Form 720 and Federal Excise Tax on sportfishing equipment - IMPORTANT

[exx1976]

DISCLAIMER:  I AM NOT AN ACCOUNTANT OR A LAWYER, I'M JUST A STICKLER FOR DETAIL AND AM PRETTY GOOD AT MATH!

( PART 1)

For the record - my lure making company is brand shiny new, and I haven't had to report anything yet due to not yet selling any product.  HOWEVER:  I learned about this tax from this very forum right here.

One of the resources that was brought up in the post was the following:  https://www.rodbuilding.org/library/sportfishingtax.html

In this article, the author purportedly provides the reader with a formula for calculating the tax due - EXCEPT IT'S WRONG.  Anyone who has been using this formula has been UNDERPAYING FET.  Please, allow me to illustrate.  From the article:

"Consumer sale {(60% of the selling price) divided by 1.1} x .1 = tax due"

The example given in the article was a $300 fishing rod.  The tax was manually figured as 300*60% = 180.  10% * 180 = 18.  So you sold the rod for $318 ($300 + $18 FET).  All is well.  However, the article goes on to say that if you tried to backfigure the FET based upon the selling price, you would be OVERPAYING - and he's right.  318 * 60% = 190.80, 190.80 * 10% = $19.08 tax you would think you owe - except that the tax paid should be backed out of the selling price.

Problem is, the above formula, shown on the website as the means to back out the tax?  The author apparently couldn't even spend the 30 seconds it took to double-check his own work.  Please, allow me!  I'll break it down individually:

Edited January 24, 2021 by exx1976

[exx1976]

( PART 2 - having trouble posting)

$318 * 60% = $190.80

190.80 / 1.1 = 173.4545454545454545

173.46 * 10% = $17.346

As you can plainly see, $17.346 != $18 (which is the correct amount of tax due!)

 

I have the correct formula for you.  Only took a minute with some... 6th grade, maybe? math to figure it out:

Selling price - ((selling price * 100) / 106)

Proof:

318 - ((318 * 100 = 31800) / 106

31800 / 106 = 300

318 - 300 = 18

 

Viola.  Math, it's a wonderful thing.  Hopefully no one has been bitten by this, and if you HAVE been bitten by it, hopefully the IRS doesn't give you too much of a hard time when you go to make it right.

[cphubert]

Not sure if a fishing rod is a good example, as a manufacturer of a rod the max excise tax paid is $10.00 per rod (rod manufacture's probably have better lobbyist! )

Manufacturers not in a relationship with a wholesaler and selling direct retail pay the lower of

-10% of wholesale constructive sales price (as determined by the IRS!) usually accepted as 60-75% of MSRP

-or the actual sales price 

Selling retail with a relationship with a wholesaler manufactures pay 10% of the lower of

-actual sales price

-highest price manufacturer sells to wholesaler

agree with your math

[exx1976]

20 minutes ago, cphubert said:

Not sure if a fishing rod is a good example, as a manufacturer of a rod the max excise tax paid is $10.00 per rod (rod manufacture's probably have better lobbyist! )

Manufacturers not in a relationship with a wholesaler and selling direct retail pay the lower of

-10% of wholesale constructive sales price (as determined by the IRS!) usually accepted as 60-75% of MSRP

-or the actual sales price 

Selling retail with a relationship with a wholesaler manufactures pay 10% of the lower of

-actual sales price

-highest price manufacturer sells to wholesaler

agree with your math

I understand, and I'm aware you have better lobbyists - I was simply sticking with the example given in the article so that the math was easier to follow, as well as more easily verifiable that it was incorrect in the aforementioned article.

However, your pointing that out simply serves to underscore the inaccuracies of that article, since you are absolutely correct - there exists no circumstance in which a rod builder would ever pay more than $10 FET on a single fishing rod.

One last item worth noting, however:  In your examples of tax due, you used some terminology that may be confusing to new people.  Having done considerable research on this topic, "wholesale constructive sales price" isn't mentioned anywhere in the tax instructions I was able to find (not with that language).  It is referred to as "Constructive selling price".  Further, it is not "as determined by the IRS usually accepted as 60-75% of MSRP".  The tax instructions clearly state it is 60% of the actual retail selling price.  I had located the original document at one point, but here is a link that contains the same info, from a reputable source:  https://www.taxnotes.com/research/federal/irs-private-rulings/letter-rulings-%26-technical-advice/taxable-sale-price-of-lures-sold-to-a-wholesale-distributor/1h4b8

Edited January 24, 2021 by exx1976

[cphubert]

Determination of Sale Price In General. The tax on sport fishing equipment, electric outboard motors, and bows is based on the price for which the article is sold.
Constructive sale price; background. The basic sale price rules assumes that the manufacturer sells the article in an arm’s length transaction (that is, in a transaction between two unrelated parties) to a wholesale distributor that then sells it to a retailer that resells to consumers.
However, if an article is sold other than to a wholesale distributor or at less than a fair market arm’s length price, the law requires that the tax calculation be made on a constructive sale price (CSP) rather than the actual sale price. Constructive sale price; general rule; § 4216(b)(1). If a manufacturer sells an article-
• At retail, • On consignment, or • At less than fair market price and in other than an arm’s length transaction,
then the tax is to be computed on the highest price for which the article is sold to wholesale distributors, in the ordinary course of trade, by manufacturers as determined by the IRS. For articles sold at retail, the tax is computed on the lower of

CFR goes on and on other sections list (CSP) at 75% as noted the private ruling listed at 60%, keep good records and use your own judgement or as other have use the actual sales price.

[exx1976]

37 minutes ago, cphubert said:

Determination of Sale Price In General. The tax on sport fishing equipment, electric outboard motors, and bows is based on the price for which the article is sold.
Constructive sale price; background. The basic sale price rules assumes that the manufacturer sells the article in an arm’s length transaction (that is, in a transaction between two unrelated parties) to a wholesale distributor that then sells it to a retailer that resells to consumers.
However, if an article is sold other than to a wholesale distributor or at less than a fair market arm’s length price, the law requires that the tax calculation be made on a constructive sale price (CSP) rather than the actual sale price. Constructive sale price; general rule; § 4216(b)(1). If a manufacturer sells an article-
• At retail, • On consignment, or • At less than fair market price and in other than an arm’s length transaction,
then the tax is to be computed on the highest price for which the article is sold to wholesale distributors, in the ordinary course of trade, by manufacturers as determined by the IRS. For articles sold at retail, the tax is computed on the lower of

CFR goes on and on other sections list (CSP) at 75% as noted the private ruling listed at 60%, keep good records and use your own judgement or as other have use the actual sales price.

You're quoting out of date information.  The info I provided is accurate.  There is no 75%, nor computation by the IRS, if you as the manufacturer sell directly to retail customers and do NOT sell to wholesalers.

If you want to use the actual sale price and light money on fire, hey, that's on you.  I suppose you're just helping to "even things out" for all those illegitimate sellers on FB. 

Edited January 25, 2021 by exx1976

[cphubert]

Your correct this is the IRS FY2000 ruling document for 60%, copied to my accountant, Thanks 

IRSCSP60%.pdf

[exx1976]

3 hours ago, cphubert said:

Your correct this is the IRS FY2000 ruling document for 60%, copied to my accountant, Thanks 

IRSCSP60%.pdf 10.75 kB · 1 download

Indeed, that's the document I was referring to. 

 

You are most welcome, happy to help!