. It is important to note that you must comply with the laws of the states in which you are traveling.

Ammunition
Ammunition may be transported in a checked bag.[8] Transporting ammunition in a carry-on bag is prohibited.[9] If you transport ammunition in a checked bag, the ammunition must be secured in a package that is specifically designed to carry ammunition.[10] If the ammunition that you wish to transport is a shotgun shell or the caliber does not exceeding .75 caliber, the ammunition may be carried in the same hard-sided case as your firearm.[11]

You must declare the ammunition to your airline when checking your bag at the ticket counter. Be sure to declare the ammunition each time you check your bags at the baggage counter. Again, it is important to note that you must comply with the laws of the states in which you are traveling.


[1]See https://www.cbsnews.com/news/tsa-has-seized-a-record-number-of-guns-this-year/?ftag=CNM-00-10aab8d&linkId=61112056
[2]Id.
[3] 49 CFR §1540.11(c).
[4]Id.
[5]Id.
[6]Id.
[7]Id.
[8]49 CFR 175.10 (a)(8).
[9]Id.
[10]Id.
[11]Id.


Civil Penalties

If you receive a TSA Notice of Violation, you are being accused of violating a security requirement at an airport. As a result, you are likely facing criminal prosecution as well as a civil monetary penalty.

The TSA determines the civil penalty based upon the Sanction Guidance Table.[12] The civil penalty varies upon the violation.[13] In determining the amount of the penalty, the TSA considers the totality of the circumstances, including aggravating and mitigation factors.[14] If the TSA determines that the totality of the circumstances calls for a sanction outside of the amounts listed in the Sanction Guidance Table, the TSA may seek an amount outside of the normal ranges.[15] See the table below for the civil monetary penalties for a single violation.

Security Violations by Individuals for Prohibited Items Discovered at Checkpoints/Sterile Areas/Onboard Aircraft

ViolationCivil Penalty
Loaded firearms (or unloaded firearms with accessible ammunition)$4,000-$10,000 + criminal referral
Unloaded firearms$2,000-$4,000 + criminal referral
BB, pellet, and compressed-air guns; flare and starter pistols; realistic replicas of firearms (including gun lighters); permanently inert firearms; spear guns; stun guns, cattle prods, or other shocking devises $340-$2,000
Silencers, mufflers, frames and/or receivers$2,000-$4,000 + criminal referral
Axes and hatchets; ice axes and icepick; knives with blades that open automatically (such as switchblades); knives with blades that open via gravity (such as butterfly knives); any double-edge knives or daggers; meat cleavers; saber; swords; and machetes$340-$2,000
Throwing stars$340-$2,000
Incendiaries$340-$2,000
Smoke grenades$660-$3,320 + criminal referral
Self-defense spray; tear gas$340-$2,000
Blasting caps; dynamite; gunpowder (more than 1 oz.); hand grenades; plastic explosives; all other high explosives$8,000-$13,333 + criminal referral
Realistic replicas of explosives; inert hand grenades; intact vehicle airbags$660-$3,320 + criminal referral
Consumer fireworks, novelty fireworks, professional display fireworks; flares; gunpowder (10 oz. or less); ammunition$340-$2,000 + criminal referral

[16]Id.

Security Violations for Prohibited Items Discovered in Checked Baggage

ViolationCivil Penalty
Loaded firearms$1,340-$2,660 + criminal referral
Undeclared and/or improperly packaged firearms$660-$1,340
Incendiaries$340-$2,000
Smoke grenades$660-3,320 + criminal referral
Blasting caps; dynamite; gunpowder (more than 1 oz.); hand grenades; plastic explosives; all other high explosives$8,000-$13,333 + criminal referral
Realistic replicas of explosives; inert hand grenades; intact vehicle airbags$660-$3,320 + criminal referral
Consumer fireworks, novelty fireworks, professional display fireworks; flares; gunpowder (10 oz. or less); ammunition$340-$2,000 + criminal referral

[17]Id.

Criminal Penalties

Many of the civil penalties require the TSA to refer your case to the local prosecutor’s office. If criminal action is pursued, it will be handled by criminal prosecutors and you will receive a separate notification of such action. The criminal consequences that an individual will face if charged with violations of criminal law will vary by local, state, and international law.

