FET question...

I understand that FET must be charged at 10% of 60% when selling to a reseller, and at 10% when selling directly to the consumer.

However, I'm in a situation now which isn't quite clear. I am assembling rods for a fellow who is paying for all the components and blanks. The components and blanks are shipped to me, I assemble them, and then I ship them back. I am constructing a finished product, but not selling the product to him. I am charging a flat fee for the assembly with no parts mark-up.

Am I responsible to collect the FET? Is he when he sells it to the customer? Do we both have to?
I figured someone else on here has probably been in the same boat before...help!

You've got it backwards. When selling to a consumer it's 10% of 60% of the selling price. When selling to a reseller, it's a straight 10% of the selling price.

In your case, the first point of sale on the finished rod is on his end. He is liable for the tax. You are simply a sub-contractor who is proving labor services for him. You are not involved in any tax liability in this specific instance.

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Scott- you have the "Constuctive " selling price backwards. It's 10% of 60% when sold directly to the consumer, a full 10% when sold to a reseller.

I would contact your local IRS office. Contrary to pouplar belief they are good to deal with. I had an audit in 1994 and 2001. I've been under scrutiny ever since, but everyone in the IRS office is helpful to make sure you pay the tax correctly.

Bruce Vetre
VRC

First I will assure you all I am no math wiz....but it seems to me that 10% of 60% will always be the same as 6% of the original number. Why do we need to take the long route instead of just saying the tax we owe is 6% when selling directly to a consumer?

Hi Scott - Tom is RIGHT on target. I too have been audited by the Feds on this 720 stuff. Thanks to Jean Harrington of Harrington Rod Co. I had all my ducks in a row even had a 635 exemption and sailed through and only get a check up every two years to see if I am keeping my nose clean. The reason I was picked up was because a big west coast rod company got audited and they then targeted everyone to whom they shipped. A popular tackle shop go hit big time because they assumed that if they bought with excise included then they didn't have to collect it. I might suggest that the parts shipped to you be under his business or personal name. You dont want to have the Feds looking into your stuff if you have ever fudged because there is no Statute on Federal Taxes. Dont get scarted, just dont paint a target on your back. Doc

It is 6%, but because you figure it on the "constructive sales price," which is 60% of the total, we often word it that way so people will understand that it is the selling price that is adjusted, not the actual tax which is always 10%.

All builders should be aware that their local IRS people are rarely well versed on the tax. Most don't even know the ruling number for the "60% rule." If need be, print out the article in the online library and take that with you in the event your IRS person balks at how you are figuring or paying the tax. The code numbers and revision numbers are included in the article so they can look it up if need be.

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Sorry, I got my figures backwards. It wouldn't make any sense to charge the consumer a higher FET than the reseller.

The first answer from Tom was the one I wanted to hear. Also thanks to James for the idea on having the components shipped to me under his business name.

I already have to deal with the whole self-employment, home-office, blah blah blah tax situation. I keep good records in my other business dealings but know that since the FET is a very obscure little thing that it sounds like a lot of IRS agents aren't familiar with, I want to make sure there's NOTHING that will pull that big bad audit lever.

Just to clear something up here guys, my post came in after Tom's, but when I went to respond there were no responses, it just took a while to hit the submit button. I'm not questioning what he said. I appreciate the fact that this site points out the FET tax, there are alot of builders who don't know about it. I also believe kudos to Tom for putting the effort and knowledge into it.

I too was like that store that was buying components with the tax paid, I never even gave it a thought after that. Boy was I wrong.
I just had good luck with the IRS office I dealt with and even though they have eyeballed my shop and records, every "I" is dotted and "T" is crossed.

Bruce

Hold on a second there, don't assume you're OK Scott. The reason I say this is I'm in exactly the same boat as you are regarding FET. In essence subcontracting my labor only.

"In your case, the first point of sale on the finished rod is on his end. He is liable for the tax. You are simply a sub-contractor who is proving labor services for him. You are not involved in any tax liability in this specific instance. "

I emailed back and forth with the "new" IRS Expert for Sportfishing FET, Jack R. Brown. He suggested that I file for 2004 when I literally was just building for friends and charging NOTHING for labor. From my point of view, it was a hobby, you know, like arts and crafts, not a business, not for profit, heck all components were purchased at retail. Let the IRS come after me for the $10 I'd owe them anyway; I've overpaid numerous times.

Conversely though, now, I'm building and still buying components at retail, or having clients buy their components and ship to me, basically charging a service fee of $10/ft for single foot guided fly rods, and $15/ft for traditional fly rods. In response to my explaining this to the IRS, here is the exact question and response, verbatim from our email exchange:

My question - 1. As a custom rod builder, if I am only offering my services to a potential client, does that service fee create an Excise Tax Liability. As an example, if a client orders a blank from vendor X, the remainder of the components from vendor y, and then brings them to me for assembly, do I have a tax liabilty for the fee charged to build the rod?

Mr. Brown's Response - "The Manufacturer of a fishing Rod is subject to the tax. It is not my position to discuss situations that by form would avoid the tax. "

So in other words, even if you're NOT LIABLE for the TAX as Mr. Brown's response MIGHT SUGGEST OR IMPLY, the IRS isn't going to TRY to see it that way...they want your $$$.

I'm following the lead of all my other pro builder friends, filing FET on my rods sold. As I just went into "business" (but have not formally set up business) I'm kinda in a nasty situation since I reside in one state, build in another, and am trying to move as well. But, to be safe, I'll be filing my first FET after March. I may even go back and file my $10 FET liability created by building for friends in a hobby capacity - which for the record is absurd.

I have the full email exchange saved for anyone who would like a copy of it - shoot me an email with "FET Email Copy" or something in the subject line and I'll be glad to email it back - matt@cichlidrecipe.com

FWIW, your milage may vary,

MP

Oh, I figured I should just come back and post this one too...if accurate, this means that all those hobby builders out there are liable for a tax they're probably not even aware of (just as I was). Rediculous in my opinion:

1. Am I liable for Excise Taxes based on hobby-efforts that generated, if anything, a financial loss?
1a. If liable, what process do I need to undergo to "straighten out" my standing with the IRS regarding this activity?

Mr. Brown's Response - "Yes Excise Taxes due whether the activity is a hobby or business. It would be best to file delinquent returns based on the 60% rule."

@#$%&?! as you might be thinking!

MP

Thank you for the info, Matt!

It seems to me, though, that my situation is slightly different because you are selling your assembly service to the end user. By doing this, you would be avoiding the tax entirely. If anything, the end user would be liable for it as they were the one who commissioned the assembly of the rod, thereby making them the manufacturer...

I'm not trying to avoid the tax by any means, just trying to avoid us having to pay double. If my partner sells to an end user, he will indeed charge the 10% of 60%...

-Scott