Rev. Rul. 67-356

Advice has been requested as to the application of the manufacturers excise tax imposed on firearms, shells, and cartridges in the circumstances described below.

A manufacturer of firearms, pistols, and revolvers also manufactures shells and cartridges. Some of the shells and cartridges are used by the manufacturer to test firearms, pistols, and revolvers of his own manufacture while other shells and cartridges are sold to other manufacturers of firearms, pistols, and revolvers for their use in testing such articles.

Section 4181 of the Internal Revenue Code of 1954 imposes a tax on the sale by the manufacturer, producer, or importer of firearms, shells, and cartridges.

Section 4218(a) of the Code provides that if any person manufactures, produces, or imports an article and uses it (otherwise than as a material in the manufacture or production of, or as a component part of, another article subject to the manufacturers excise tax to be manufactured or produced by him), then he becomes liable for manufacturers excise tax in the same manner as if such article were sold by him.

Section 48.4218-4 of the Manufacturers and Retailers Excise Tax Regulations states that `an article is used as material in the manufacture or production of, or as a component part of, another article, if it is incorporated in, or is a part or accessory of, the other article. * * * However, an article which is consumed in the manufacturing process so that it is not a physical part of the manufactured article is not used as material in the manufacture or production of, or as a component part of, such other article.'

Section 4221(a)(1) of the Code provides that no tax will be imposed on the sale by the manufacturer, producer, or importer of an article for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture.

Section 4221(d)(6) of the Code provides, in part, that an article shall be treated as sold for `use in further manufacture' if such article is sold for use by the purchaser as material in the manufacture or production of, or as a component part of, another article subject to the manufacturers excise tax to be manufactured or produced by him.

It is held that shells and cartridges used by the manufacturer thereof to test firearms, pistols, and revolvers of his own manufacture, as in the instant case, are not `used in further manufacture' within the meaning of the law and regulations. Accordingly, shells and cartridges so used by the manufacturer are subject to the tax imposed by section 4181 of the Code in the same manner as if such shells and cartridges were sold by the manufacturer, as provided in section 4218(a) of the Code. In like manner, shells and cartridges may not be sold by the manufacturer thereof tax free under section 4221(a)(1) of the Code for use by the purchaser in testing firearms, pistols, and revolvers of his manufacture. The manufacturer is liable for the tax imposed by section 4181 of the Code on such sales.

Inasmuch as this Revenue Ruling restates under current law and regulations a conclusion identical to that expressed in S.T. 551, C.B. XI-2, 483 (1932), S.T. 551 is hereby superseded.