What to Do After Receiving a Notice of a Violation

Just because you receive a Notice of Violation does not mean that you are guilty. You have rights; we are here to protect your rights. Munitions Law Group has the knowledge and experience to fight for you. Contact Munitions Law Group for a free initial consultation with one of our attorneys.


[16] See Enforcement Sanction Guidance Policy, Transportation Security Administration (https://www.tsa.gov/sites/default/files/enforcement_sanction_guidance_policy.pdf)
[17]Id.

Four Ways Businesses Can Reduce FAET Obligations

Strategy 4: Implementing Shipping Practices That Effectively Reduce Liability for Freight Expenses

 

Posted 2/15/19

(Part 5 of a 5 Part Series on FAET Tax Planning and Minimization Strategies)

As we discussed at the beginning of this series on FAET, companies paid $341 million in Firearms and Ammunition Excise Tax (“FAET”) in just the first 6 months of 2018. We have been able to help our clients significantly reduce their FAET obligations by optimizing their utilization of these tax planning and minimization strategies. In this final part of the series, we discuss shipping and freight practices.

To recap, the primary methods for minimizing FAET are:

(1) Setting sales prices to pass FAET through to customers,

(2) Utilizing “product data spec sheets” for each product, to determine what percentage of the product is taxable,

(3) Identifying and classifying your customer categories, effectively use a “constructive sales price” formula, and

(4) Implementing shipping practices that effectively reduce liability for freight expenses.

A taxpayer may exclude the costs of (1) transportation, (2) delivery, (3) insurance, (4) and other expenses actually incurred in connection with the delivery of a product to a purchaser.[1] These costs are often collectively referred to as “freight charges”. In order for freight charges to be excluded from FAET, the charges must be (1) based on actual freight expenses incurred and (2) allocated in relation to the weight of the taxable product versus the total weight of the shipped package.

The key to excluding freight charges is the development of a formula (supported by appropriate business records) to determine the proportion of a product, in its shipping packaging, that is taxable. When shipping and freight best practices are used in conjunction with the customer pass-through, Product Data Spec Sheets, and the CSP, a taxpayer can fully minimize FAET on taxable products and significantly improve their bottom line.

[1] 26 U.S.C. Section 4216(a) and 27 C.F.R. Section 53.92(b).

Four Ways Businesses Can Reduce FAET Obligations

Strategy 3: Identifying and Classifying Your Customer Categories, Allowing You to Effectively Use a “Constructive Sales Price” Formula

Posted 2/8/19

(Part 4 of a 5 Part Series on FAET Tax Planning and Minimization Strategies)

Classifying the types of customers to whom you are selling can potentially allow for a further reduction in FAET obligations.

Federal law identifies different classifications of sales.[1] These are:

Wholesale Distributor: A person engaged in the business of selling articles to persons engaged in the business of reselling such articles.

Sales to retailers or to a retail dealer: Sales to individuals who are engaged in the business of selling articles at retail.

Sales at retail: Sales of a taxable article to a purchaser who intends to use or lease the article rather than resell it.

By classifying sales, taxpayers can determine whether they can use a “constructive sales price” (“CSP”), which is a reduced substitute taxable sale price. Because FAET is based on the wholesale sales prices of the products, and taxpayers may sell products at retail (which will be at a higher price), the CSP is a presumptive sale price designed to be comparable to the taxpayer’s wholesale price.[2] Generally speaking, a CSP applies when products are sold to any customer other than a wholesale distributor in an arms-length transaction. So, the nature of the customer and the sale will dictate whether the taxpayer can elect or is required to use a CSP.

Ultimately, the key to this whole process is classifying sales. This means, (1) to whom is the taxpayer selling firearms and (2) what are their relationships (affiliate or non-affiliate) to the taxpayer? Armed with this information, the taxpayer can run calculations and evaluate scenarios (including realistic projected modifications to the downstream sales channels). There may also be some ways to restructure or adjust business practices based on the outcomes, to reduce FAET.

