So you’re a FFL holder with a business in the state of New York. You want a competitive advantage over other dealers, so you figure out a way to get a bigger slice of the profits pie.
The country is EBR (Evil Black Rifle) crazy and New York is no different. The problem is that manufacturers of AR-15 style rifles charge more for ones assembled without the “EVIL” features that would “restrict” or “prohibit” Joe Sixpack from Ronkonkoma from buying and possessing. Bushmaster makes their M4 Type “Post-Ban” Carbine PCWA3X 14M4IZ & PCWA2X 14M4IZ assembled at the factory in a fashion that meets their definition of a New York-compliant non-“Semi-Auto Assault Weapon”. These rifles retail for $1265 and have a swedged-on muzzle brake installed onto a specially manufactured non-threaded barrel, and a receiver extension tube manufactured without the 4-pos or 6-pos track. The buttstock is held in permanent place with an allen-head bolt.
So how do you put extra cash in your profit pocket? Well, you don’t order NY-compliant rifles from the manufacturers; you order 47-state versions (NY-non-compliant / L.E.) and do the “conversion” into a NY-compliant version yourself. 47-state versions are cheaper by almost $500 in both retail as well as wholesale, and thanks to a great mis-understanding over what constitutes a civilian-legal rifle, this questionable business practice is making a lot of NY FFLs rich. Who provided the method of “conversion” to these dealers? Is there a written set of procedures that tell’s the NY FFL on how to do it?
In fairness, there has never been a formal memo released from the NYS Police on the subject and it is rumored that in one exchange with a questioning dealer, the Trooper so questioned answered, “don’t ask because you won’t like the answer”. So blissful ignorance abounds. But here’s the rub; a manufacturer can make a “restricted” version or a NY-compliant version and legally ship either into NYS, but only to a FFL who also holds a NYS “Dealer in Firearms” license. The AR-15 in all it’s forms has been categorized (as per the Penal Law) as a “FIREARM” which means in NYS, an EBR and it’s lower receiver, and even the NY-compliant version, requires that the FFL be a NYS “Dealer” also. Most distributors and other dealers are unaware of this legal fact. A FFL who only deals in rifles, continues to receive AR-15 rifles thanks to the lack of knowledge regarding the law as well as a lack of enforcement.
So you’re a FFL and maybe you have a NYS “Dealer’s” license too. You order in a bunch of 47-state legal Rock River Arms AR15s and they cost you $835 a piece. You take a couple of roll pins and drill a few holes and in 10 minutes, a NY-compliant rifle. That rifle placed on the shelf of one of your two gun stores can now command $1400. You say that he’s entitled to make a profit? Yes he is, but….
Read this about Federal Excise Tax on firearms and who has to pay it:
Internal Revenue Service
Rev. Rul. 64-202
1964-2 C.B. 431
A gunsmith who buys used military-type firearms and performs various operations thereon, resulting in the production of custom-type firearms which are considered new and different articles, is the `manufacturer’ of the custom-type firearms for purposes of the manufacturers excise tax. Accordingly, the gunsmith’s sales of such firearms are subject to the tax imposed by section 4181 of the Internal Revenue Code of 1954.
Rev. Rul. 64-202
Advice has been requested whether liability for the manufacturers excise tax on firearms, imposed by section 4181 of the Internal Revenue Code of 1954, is incurred with respect to the sale of firearms produced under the circumstances set forth below.
A gunsmith buys used military-type firearms. He discards the stocks, sights, and trigger guards and uses only the barrels and actions in making custom-type firearms. The total process involved includes adding a custom-made stock, cutting down the barrel, bluing the barrel and action, altering and polishing the bolt, and replacing the trigger guard and sight. In some instances, telescopic sights are installed.
Section 4181 of the Code imposes a tax upon the sale by the manufacturer, producer, or importer of pistols, revolvers, and other firearms.
Section 316.4(a) of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that the term `manufacturer’ includes a person who produces a taxable article from scrap, salvage, or junk material, as well as from new or raw material, (1) by processing, manipulating, or changing the form of an article, or (2) by combining or assembling two or more articles.
The total process performed by the gunsmith in the instant case constitutes a manufacturing process the result of which is the production of custom-type firearms different from the used firearms acquired by the gunsmith. Accordingly, the gunsmith is the `manufacturer’ of such firearms within the meaning of the regulations.
Therefore, it is held that the gunsmith’s sales of the custom-type firearms are subject to the manufacturers excise tax imposed by section 4181 of the Code. See Revenue Ruling 58-586, C.B. 1958-2, 806, which relates to the excise tax consequences of the processing of firearms under various other circumstances.
OK, you might say that those Rock River rifles were “New” and not used rifles but read paragraph 4 & 5 one more time.
So the dealer needs to also be a gunsmith to “materially” “change the form” of the firearm. But he is concidered to be a “manufacturer” under the federal tax code and therefore has to hold an FFL as a “manufacturer” and not just a dealer. Why is that important? Because he has to file an FET tax return every year disclosing the number of “firearms” he “produces” as oppose to just purchasing and reselling. He has incured a “Tax Liability” as per “gunsmith’s sales of the custom-type firearms are subject to the manufacturers excise tax”.
But what about the 50-gun exemption? Yes that’s true and here is the ATF’s Ruling on the subject:
To: Manufacturers, producers and importers of firearms
What is the purpose of this information sheet?
