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THE SPORTFISHING EXCISE TAX

  • By Tom Kirkman
*As of September 30, 2005, The Sportsfishing Excise Tax on fishing rods has been capped at a maximum of $10. The following article is still accurate, but the maximum tax liability per rod is now $10. For custom builders, you should still figure and pay the tax as described in the article, on any rod that you sell for $160 or less. On rods selling for over that amount, your total liability will now be a flat $10.

Although relatively unknown to most fishermen, every time they purchase fishing tackle or related gear, they're paying a 10% user tax on that equipment. The reason that most aren't aware of the tax is simply because it's buried in the price of the gear. It is collected and paid by the manufacturer at the first point of sale, which is usually to a sporting goods jobber or distributor. Once buried in the price, it is passed on through each point of sale until it finally reaches the consumer.

Not many of us enjoy paying taxes. It seems like everything carries some sort of tax these days and the very idea that a user tax is buried in the price of our fishing tackle can be upsetting. However, this is one situation where you can be sure where your tax money is going and what it's being used for. Each fiscal year, the monies collected under the SportFishing Excise Tax (Wallop-Breaux Tax) are distributed among the Fish and Wildlife Departments of all 50 states. The amount each state receives is based on a variety of criteria, including respective state fishing license sales and ratio of land to water. Only a small percentage (about 6%) of the total tax is withheld for admninstrative purposes. The next time you see your Fish and Game department improving a boat ramp, stocking a lake or river, conducting a fishery survey, etc., you'll have a good idea where the funding for these programs come from. For many, it is the primary source of their total funding.

How does this affect you as a custom rod builder? Well, the Internal Revenue Service considers a "manufacturer" to be anyone who manufactures, constructs or builds a product, or uses previously manufactured products in the creation of a new product. As a custom rod builder, you are considered a manufacturer and are liable for the collection and payment of the SportFishing Excise Tax on each and every rod you sell. Remember, this is a consumer tax, which is passed on to your customer. You are not paying the tax, your customer is. But it is your responsibility to collect the tax and send it to the IRS.

PREVIOUSLY PAID TAXES

Before we go into the specifics of how to figure, collect and pay the tax, let's take a moment and dispel some of the myths which often concern the tax. The first has to do with the blank and component parts you use when constructing (manufacturing) a fishing rod. It is true that in most cases, the component parts you purchase already have the tax buried in the price. This is done at the first point of sale between the manufacturer and the jobber or distributor and is passed on to you. If you sell a blank or any sort of component part to a customer of yours, there is no further tax liability involved. This is because the tax has already been collected and paid at that first point of sale by the original manufacturer. Subsequent sales simply pass the tax, buried in the price, on down the line until it reaches the consumer.

But what about when you use that blank or part to construct a rod? Can't you deduct the tax that's already been paid from what you'll ultimately owe on the finished rod? Sorry, no, it's neither possible nor allowable.

Even if the IRS was to allow you to deduct taxes previously paid on your component parts, you'd have almost no way to figure out exactly how much tax has already been paid. How much tax was paid on that $18 reel seat you just bought? If you say $1.80 you'll be wrong. Remember, at the first point of sale that seat didn't sell for $18, it sold for $5 or $10 or whatever, and you have no way of knowing what that price was. Thus, if you can't show the IRS the exact dollar amount paid in tax, you can't possibly deduct it.

But here's the real kicker - when you use a previously manufactured part in the construction of a fishing rod, you are manufacturing a totally new item; something that did not previously exist. You no longer have a blank and some component parts, you now have a fishing rod. Thus, you have a new manufactured item upon which the full tax is due upon the point of first sale. Any taxes paid previously on the parts used in the construction of the new item are no longer considered. The tax is due on the selling price of the new custom rod.

EXEMPTIONS

You may have heard of something called a 637 exemption which removes you from having to pay the tax on items you purchase for use in constructing your rods. It is possible to acquire this exemption, but in most cases it does the custom rod builder very little good. Once you move past the first point of sale, to a dealer or supplier, the tax has already been added to the item and is buried in the price. It cannot removed at that point. So, even if you have a 637 exemption certificate, you cannot expect your dealers and suppliers to exempt you from the tax. It's simply out of their hands at that point.

Now if you buy your parts directly from the manufacturer, your 637 exemption will be of some help. You will be exempted from the tax and it will not be added to your purchase price. However, you then take on the tax liability when or if you sell those parts to anyone else. So if you buy a reel seat from a manufacturer, and then sell that same reel seat to a customer, you will be liable for collecting and paying the excise tax on that item. This is often more than most rod builders wish to get involved in.

