May 24, 2006
American Sportfishing Association Policy Alert
The Manufacturers’ Federal Sportfishing Excise Tax—Where are we now?
If you have any questions about this issue, please contact ASA Vice President Gordon
Robertson, x237.
On May 24, ASA sent a letter to the IRS requesting that the IRS release
the document called the Industry Director’s Directive. This Directive
describes a number of specific sportfishing equipment business arrangements
and the excise tax treatment of those arrangements.
The IRS has been promising
this guidance for approximately four months.
A number of American Sportfishing
Association (ASA) members have been asking similar questions regarding
the current status of the federal manufacturers’ excise
tax. ASA asked Rod DeArment of Covington & Burling, the association’s
legal counsel for excise tax issues, to answer the most frequently asked questions.
This same information can be found in the April/May issue of American Sportfishing,
ASA’s member newsletter.
What is happening with the IRS guidance on
the application of the federal excise tax on sportfishing equipment?
After
about 16 months of meetings and document exchanges between the sportfishing
industry and the IRS, the IRS indicated that it intends to issue an “Industry
Director’s Directive” that would describe a number of specific
sportfishing equipment business arrangements and the excise tax treatment
of those arrangements. During a late January meeting with the IRS, ASA’s
Excise Tax Committee members and staff were told that the document was in
the final stages of IRS review and signoff. The same assurance was given
in late April. At that time, the IRS told ASA’s VP Gordon Robertson
that they are still awaiting the Counsel’s Office sign off. However,
they did say if they don’t receive the sign-off soon, they may go ahead
and release the document without such sign-off. Thus, we continue to expect
the document’s release “soon.”
What does this Industry Director’s
Directive do?
This document contains approximately a dozen specific “scenarios,” or
business arrangements, between importers, manufacturers, distributors and retailers
and describes how the excise tax will be applied to each fact situation. Generally,
under the Directive an importer would not be permitted to pay the excise tax
if the importer is an “agent” rather than the party that designs
the product, controls the manufacturing abroad, sets the pricing and bears
the risk of loss. Rather the United States importer must do so. The fact that
the importer affixes the distributor’s label to a product will, by itself,
not force the distributor to pay the tax. These scenarios should be read very
carefully since the result may turn on seemingly subtle fact differences. The
most current draft is posted on ASA’s Web site.
What legal effect does
the Industry Director’s Directive have?
An Industry Director’s Directive is not the law, a regulation
or a formal revenue ruling. Rather, it is an internal IRS document intended
to clarify the application of the law. It will be used (and may be already
in use) as a tool for training field agents who will be conducting excise
tax audits or for educating the industry.
Although the IRS is not legally
compelled to follow the positions and analysis set forth in the Directive,
as a policy matter they have historically adhered to positions and analyses
described in similar documents. Thus, a taxpayer may be able to use the analysis
in the Directive as support for its position when dealing with the IRS. However,
if the issue reaches litigation, the court is likely to give little, if any,
deference to the conclusions reached therein.
Does this Industry Director’s
Directive cover every fact situation?
No. Indeed, the IRS told us they decided to reserve the extremely
important “Storm
Lure” fact pattern for further review in a revenue ruling project which
would take at least a year to complete. In late April during a conversation
with ASA, however, the IRS backed off the promised revenue ruling process that
would address the Storm Lure fact pattern. This fact pattern involves the sale
of taxable sportfishing equipment between two related companies.
The “Storm
Lure” case upheld the taxability of the sale of lures
between two companies owned by members of the same family. The IRS
is likely to examine closely such related-company sales to determine whether
they believe the sales price is an arm’s-length price. If they do not
believe the related party sale is an arm’s-length sale, the IRS is
likely to impose the tax on the first sale outside the related group.
Since
we believe there may be a number of companies that have sales between related
manufacturing and distribution companies, this will remain an area of considerable
risk for IRS audit. We are concerned that the IRS seems to be retreating
from offering definitive guidance in this area. This since that leaves
the issues raised to the IRS to a case-by-case interpretation in the context
of audits.
Will these rules apply retroactively to importing and manufacturing
arrangements long in place?
Throughout the meetings process with the IRS, ASA staff and Excise
Tax Committee members have pressed the IRS to apply any new interpretation
of the excise tax requirements prospectively only.
Prospective application is
particularly appropriate since many companies were given conflicting information
by IRS personnel or had their arrangements approved in prior audits. The
association sent a formal letter to the IRS requesting that the IRS provide
transition relief where retroactive application of the standards would be
inequitable. We have not received a response to our formal request, but were
previously told by the IRS that they would not provide general amnesty. There
have been a few reports from the field that the IRS has provided some retroactive
relief in instances where the taxpayer could show reliance on past IRS advice
or where there was a prior audit that did not challenge an arrangement.
How
will the IRS action impact the price of fishing tackle?
The sportfishing
federal excise tax is a 10 percent tax on the applicable sales price. If
the IRS determines the proper point of taxation is not the foreign manufacturer’s sale to the importing entity, but the distributor’s
sale to a wholesaler or retailer, the taxable sales price may be considerably
higher. The wholesale price of tackle is typically higher than the import
price, so shifting the point of taxation will increase the cost of the tackle
for the distributor by about 10 percent of the difference between the import
price and wholesale price. This increase might negatively impact prices in
catalogues or annual purchase agreements.