This information sheet announces the recently enacted amendment to section 4182 of the Internal Revenue Code of 1986 (IRC), 26 U.S.C. 4182, to provide an exemption from the firearms and ammunition excise tax (FAET) for any pistol, revolver, or firearm (article) if it was manufactured, produced, or imported by a person who manufacturers, produces, or imports less than an aggregate of 50 of such articles during a calendar year.
What is the authority for this FAET exemption?
Section 4181 of the IRC (26 U.S.C. 4181) imposes an excise tax on the sale or taxable use of firearms, shells and cartridges by a manufacturer, producer, or importer of these articles. Section 4182 of the IRC provides for certain exemptions from this tax. Prior to October 1, 2005, only sales to the Department of Defense and Coast Guard (where the purchase is made with funds appropriated for the military department) and transactions where the National Firearms Act Transfer Tax (26 U.S.C. 5811) has been paid were exempt from the tax.
Recently, the President signed into law the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (Public Law 109–59, 119 Stat. 1144). This act amends section 4182 of the IRC by adding a provision that exempts from the tax any pistol, revolver, or firearm if it was manufactured, produced, or imported by a person who manufactures, produces, or imports less than an aggregate of 50 of such articles during the calendar year.
Who qualifies for this exemption?
Whether a manufacturer, importer, or producer qualifies for this exemption is determined by the number of firearms manufactured, produced and imported on a calendar year basis (January 1 – December 31).
For example, if “Company A” manufactures 20 firearms in a calendar year, no FAET is due upon the sale or taxable use of those 20 firearms. However, if “Company A” manufactures 55 firearms in a calendar year, then FAET is due upon the sale or taxable use of any of those 55 firearms.
The amendment also provides that all persons who are a part of a controlled group under 26 U.S.C. 1563 will be treated as one taxpayer for purposes of this exemption. It should be noted that this amendment does not apply to shells and cartridges.
When is this change effective?
The new exemption went into effect on October 1, 2005. Since FAET is paid quarterly, this corresponded to the beginning of the new tax quarter (October 1 through December 31, 2005). Further, this exemption has prospective application in that it has no effect on the tax liability of a manufacturer, producer, or importer prior to October 1, 2005.
If I manufacture, produce, or import 50 or more firearms during the calendar year, would I be liable for FAET on the first 49 firearms, as well as all subsequent firearms manufactured, produced, or imported for the remainder of the calendar year (even though I did not collect or pay the tax to the Alcohol and Tobacco Tax and Trade Bureau (TTB))?
Yes, you would owe TTB the FAET on the first 49 firearms that you sold or put to a taxable use whether or not you collected the tax from your customers upon the sale or taxable use of these firearms. This is due to the fact that the exemption applies only if you manufacture, produce, or import less than an aggregate of 50 firearms during the calendar year.
Consequently, you would owe FAET on the first 49 firearms sold or put to a taxable use, as well as on all subsequent firearms manufactured, produced, or imported for the remainder of the calendar year, regardless of when they are sold or put to a taxable use. Each calendar year stands alone for purposes of applying the 50 firearms exemption rule.
If I manufacture, produce, or import less than 50 firearms during the calendar year, would I be liable for FAET on those firearms if I sold them in another calendar year?
No, you would not owe FAET on less than 50 firearms manufactured, produced, or imported during a calendar year regardless of when you sell them.
For example, say “Company B” manufactures 20 firearms in calendar year 2006 but does not sell any of them in calendar year 2006. “Company B” then manufactures 40 firearms in calendar year 2007 and sells all 60 firearms (the 20 manufactured in 2006 plus the 40 manufactured in 2007) in 2007. “Company B” would not owe tax on the 60 firearms sold in 2007 since “Company B” only manufactured 20 of those firearms in calendar year 2006 and the other 40 in calendar year 2007. Once again, each calendar year stands alone.
Exemptions at a glance.
Exemptions from Federal Firearms and Ammunition Excise Taxes (FAET)
Type of Exemption 26 U.S.C. 4182
(Before October 1, 2005)
26 U.S.C. 4182
(After October 1, 2005)
26 U.S.C. 4182(a) Transactions where the National Firearms Act (NFA) Transfer Tax has been paid.
Are 26 U.S.C. 4182(b) Firearms, shells and cartridges sold to the Department of Defense and Coast Guard (purchased with funds appropriated for the military department).
exempt from FAET Are exempt from FAET Are 26 U.S.C. 4182(c) Any pistol, revolver, or firearm (but not shells or cartridges) if it was manufactured, produced, or imported by a person who manufactures, produces, or imports less than an aggregate of 50 of such articles during the calendar year.
If you have any questions regarding FAET exemptions, please contact:
Alcohol and Tobacco Tax and Trade Bureau National Revenue Center Firearms and Ammunition Excise Tax (FAET) Group
8002 Federal Office Building 550 Main Street Cincinnati, OH 45202–5215
Toll-free telephone number: 1-877-882-3277 Direct telephone number: (513) 684-3817 Fax Number: (513) 684-2252 E-mail:
But do you see anywhere the words “no tax returns need to be filed”??
So that dealer we were talking about who was buying all those 47-state legal rifles and performing the NY-compliance “Conversions” on his inventory needs to be a “manufacturer” and file FET tax returns, and if he sold more than 50 of those “converted” rifles in a year, he is liable for an 11% FET tax per rifle for all of them.