And, when used in conjunction with Product Data Spec Sheets, the CSP can be used to further reduce FAET (and increase profit margins) by applying the CSP to a lower taxable sale price. Using the example above, with a firearm with a $1000.00 build cost, a $1400.00 sale price, a taxable component sale price of $1260.00, and an applicable CSP, the taxpayer would potentially calculate FAET against a sale price even lower than $1260.00. Next week in our fifth and final part of this series on mimimizing FAET, we will discuss how businesses can reduce FAET even further by optimizing their shipping and freight practices.

[1] 27 CFR Section 53.94.

[2] The CSP concept works in reverse where taxpayers sell products at “less than arms length” and/or “less than fair market value”. In this situation, because the actual sale price is likely lower than an arms length or fair market value sale, the CSP would result in an increased sale price as the basis for FAET.

Four Ways Businesses Can Reduce FAET Obligations

Strategy 2: Utilizing “Product Data Spec Sheets” for Each Product, to Determine What Percentage of the Product is Taxable

Posted on 2/1/19

(Part 3 of a 5 Part Series on FAET Tax Planning and Minimization Strategies)

As we discussed last week, there are four strategies businesses may use to significantly reduce the amount of FAET they must pay; and we discussed how most firearms businesses use the pass-through strategy. This week we explain a less commonly used but very effective method of reducing FAET: utilizing “Product Data Spec Sheets.” The value of Product Data Spec Sheets is based on the premise that only part of the product sold to an end-user is taxable.

With regard to firearms, taxable firearms include portable weapons that use an explosive to expel a projectile, such as:[1]

(1) pistols

(2) revolvers

(3) shotguns

(4) rifles

(5) black powder firearms

(6) machine guns

(7) antique firearms

On the other hand, they do not include:

(1) non-portable weapons (such as cannon)

(2) devices that do not use an explosive to expel a projectile, like (a) air pistols or (b) air rifles[2]

(3) starter pistols that use blanks[3]

(4) individual components of firearms, like (a) frames, (b) receivers, (c) barrels, (d) magazines, (e) sights[4]

(5) extra or spare parts coming with a firearm, like (a) barrels, (b) sights or optics, (c) magazines, or (d) cylinders[5]

(6) accessories, like (a) cleaning equipment, (b) slings, (c) slip on recoil pads, or (d) tools[6]

There are similar rules regarding the taxable portion of ammunition products.[7]

The purposes of the Product Data Spec Sheet are to (1) identify all component parts, spare parts, and accessories, (2) identify the taxpayer’s cost of each component part, spare part, and accessory, and (3) using that data, determine the proper FAET for taxpayers that sell products with non-taxable components. This works because the Product Data Spec Sheets allow the taxpayer to isolate and remove the non-taxable portion of the sale prices, so that the FAET rate (10% or 11%) is applied to the lowest possible sale price.

The end result of the Product Data Spec Sheets is that a taxpayer who manufactures a firearm with a $1000.00 build cost and a $1400.00 sale price (that includes non-taxable components) will calculate FAET against a lower sale price based on the proportion of taxable and non-taxable components. For example, instead of calculating FAET against a sale price of $1400.00, it may be calculated against a sale price of $1260.00.

Next week we will explain how businesses may reduce FAET even further by utilizing the third strategy: effectively using a “Constructive Sales Price” formula.

[1] See IRS Revenue Ruling 57-606 and IRS Revenue Ruling 74-137.

[2] See IRS Revenue Ruling 67-453.

[3] See IRS Revenue Ruling 60-233.

[4] 27 C.F.R. Section 53.61(b)(5)(ii).

[5] 27 C.F.R. Section 53.61(b)(5((iii) and IRS Revenue Ruling 54-98.

[6] 27 C.F.R. Section 53.61(b)(5((iv) and IRS Revenue Ruling 54-98.

[7] 27 C.F.R. Section 53.61(a)(4) and IRS Revenue Ruling 68-463.

Four Ways Businesses Can Reduce FAET Obligations
Strategy 1: Passing FAET Through to Customers

Posted 1/25/19

(Part 2 of a 5 Part Series on FAET Tax Planning and Minimization Strategies)

As we discussed last week, by using these tax planning and minimization strategies, our clients have been able to significantly reduce their FAET obligations. This week, we explain how and why to utilize the first of these four strategies that are available to businesses responsible for FAET: the pass-through.

