RELOADING CUSTOMERS' SHELLS OR CARTRIDGE CASES FOR RESALE AS RELOADED AMMUNITION IS NOT AN ACT OF MANUFACTURE FOR EXCISE TAX PURPOSES.

UIL Number(s) 4181.00-00

Date: August 7, 1987

Control No.: TR-32-00114-87

ISSUES

(1) Whether the reloading of a customer's used shell or cartridge cases by X constitutes an act of manufacture by X, where the reloaded cases returned to the customer are identical to the used cases provided by the customer.

(2) If, under issue (1) above, X is not liable for tax as the manufacturer of shells and cartridges, is the customer liable as the manufacturer?

FACTS

X is an original equipment manufacturer (OEM) of ammunition who is also a remanufacturer and reloader of ammunition. The terms "remanufacturer" and "reloader" denote that used, rather than new, shell or cartridge cases are incorporated in the process which results in the manufacture of ammunition.

Ammunition manufactured by X with used shell or cartridge cases owned by X is sold by X as remanufactured ammunition. Ammunition manufactured by X with used shell or cartridge cases owned by customers of X is sold by X as reloaded ammunition. Ammunition manufactured by X with new shell or cartridge cases is sold by X as OEM ammunition. Customers of X include gunsmiths, jobbers, rifle ranges and other reloaders.

X owns and maintains an inventory of used shell and cartridge cases and includes the value of such cases in the sale price of remanufactured ammunition. X also receives used shell and cartridge cases owned by its customers for reloading. X segregates the customer-owned used cases during the reloading process and does not include the value of such cases in its sale price of the reloaded ammunition.

X does not pay tax on ammunition it classifies and sells as reloaded ammunition, but does pay tax on its sales of remanufactured and OEM ammunition.

APPLICABLE LAW

Section 4181 of the Internal Revenue Code imposes a tax of 11 percent upon the sale by the manufacturer, producer or importer of shells and cartridges.

Section 48.4181-1(a)(2) of the Manufacturers and Retailers Excise Tax Regulations states that no tax is imposed by section 4181 on the sale of parts or accessories for firearms, pistols, revolvers, shells and cartridges when sold separately, or when sold with complete firearms for use as spare parts or accessories. The tax does attach, however, to sales of complete firearms, pistols, revolvers, shells, and cartridges, or to sales of such articles which, although in a knockdown condition, are complete as to all component parts.

Section 48.4181-2(d)(1) of the regulations defines the terms "shells" and "cartridges" to include any article consisting of a projectile, explosive, and container that is designed, assembled, and ready for use without further manufacture in firearms, pistols or revolvers.

Section 48.4181-2(d)(2) of the regulations states that a person who reloads used shells or cartridges is a manufacturer of shells or cartridges within the meaning of section 4181 of the Code if such reloaded shells or cartridges are sold by the reloader. However, the reloader is not a manufacturer of shells or cartridges if, in return for a fee and expenses, he reloads shells or cartridges submitted by a customer and returns the identical shells or cartridges to that customer. Under such circumstances, the customer would be the manufacturer of the shells or cartridges and may be liable for tax on the sale of the articles.

Section 4218(a) of the Code provides that if any person manufactures, produces, or imports an article (other than certain specific articles not involved here) and uses it (otherwise than as material in the manufacture or production of, or as a component part of, another article taxable under Chapter 32 of the Code, to be manufactured or produced by him) he is liable for tax in the same manner as if such article were sold by him.

Section 48.4218-2(b) of the regulations provides that the tax on use imposed by section 4218 of the Code shall not apply to an individual who incidentally manufactures, produces, or imports a taxable article for his personal use or causes a taxable article to be manufactured, produced, or imported for his personal use.

Section 48.0-2(a)(4)(i) of the regulations defines the term "manufacturer" to include any person who produces a taxable article from scrap, salvage, or junk material, or from new or raw material, by processing, manipulating, or changing the form of an article or by combining or assembling two or more articles.

Section 48.0-2(a)(4)(ii) of the regulations states that under certain circumstances, as where a person manufactures or produces a taxable article for another person who furnishes materials under an agreement whereby the person who furnished the materials retains title thereto and to the finished article, the person for whom the taxable article is manufactured or produced, and not the person who actually manufactures or produces it, will be considered the manufacturer.

Section 48.0-2(a)(5) of the regulations defines the term "sale" to mean an agreement whereby the seller transfers the property (that is, the title or the substantial incidents of ownership) in goods to the buyer for a consideration called the price, which may consist of money, services, or other things.

