Retail

Federal Excise Tax Requirements and Issues That Affect Retailers

Find out if you’re obligated to pay the federal excise tax and what you can do to educate customers about federal excise tax slippage.
Photo Credit: ATA

Author: Cassie Gasaway

Do you get disgusted with taxes? Many people do, especially this time of year, but federal excise taxes are extremely important to the outdoor industry, and that is why you should care about them. In this article, we define the federal excise tax, explain your role in the FET process and break down how to ensure the funds get to the right place. Let’s dive in.

 

The FET and Your Business

The FET is a 10% to 11% tax manufacturers pay on the first sale of firearms, ammunition and some archery equipment. The tax goes back to the 1937 Wildlife Restoration Act, more commonly called the Pittman-Robertson Act. Archery equipment was added to the FET 35 years later in 1972. Since then, bows and arrows have been subject to the FET, as is all equipment that attaches to a bow and is used to shoot archery.

Many retailers don’t consider themselves manufacturers and so they don’t pay federal excise taxes, but Nathan Fitzgerald of BKD CPAs & Advisors said they might need to. BKD LLP is a full-service certified public accounting firm and a MyATA service provider.

“There are some situations where the FET might apply to retailers,” Fitzgerald said. “The most common situation is when they are in-house doing some level of manufacturing. Another less common scenario is where a pro shop has subcontracted some level of manufacturing, and they own intellectual property. We typically see this with bowstrings where the string components are readily available.”

In other words, if you are involved in the final manufacture of products or in the first sale of taxable products in the U.S., you must pay the FET. Another situation where a retailer would pay a FET is if they buy products from an overseas entity and are categorized as an importer of record by the IRS.

“Retailers need to be cautious of their procurement of goods,” Fitzgerald said. “If they’re not doing any level of custom string building and all their components are off-the-rack sales and their suppliers are normal domestic suppliers, there will not be an obligation to collect and remit FET, but they are taking part in the federal excise tax cycle.”

The IRS website outlines who is liable for the FET and has a comprehensive list of which archery items are subject to the FET and which archery items are not. The site also explains how the IRS defines terms, such as manufacturer and importer, to determine the proper taxpayer.

The ATA created a free, comprehensive guide to federal excise taxes for its members. The document outlines the IRS information mentioned above, summarizes IRS rules and regulations, lists step-by-step instructions for paying the FET, and gives examples of how to calculate FET payments accurately. Download and read the ATA’s Federal Excise Tax Guidelines document to determine if you’re obligated to pay. If you fail to pay required FET taxes, you’re subject to fines and penalties, and you’re breaking the law.

Encourage archers and bowhunters to shop locally. Photo Credit: ATA

FET Slippage

Another FET-related issue that affects retailers, manufacturers and the entire industry is so-called FET slippage. A recent study by Southwick & Associates estimates about $7.8 million worth of federal excise taxes are lost each year through online marketplaces where non-U.S. companies sell products to U.S. customers. This is a relatively new issue. Fitzgerald said there isn’t a wild level of noncompliance among retailers, but it is a common issue among U.S. consumers who aren’t familiar with the FET process.

For example, say a customer comes into your shop and sees a pack of arrows for $25. They hop on their phone and start scrolling. Then, suddenly, they leave your shop. What happened? Chances are the customer found the arrows online through an international supplier for less money, so they decided to buy online.

Because the online process doesn’t recognize internet marketplace facilitators as importers that are responsible for paying the federal excise taxes on these transactions (hence the lower product price), these funds are slipping through the cracks. Unfortunately, that oversight hurts American businesses and state wildlife agencies that rely on these dollars to conduct necessary habitat restoration, hunter education, wildlife research and other conservation projects.

Dakota Comer, a CPA for BKD CPAs & Advisors, said the IRS and U.S. Fish and Wildlife Service (the two entities responsible for collecting FET funds and distributing them to state wildlife agencies) are aware of the issue but have their hands tied.

“A few years back, there was this (realization) that online retailers domestically weren’t collecting sales tax,” Comer said. “That was a big issue, and there was a Supreme Court case that ended with a significant ruling that changed the sales tax landscape for us. This is a similar issue, but we haven’t had that similar landmark Supreme Court decision. We’re still waiting on the government side to fix that.”

Comer said that wouldn’t happen overnight. Tracking down FET slippage funds from the past would be time consuming and difficult. So, as we wait for the government to update the laws to fix the issue, we must focus on compliance in the future.

That compliance starts with ATA members educating themselves and consumers. The goal is to explain the FET slippage issue to customers so they understand the problem and opt to shop locally to support the industry.

“What archery shops and retailers can focus on and what I think is wanted by customers right now is education,” Comer said. “Bow shops that educate the customer about excise taxes, what they do for our industry, and why they’re so important to all of us will help customers understand the process. Then, that price difference doesn’t matter as much, and the customer is willing to pay the higher cost to help fund their hobby and passion.”

Retailers must approach the topic with caution and compassion, Fitzgerald said, because newcomers simply aren’t aware of what they’re doing.

“Customers don’t understand the difference in price; all they see is the price difference,” Fitzgerald said. “You might lose a customer for life if your message is too direct. Most new hunters make missteps, whether it’s FET slippage, inadvertently crossing a property line, or making a bad shot. It’s important for retailers to be prepared to provide education and coaching (in these instances).”

Here are two ways ATA members can carefully talk to customers about FET slippage.

1. If a customer comes in with a product they bought online, you could say something like:

“We’re glad you came in. We can definitely help you set up your equipment, but please consider supporting our local business with your initial purchase next time. You probably didn’t know it, but American businesses must comply with federal excise tax rules that don’t affect online retailers. The funds generated by the FET help with the continuation of the sport by ensuring people have places to hunt and animals to pursue. So, investing locally is extremely important for our sport’s survival.”

2. If a customer starts price shopping on their phone while they’re looking at your products, you could say something like:

“Hey! I saw you pulled out your cellphone to compare prices. You’ll notice our prices might be slightly higher than what you see online. That’s because American businesses sell products that are subject to federal excise taxes. Those taxes are collected by the IRS and distributed to states that use them on projects to benefit hunters, wildlife and wild places. The cheaper products you often see online don’t include a federal excise tax, and therefore, they don’t support wildlife and hunting in the U.S.”

By providing gentle education and good customer service, you can win over the hearts and wallets of customers while simultaneously combating the FET slippage issue.

If you have questions or concerns regarding federal excise taxes, please contact:

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