The primary methods for minimizing FAET are:

(1)        Setting sales prices to pass FAET through to customers,

(2)        Utilizing “product data spec sheets” for each product, to determine what percentage of the product is taxable,

(3)        Identifying and classifying your customer categories, effectively use a “constructive sales price” formula, and

(4)        Implementing shipping practices that effectively reduce liability for freight expenses.

Strategy 1: Setting Sales Prices to Pass FAET Through to Customers

The simplest way to reduce FAET is to price products to include the applicable FAET.  This is because the tax itself is not a taxable part of the sale price.[1]

Here is an illustration of how this reduces FAET liability:

Assume you sell a rifle (11% tax rate) for $1,000.00.

  • Sales Price Does Not Include FAET
    • If the sales price does not include FAET, the taxable sale price is $1000.00 and the tax due on the sale will be $110.00
      ($1,000.00 x .11).
  • Sales Price Does Include FAET
    • If the sales price does include FAET ($1,000.00 / 1.11 = $900.90), then the taxable sale will be $900.90 and the tax due on the sale will be $99.10, which is a savings (additional profit) of $10.90 per firearm.

Even with price competition, a manufacturer should consider including FAET in its pricing.  In our experience, most FAET taxpayers do.

Next week, we will take a detailed look at how businesses can utilize Product Data Spec Sheets, which when used in conjunction with FAET-included pricing, can maximize the reduction in the taxable percentage of a firearm’s actual sales price to better manage FAET, reduce liability, improve profits, and be more competitive.

[1]              26 U.S.C. Section 4216(a) and 27 C.F.R. Section 53.92(a).

FAET:  Tax Planning and Minimization Do Work

Posted 1/18/19

(Part 1 of a 5 Part Series on FAET Tax Planning and Minimization Strategies)

In the first half of 2018 alone, companies paid $341 million in Firearms and Ammunition Excise Tax (“FAET”).[1]  That is a big number.

We encourage FAET taxpayers to approach FAET as they do income taxes, by conducting tax planning and implementing legal tax minimization procedures to reduce their obligations. By following these strategies, our clients have significantly reduced their FAET obligations.

In this first[CC1]  part of a five part series on FAET tax planning and minimization strategies, we explain FAET and how to first prepare your business to implement these strategies.

Part 1

What is FAET?

FAET applies to the manufacture, production, importation, and sale of firearms, shells, or cartridges.[2]  A taxpayer is liable for FAET if it manufactures or produces a taxable product in the United States or imports a taxable product into the United States from a foreign source.[3]

FAET is calculated by multiplying the sale price of the taxable product by the applicable tax rates.  The applicable tax rates are:

  • 10% of the sale price of pistols and revolvers;
  • 11% of the sale price shells, cartridges, and firearms other than pistols and revolvers.[4]

The burden is on taxpayers to calculate, return, and pay FAET.  As with IRS tax returns, the law and regulations provide taxpayers various routes to reduce liability.  With proper planning and implementation of certain procedures, plus the development of appropriate business records to support their planning and procedures, taxpayers can reduce their liability.

The Federal Alcohol and Tobacco Tax and Trade Bureau (“TTB”) administers FAET, collecting the tax, conducting audits, and enforcing the law and regulations.  Importantly, TTB audits are much more detailed and burdensome than ATF compliance audits.  TTB has the legal power to review any kind of business record, and even request or compel records from third-parties, such as customers and vendors.  For that reason, part of the planning and implementation process should emphasize the development and retention of appropriate supporting business records.

There are four strategies businesses can use to reduce their FAET obligations. Next week in Part Two we will discuss what each of those are, and for the next four weeks we will discuss a different minimization strategy in detail each week.

[1]              NSSF’s FAET Master Quarterly History table.

[2]              26 USC Section 4181(a); 27 CFR Section 53.61(a).

[3]              26 U.S.C. Section 4181 and 27 C.F.R. Section 53.61.

[4]              26 U.S.C. Section 4181 and 27 C.F.R. Section 53.61(a).