- 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
[email protected]
6800 Southpoint Parkway, Suite 500, Stop 4101,
Jacksonville, FL 32216
~Tom Kirkman
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