Revenue Ruling 56-209, 1956-1 Cumulative Bulletin 511, provides that the reloading of used shotgun shells (not belonging to the customer) is a manufacturing operation and the sale of such shells by the reloader is subject to the excise tax. However, a different ruling applies in the case of custom reloading. Where the reloader merely reloads shells belonging to his customer and is paid for his labor and materials expended in performing such reloading service, there is not a taxable sale of reloaded shells as such. In the latter case, there must be a return to the customer of the identical shells tendered by the customer for reloading. If, instead of a return of the identical shells, an equivalent number is withdrawn from the inventory of the reloaded shells on an exchange basis and the person reloading the shells is liable for the tax.

Rev. Rul. 68-463, 1968-2 C.B. 507, provides that the manufacturers excise tax imposed upon sales of shells and cartridges by section 4181 of the Code does not apply to sales of separate parts of ammunition such as cartridge cases, primers, bullets, and powder. However, the tax imposed by section 4181 does apply to sales of complete shells and cartridges or to sales of such articles which, although in a knock-down condition, are complete as to all component parts.

RATIONALE

Where a reloader who owns used shell and cartridge cases processes such salvaged cases into usable ammunition for a firearm, the reloader has produced taxable shells and cartridges within the meaning of section 4181 of the Code. Under sections 48.0-2(a)(4)(i) and 48.4181-2(d)(1) of the regulations, the reloader is considered liable for tax as the manufacturer of the shells and cartridges.

The reloader is not considered the manufacturer where (1) the reloaded ammunition it produces consists of shell and cartridge cases owned by its customer, and (2) the reloaded ammunition returned to the customer includes the identical shell and cartridge cases furnished by the customer. Under these circumstances, the sale of reloaded shells and cartridges by the reloader is a transfer of property (the primer, bullets, and powder) owned by the reloader and does not include property (shell and cartridge cases) owned by the customer. Under Rev. Rul. 68-463 the sale of separate parts of ammunition is not a taxable event under section 4181 of the Code.

If, however, the reloader commingles customer-owned cases with its own inventory of used cases and in reloading such cases substitutes an equivalent number of inventory cases for those cases furnished by the customer, the tax consequences of the sale of such reloaded ammunition is not similar to the nontaxable sale of reloaded ammunition described above where the customer has no retained right of ownership in the substituted cases. Thus, the sale of the reloaded ammunition by the reloader who commingles customer-owned cases with its own inventory is a transfer of property (primer, bullets, powder and shell or cartridge cases) owned solely by the reloader. Under section 48.4181-1(a)(2) of the regulations, the sale of such complete shells or cartridges constitutes a taxable event under section 4181 of the Code.

If the reloader can establish with absolute certainty that the cases taken from its commingled inventory are identical to (exactly the same as) the cases furnished and owned by its customer then the aforementioned nontaxable situation would apply. Please note, however, that "similar" cases or cases that are "the same for all practical purposes" are not considered "identical" for purposes of section 48.4181-2(d)(2) of the regulations.

Further, neither the reloader nor its customer (i.e., a gunsmith, etc.) is considered the manufacturer where (1) the ammunition produced by the reloader consists entirely of shell or cartridge cases furnished by its customer, but which are owned by a client (a hunter, target shooter, etc.) of the customer, and (2) the customer advises the reloader that it is acting merely as a conduit between its client, who will use the reloaded ammunition, and the reloader. Under these circumstances, the client of the customer (ie. a gunsmith, etc.) who furnishes the major components (shell and cartridge cases) of the reloaded ammunition and retains title to them during the fabrication of the ammunition is the manufacturer. Because the client's primary purpose in obtaining reloaded ammunition is for personal use (hunting, target shooting, etc.) rather than to engage in the business of an ammunitions manufacturer, the client is considered to have incidentally manufactured the ammunition for a nontaxable personal use within the meaning of section 48.4218-2(b) of the regulations.

CONCLUSION

(1) Under the facts presented, the reloading of the customer's used shell or cartridge cases by X is not an act of manufacture by X. Thus, the sale by X of reloaded shells or cartridges to a customer who is the owner of the cases used in the manufacture of the reloaded ammunition is not subject to the tax imposed by section 4181 of the Code.

(2) The customer (ie. the gunsmith, etc.) that owns the shell or cartridge cases which were reloaded by X is the manufacturer of taxable ammunition and its sale or use of the reloaded shells or cartridges is subject to the tax imposed by section 4181 of the Code. In determining the taxable sale price of a reloaded shell or cartridge, the amount paid for the reloaded shell or cartridge plus the value of the used casing is includable in computing the tax imposed by section 4181 of the Code.

A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. In accordance with section 6110(c), names, addresses, and identifying numbers have been deleted.