It should be noted that the 637 exemption does not exempt you from collecting and paying the tax on finished custom rods. It only keeps you from having to pay the tax on items you buy direct from a manufacturer and which are intended for use in the construction of such rods. If you build a lot of rods and can afford to buy direct from a manufacturer, this exemption may be worth looking into. For most rod builders, however, it is not. Do remember, that your tax liability on finished custom fishing rods is the same as those who do not have the 637 exemption.

FIGURING, COLLECTING AND PAYING THE TAX

The custom rod builder finds him or herself in a somewhat odd situation with regards to the excise tax. Most manufacturers do not sell direct to the end user, instead they sell to a jobber or distributor. Thus, the selling price at that point is considerable lower than it will ultimately be at the retail level. When a custom rod builder sells to the end user, however, the selling price is immediately at the retail level and the tax is considerably higher, dollar wise, than it would be had the rod been sold at what is considered a wholesale or jobber price.

Thus, the Internal Revenue Service has made an allowance in the amount of the selling price which the custom builder and his customer is liable for. This is intended to more closely approximate what the price and the tax would be if sold at the wholesale or jobber level. Such a price adjustment is known as a "Constructive Sale Price" and can be found under IRS ruling 26 CFR 48.4216(9)-2:Constructive Sales Price, basic rules. There is also a revision under: Rul. 81-226. Among custom builders, this is often referred to as the "60% rule."

Here's how it works - lets say you sell a custom rod to your customer for $300. Instead of figuring a 10% tax of $30, you would create a Constructive Sale Price by multiplying $300 by 60% (300 x .60), which is $180. The tax (10%) is now due on that amount ($180). Your customer would be charged $300 for the rod, $18 for the excise tax, and any applicable sales taxes your state or county impose.

You may only take advantage of a Constructive Sale Price when selling to the end user. If you sell a rod to a reseller, someone who then sells the rod to another reseller or the end user, you must pay the 10% tax on your full selling price. Let's take a rod that you sell to a fishing tackle store for $150 and which they intend to sell to one of their customers. Your tax liability would be 10% of the full $150 (.10 x 150) which is $15. (The shop or store has now fulfilled their tax obligation and no further collection or payment by them upon selling the rod to a customer is required.)

THE 720 FORM

You will use Internal Revenue Form #720 to report and pay the tax. You report the tax due on line #41 - Sport Fishing Equipment. Previously, you calculated your tax on a worksheet but this was discontinued in 1996. Thus, take your total sales made to end users and figure 60% of that amount (multiply by .60) and record the total sum. Now take any sales made to shops or stores and intended for resale, and record that total sum. Add these two amounts together and figure the tax at 10% of the total (multiply by .10). Record this amount on line #41. This is the amount of tax now due.

Even should you experience a quarter when you do not make any sales, you must still file the 720 form. You would simply list the tax due on line #41 as $0.

Once you request a 720 form, you will continue to receive one a few weeks before each tax period is due. The tax is filed and paid quarterly. You can obtain a 720 form from nearly any Internal Revenue Office or by phone at 1-800-TAX-FORM.

ALTERNATE METHODS

Some builders still prefer to bury the tax in their selling price and then back figure it when the time comes. That's fine, but if you do you should use the following equation in order that you do not overtax your customer, or yourself. Let's go back to that rod you sold your customer for a total, rod and tax, of $318. For whatever reason let's say you don't want him to see the tax and thus have buried it in your selling price. If you simply back figure on $318, you're going to wind up showing a tax due of $19.08. That's because you're including the $18 worth of tax in your calculations. You can remove it and figure the tax correctly by the following equation:

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

For Resale (selling price divided by 1.1) x .1 = tax due

When you file on your 720 form you would simply add up each tax amount figured on each rod and combine them for your total tax due.

Personally, I would just figure the tax at the time of sale and list it on my sales invoice just as I would any state or county sales tax. At the end of the quarter. take the totals for end user sales and reseller sales, and figure them according to the instructions given previously. It's easier and also allows your customer to see that your rod price is not as high as they thought! Just like gasoline, some of the price is tax.

CONCLUSION

Keep good records and make sure you create a sales ticket or invoice for each sale. When in doubt, ask your Internal Revenue Office, not your rod building component supplier or the rod builder across town. File and pay your tax each quarter and in a timely manner. Take a moment to educate the fisherman on what the tax is used for and why it's important to our fisheries. Most times, they'll appreciate knowing that your a conscientious business person and the fact that their purchase helps put something back into our water resources. by Tom Kirkman

More information on the SportFishing Excise Tax can be found in the Volume 1 #4 September/October 1998 issue of RodMaker.

Questions on the SportFishing Excise Tax may also be addressed to:

Mrs. June Rittscher/Internal Revenue Service
june.rittscher@irs.gov
6800 Southpoint Parkway, Suite 500, Stop 4101,
Jacksonville, FL 32216


~Tom Kirkman