President Obama Signs Excise Tax Reform by Jim Shepherd 8-18-2010

President Obama Signs Excise Tax ReformThe President has signed H.R. 5552- the Firearms Excise Tax Improvement Act of 2010 into law, putting the firearms industry on the same federal excise tax schedule as other industries.

Previously, firearms and ammunition makers were the only businesses that were required by the Internal Revenue Service to pay their federal excise taxes every two weeks. Other businesses only pay that tax burden quarterly.

The industry has long maintained that this inequity in the tax code created unnecessary burdens on the industry, from the thousands of man hours required to prepare the bi-weekly reports, to many companies routinely having to borrow the money to make their payments on-time, every-time.

Admittedly, I understood the concept behind the industry’s having fought hard and long for the adjustment, but a visit to Steyr Arms yesterday helped bring the concept home in concrete terms.

I wasn’t intending to visit Steyr to talk about the economy, but my tour and talk with Steyr CEO Scott O’Brien turned, as many of my conversations tend to do, toward business.

Steyr Arms imports high-end brands: Merkel, Anschutz and Steyr Mannlicher.

For many companies their average firearms price is in the hundreds of dollars. For Steyr, the entry point is about $1,000 and they go up - way up- from there.

The Steyr product line being shown here by CEO Scott O’Brien doesn’t just represent craftsmanship and quality. Each unit in inventory represents a significant tax burden.

It’s a scene generally unseen, but firearms manufacturers and importers have similar scenes in their wearhouses. Each box contains a firearm. Every one represents Pittman-Robertson Trust Funds. Going forward, however, they may not represent the financial burden created under the old excise tax schedule.
Each of those firearms imported into the United States represents not just a purchase cost but a tax burden-a burden that under the old schedule, was paid far in advance of payments being received.

“The federal excise tax is unavoidable,” O’Brien observed, “it has to be paid on-time, every-time, and that means companies in our industry have to dedicate lots of resources to handling them.”

“It’s not that we mind paying it,” he observed, “it’s one of the very few taxes where we all actually see the benefits. It doesn’t get spent or re-allocated in Washington, it comes back to the states in as funding for the Wildlife Restoration Fund.”

“That,” he said simply, “helps pay for conservation and wildlife everywhere.”

Today, that payment burden may be just a bit lighter across the industry. But it took O’Brien’s explaining it in simple terms to understand it.

“Imagine your electric bill,” he said, “you get a bill every month, look at it, fill out a check, put it in the envelope and send in your payment. It’s a pretty simple process and most of us don’t take very long to do it. We know what our monthly bill runs.”

“Now,” O’Brien continued, “imagine having to pay your electric bill- by check- daily -and you can’t combine your payments. If you repeat the payment process thirty times a month, it becomes a lot more of a chore.”

In other words, a report that had to be assembled and completed -and an accompanying payment that had been coming due twenty-six times a year- every year- has just been reduced to only four times a year.

For me, that made the inequity of the old schedule a lot more understandable.

O’Brien and I did, however, talk in general terms about the gun business. In those talks, he confirmed that what I’ve been hearing for months was true: pistol sales are fairly steady, black guns continue to slow, and a hunting market that has been soft for the past three to four years isn’t really showing signs of an upturn.

So where does he see growth? “For us, it’s like this,” he says, “we think our pistols coming back into the United States will be our number-one volume item, they will be followed by the AUG, and the Scout/specialty rifles, with hunting rifles staying pretty steady.”

In the hunting category, although O’Brien didn’t offer specifics (nor did I expect him to), it seems Steyr/Merkel aren’t radically different from other companies when it comes to unit sales. Entry-priced rifles are “soft” with sales fairly steady as you move up-line. The one area that most companies have told me are pretty steady might not be the one you’d consider. It’s not mid-to-upper middle lines; it’s the higher end.

The reasoning? Simple. Disposable income is relative. If you have limited disposable income when times are good, you’re feeling the pinch in our slow economy. If your financial situation continues to give you truly disposable income, you might curtail your spending in order to increase reserves, but you still have disposable income. When you’re having a double rifle hand-engraved, the difference in $24,000 and $28,000 might be your definition of “cutting back” - but you’re still able to afford that discretionary purchase.

Hand engraving. You might not want it on your gun, but the artistry is indisputable.
Long story short, the change in the federal excise tax schedule is one that might not be obvious to consumers, but it will have an almost immediate impact on the companies in the firearms and ammunition industry.

We’ll keep you posted.